Pushing LPs over the hedge

Perhaps there was no more apt way to get introduced to the Windy City. As we landed in Chicago for the 2017 Agri Investor Forum last week, we were caught in the tail of a hurricane. We saw it as a sign that our asset class was about to witness electric change, and rushed to dry up in the warm conference room to ponder on what this change could be.

This evolution turns out to be less radical than the storm promised – for now. Like clouds slowly amassing in a clear sky, LP interest in the asset class has gradually been building in recent years; so has the sophistication of their approach toward private markets. For fund managers and the advisory universe, a tipping point is near. Soon will come a time when this promise will either turn out to be a damp squib – or an occasion to say: “When it rains, it pours.”

This change has been in the air for some time. Ever since food prices rose and the financial crisis hammered mainstream asset classes, it had occurred to institutions that agriculture could be a good place to store money (and make it grow). Yet it took time to take off. The commodity bust played a part; more likely, the asset class was simply too new and disparate to reassure LPs. They also found more straightforward alternatives in the likes of infrastructure and real estate.

In Chicago, though, the vibe is that the agri narrative is starting to catch on. Jamie Shen, chief investment officer at Prudential Agricultural Investments, noted solid progress over the last five years, with institutional investors now devoting “attention and time” to agri. That did not apply only to big pensions with vast war chests and investment staff: the chief executive of a $1.4 billion Canadian trust told us it was in the early stages of a thorough review of the asset class. Many of its peers, she said, were currently doing the same.

The way she described the asset class suggests LPs largely see it as a part of real assets, of which investors are increasingly fond of (a 2017 survey by BlackRock found that 61 percent of its clients intended to up allocations to the segment). They often cited agriculture’s strong fundamentals – growing food consumption worldwide, rising awareness about organic and quality foodstuff in the US, and the productivity jumps promised by agtech. But the main draws were financial: recurrent yield, capital appreciation possibilities and above all, diversification, at a time when other real assets are dear.

Yet while a broad cohort of LPs are doing their research, many have yet to make their minds up. In part, this owes to the perception that agri remains a risky business, as evidenced by the varying performance of row crops over the last decade. But many investors understand volatility can be mitigated. Rather, their doubts lie in the fragmented manager universe: they say funds are small and too specialized for someone looking to make an entry. Evaluating “niche” strategies in the absence of benchmarks is tough, one of them said. Who’s to say if the risk/return trade-off is worth it?

For GPs, the current state of play holds much promise. Most questions puzzling LPs will in time solve themselves, as the asset class coalesces around the most adequate structures. LPs also need to spend some time in the fields to better understand farming, and relevant research should be made public, so LPs feel better informed. At the end of the day, however, the onus is on GPs to prove their case – through education, reporting, cross-industry data sharing and, crucially, strong performance.

LP checks won’t come without a leap of faith – but a vigorous nudge is also needed.

Write to the author at matthieu.f@peimedia.com