Following a $433 million final close for agribusiness-focused Blue Road Capital – with a significant amount of additional co-investment – former Ospraie partner John Duryea spoke with Agri Investor about raising a first-time fund, growing LP appetite for co-investment opportunities and the advantages of the fund’s vertically integrated pecan strategy.
Was Blue Road launched with a specific focus on pecans?
Pecans came first, and that was a key part of the fundraising for us. We looked at the pecan space for a long time before the first closing of the fund. We spent a lot of time looking at the farming and the processing.
That really became part of the offering of Blue Road, because as a first-time fund, we wanted to have something to point to that would show how our strategy would work and what sort of assets we would be looking at.
How do you demonstrate your strategy as a first-time fund?
One of the big challenges for any fund, particularly a first-time fund, is that it’s almost a necessary condition to have one or more deals identified, so that the LPs know where the money is going to go. It becomes a bit of a juggling act, because you can’t lock up a deal without capital, and it’s very hard to lock up your fund if you don’t have any deals.
Years ago it was sufficient to just be very credible and capable and have a track record in order to raise a fund. But now limited partners are, understandably, a lot more concerned with knowing what kind of deals their capital will go toward.
How important to the fund are co-investment opportunities?
I’ve seen a growing interest in co-investment opportunities going back to the last fund with Ospraie. Our LPs expect co-investment opportunities and many of them invested in the fund based on that expectation.
The first place a lot of progressive LPs invest directly in is farmland. So to the extent that we’re investing in midstream and processing assets, that’s just one step away from agriculture.
If you’re going to make a leap from farmland ownership to leveraged buyouts in tech, that’s probably going to take you out of your comfort zone, whereas we invest in something tangible that’s relatively understandable to somebody who already has exposure further up the value chain.
What does that co-investment component look like for the LP?
If we have an investment of a scale that’s greater than the limits of our fund allow, we go to our LP base and provide them with a co-investment platform that looks and feels and acts almost identical to our main blind [pool] fund. We just eliminate all the economic provisions going back to the GP. So the structure is controlled and voted and administered by us, which eliminates a lot of complexity for the LP. The heavy lifting in our model is growing the companies, so board meetings – that may in some cases be happening daily – aren’t something a manager from a big pension fund is going to want to be actively involved with.
So, functionally, the co-investment is just one iteration further from letting the GP run the whole show. It gives LPs an opportunity to get a little more money into an investment on an advantaged fee basis, but there’s no extra fiduciary duties or board representation, which frankly they wouldn’t have time for.