Overcoming first fund fatigue

The existence of poorly managed agri-focused investment funds has stunted the market’s growth over the past 10 years and more, most veteran market practitioners are quick to point out.

I’ve heard several horror stories about investment bankers leaving Wall Street with the aim of making a quick buck by investing into farmland with little understanding of agriculture and its various moving parts. And market participants say the results have not been good, leading to a number of peaks and troughs in demand since the 1990s.

“A lot of people still think that there’s enough dumb money in the market and that they can raise money in an agri fund because it’s a new trend – but they have screwed things up for other more reputable funds,” one frustrated US-based placement agent told me last week.

This has resulted in a lack of established “institutionally-credible funds” for investors to choose from, he added. It has also created an air of mistrust among some of agri investment’s early movers that were stung by poor performance and poor governance, several market insiders tell me.

But a marriage is emerging between farming and finance professionals launching investment funds or firms together. This is creating a “healthy tension” that is attractive for investors, according to one US-based placement agent. And this approach should be encouraged to rebuild the trust of those early movers, and convince first timers of the market’s new credentials.

Many of my conversations with newly launched funds have been with ‘married’ players such as these. Either an investment management firm has created a joint venture with a farming operator, or an ex-farmer has joined forces with an ex-banker to establish a new investment firm. There have also been cases of agriculture consultants partnering with capital markets firms.

The finance professional brings expertise in structuring and raising capital to the partnership whereas the agriculture expert selects the opportunities and the on-the-ground strategy. In many cases, he or she will also have relevant contacts in the agri world from potential off-takers to land sellers to leasers.

There are parallels here to generalist private equity funds that have realised over the years they need more operational expertise to truly affect change in their portfolio companies – and continue to experiment with various models using both in-house and external operating partners/advisors to do so.

For agri, partnerships directly incorporating and incentivising an operational strategy should help allay fears about alignment of interests – a big criticism among some early overseas agri fund LPs. They have complained that agri fund managers’ fee structures did not adequately incentivise their farmland operators on the ground, paying too much to the investment firm.

Some own-and-operate funds are offering their on-the-ground staff skin in the game, or their own share in the fund. Other own-and-operate structures involve sharing the revenues of the off-take. One investment platform that pursues a buy-and-leaseback model allows farmers to participate in any land value increase on the land they are farming – understanding that the way that land is farmed will ultimately impact its value when the investment comes to an end.

Unfortunately there is still “first fund fatigue” in the States, according to another placement agent, and the establishment of all these newly structured funds might not help all institutional investors move past that right away. But as the new generation of agri funds attract commitments and prove their expertise, wary investors may just start to take a second look.