Ag industry primed for private debt

At ACG New York’s monthly luncheon in Manhattan on Thursday, speakers identified private debt funds as both the fastest growing and most sought after vehicles by institutional capital, a trend that could impact farm leverage levels in the coming year.

“We’ve seen more capital raised by private debt funds than any other sector,” one speaker said, as he and other panelists explained growing optimism and robust deal flow across PE strategies. “We think debt funds of all types are going to continue to raise lots of capital.”

According to data from PDI Research & Analytics, 2016 saw 151 private debt funds close globally, raising a total $111 billion. That’s slightly less prolific than the $120 billion break out year that was 2015, but puts 2016 well above the annual average of $89.5 billion since 2009.

“The fundraising market is as strong as it’s ever been and LPs are aggressively putting that capital out there,” said Philip Edwards, managing director, Stifel Financial Corp.

In agriculture, while farmers don’t typically leverage their assets anywhere near levels seen across many other real asset classes, debt levels have steadily risen in recent years. Farm real estate debt in 2016 is expected to reach a historic high of $226.7 billion, 8.6 percent above the previous high set in 2015, according to USDA data.  

This comes as a new generation young farmers emerges, some of whom may have first-rate business degrees but also lack the memory of the 1980s farm debt crisis, arguably making them less risk-averse than their predecessors.

Along with this new generation of farmers comes an influx of private lenders into the asset class as banks become overburdened by regulations, Farmer Mac’s senior vice president for agricultural finance, Curt Covington, recently told Agri Investor in a Q&A.

“Leverage kills,” he warned. “A 50 percent debt-to-asset ratio can easily shoot to a 70 percent debt-to-asset ratio if some of these commodities continue to struggle and land prices continue to fall. Then all of a sudden you find that what looks good in a textbook doesn’t always work out on the farm.”

But with some $80 billion of private debt floating around and looking for a home, private lenders, at least those willing to shell out smaller loans, will target agriculture.

Dan Galpern, partner at TZP Group, issued his own warning at the ACG New York event: “The behavior that needs to change is the very short memory of what happens when you put leverage on top of leverage on top of leverage in an attempt to [maximize] gains.”