Paine Schwartz: co-investment on the rise

You couldn’t fault Kevin Schwartz for not having his roots set in the field. Agriculture has for several generations been in the family’s DNA: his father, uncle and grandfather were all employees of John Deere, the ag equipment giant. Schwartz took a different route, starting as an investment banker at Goldman Sachs, following with a stint at American Industrial Partners, a private equity house. But he ended up deep in agriculture all the same: having co-founded Paine & Partners in 2006, he is now chief executive of the ag-focused firm (renamed Paine Schwartz Partners this February).

Simple statistics speak to Paine Schwartz’s important role in the asset class. Since inception, the firm has deployed close to $2 billion in agribusiness companies, through 15 platform investments and a total of 40 transactions. In 2014, it closed its fourth fund on $893 million, ahead of its $800 million target. In an exclusive interview with Agri Investor, Schwartz notes that the vehicle is now more than 50 percent deployed, prompting him to remark that the firm “is achieving the pace of investment that we expected.”

Paine Schwartz occupies an unusual space on the agriculture risk-return spectrum. It targets gross IRRs of more than 20 percent, with funds that have a fairly common private-equity structure (Fund IV has a 12-year term, with average holding periods of five to seven years). And its LP base includes typical private equity investors, such as pension funds, endowments, wealthy families and insurance companies. Yet it also raises capital from institutions that otherwise seek exposure to land or infrastructure as part of broader real asset strategies.

“They invest in us because we offer an uncorrelated, higher-return opportunity. And so, in certain institutions we are in their private equity bucket, and in others we’re in their real asset bucket, even though we’re generating private equity returns,” Schwartz says, adding that about half of its LPs belong to each category.

Investors in Fund IV include the Maine Public Employees Retirement System, Rhode Island State Commission, University of Texas Investment, Northwestern Mutual Life Insurance Company and the Public Employees Retirement Association of New Mexico, according to LP documents.

Another way Paine Schwartz’s strategy stands out is the large amount of co-investment capital it deploys alongside its flagship funds. “It’s been a key part of our strategy for a long period of time. About a third of the equity capital we’ve deployed is LP co-invest,” Schwartz says. He observes that this proportion has grown even more of late, as Fund IV involves an almost equal amount of co-investment equity. “That’s a real positive for us in that we’re able to do investments that are larger than our fund would allow us to do standalone.”

Hungry for higher returns

He notes that the firm has a consistent group of investors that repeatedly co-invest, allowing them to see what the team is doing “day-in, day-out, rather than just getting a quarterly report and seeing us at the annual meeting.” Increased co-investment with Fund IV, he says, involves both existing co-investors deploying more alongside the vehicle and LPs new to the game. Underpinning this demand is institutional demand for agribusiness investment opportunities delivering private equity returns, which few specialized GPs are capable of addressing, he argues.

“In our existing LPs there’s an interest in greater exposure than just through the fund. And we’ve offered co-invest on a no-fee, no-carry basis so that’s economically attractive to our LPs.”

Outside the firm’s LP base, there’s also appetite for co-investment from the broader institutional community; Schwartz says some investors that did not make it into Fund IV are also participating. “We have some relationships like that and we try to show them some of the co-invest opportunities as well.”

Does he see LP interest rising across the agricultural asset class? “I think there’s a growing appreciation for the size of the industry. It’s an $11 trillion global industry in terms of economic output.” As a caveat, he notes that less sophisticated investors have been somewhat dampened by the broadacre commodity downcycle – which makes it all the more necessary to focus on specific sub-sectors and opportunities. Three themes stand out, in his view: specialty crops, the need for services designed to improve productivity and rising global demand for proteins.

In other real asset classes, ‘value-add’ strategies have emerged as investor favorites amid tapered  returns at the safer end of the risk spectrum. The sample size makes it hard to generalize to agriculture as well; still, Schwartz has little doubt. “We’ve got incredible demand and interest right now from institutional investors in what we’re doing. I think higher than it’s ever been.”