Oregon PERF: ‘Ag and timber requires more work’

Oregon PERF's senior alternatives investment manager Ben Mahon tells Agri Investor about the role of agriculture within a fund’s alternatives allocation and offers his views on what drives LPs' desire for direct investments.

Oregon PERF made its first timber investment into the Brookfield Timberlands Fund V in 2013 and has since followed it with other timber and agriculture-related investments. Here, senior alternatives investment officer Ben Mahon tells Agri Investor about the role of agriculture within a fund’s alternatives allocation, how he evaluates funds without a long track record and what drives LPs’ desire for direct investments.

From which bucket in Oregon PERF’s portfolio are agricultural investments made and what role do these investments play?

Our terminology is “alternatives portfolio,” and that is a 12.5 percent target allocation of the total pension plan, which includes three sectors: infrastructure, natural resources and diversifying strategies, which are akin to hedge funds. Within that natural resources allocation, about 10 percent of the current alternatives portfolio is in timber and ag. The primary objective is to provide a source of diversification. The vast majority of the plan’s risk is sensitivity to equity markets, so we will look to diversify primarily from equity beta.

What are your return expectations for agriculture?

The overall alternatives portfolio strategy has a target of CPI [consumer price inflation] plus four percent annually. For the individual strategies within alternatives, we don’t have a benchmark or hurdle rate.

How do you evaluate funds without a long history?

If you require a 10-year track record, there are only a handful of firms that you can invest with and that is just too limiting. That means you do have to work harder to gain confidence in the strategy and the manager’s ability to execute.

The Brookfield Timber Fund was our first relationship with Brookfield and that strategy has a focus on Brazil, so we needed to achieve a high level of comfort with their capabilities and personnel there. Homestead was a firm that we got to know extensively during their first fund raise, so when it came to their second fund they had started to prove the model.

Is sustainability an important consideration when determining which agriculture fund to invest with? If so, how do you look to measure that sustainability?

The Oregon Investment Council has adopted investment beliefs that call out the need to recognize environmental, social and governance factors as potential risks. That said, there is not a specific financial or percentage target for strategies that have an ESG screen or an impact flavor. But our experience shows a clear linkage. We’ve found across the real asset portfolio, because of requirements of the investor base, funds are very sensitive to these issues and proactive in handling them.

For example, when we made the investment in the Brookfield Brazil Agriculture Fund II, we visited the farms in Brazil. It was important to see the labor conditions and how the native forests are being protected.

Has the limited universe of devoted managers made it difficult to reach your target allocation for agriculture? 

Energy is an example of a sector that is a very large, with mature funds, where you can get your allocation invested very easily. Ag and timber requires more work so we’ve had to be more creative, investing earlier in the life cycle of funds or targeting non-traditional vehicles and structures. We’re a long-term investor, so if we think about hitting our target allocation over a decade, it’s certainly achievable.

What do you think is motivating LPs to increasingly look for direct investment opportunities in agriculture?

What you hear from investors or GPs is that there is a duration mismatch between a 10-year fund life and timber you could own for 50 years, depending on species and location. Fee structure is another important factor. These are fundamentally lower-returning asset classes that often charge a private equity style fee. In order for managers to justify that fee they have to produce higher returns, and in order to do that they need to take more greenfield risk, or go into riskier jurisdictions. By going direct, investors substantially reduce that fee drag.