Rufo Quintavalle, a private investor, principal at a multi-family office and director at Agro-Ecological Investment Management, the New Zealand-based firm, has started building a globally diversified agriculture portfolio. Here he describes the process and the importance of sustainability in his work.
When did you first take an interest in agri investment and what were your first investments?
I started looking at agriculture and reading up on the topic about four years ago. A lot of family offices did the same thing; they got spooked by the financial crisis and so started looking at alternative investments and searching for more tangible assets.
My aim is to preserve capital over the very long term so farmland seemed a good way to access the agricultural space. It is an inherently illiquid and long term investment which goes against the grain of much financial sector activity that is getting more and more short term.
People got their fingers burnt in 2008 and found themselves inside structured financial products that they couldn’t get out of and are terrified of illiquid investments as a result. When Solvency II and Basel III finally come into effect, this will further exacerbate the situation regarding short termism in the financial markets. I believe there is an opportunity for those who can afford to take a genuinely long term view and are not afraid of illiquidity.
I have a broader environmental mandate that I place over my whole investment portfolio so I started meeting managers that have a good sustainable investment case. It was hard to find many that ticked both boxes: financial credibility and environmentally sustainable credentials. But I came across Agro-Ecological in New Zealand [the agriculture investment manager] and was so impressed that I bought a stake in the company and have recently made an investment into permanent crop land to be managed by them.
I have also launched a forestry operation in Brazil with a partner where we are processing timber and using that as a springboard to create mixed species plantations with a variety of different revenue streams. In forestry too it is vital to be able to take a long term view – with the exception of Eucalyptus (6-8 years), Paricá (5-10 years) and a few other fast growing tropical and sub-tropical species, commercial forests of high value timber take at least 15 years to reach a harvestable age. In the case of African Mahogany & Teak, for example, it is a 23 to 30 year cycle. It is possible to get other smaller yields from sub products such as honey, nuts, fruits, resins or essences in the shorter term but an investor ideally has to be able to have staying power to maximize his return.
So for me it made sense in both farmland and forestry to go for a direct investment rather than a closed end fund.
What is your due diligence process for determining a manager’s sustainability credentials?
To me it’s about getting the right people. Sustainability as a concept is too new for there to be established reporting requirements that would tick all the boxes in a traditional investment committee. If you asked every manager to give you a 10 year track record on sustainability reporting that would drastically reduce your investable universe!
So while I certainly support initiatives like GIIRS [Global Impact Investing Rating System] or IRIS [the Global Impact Investing Network initiative], I take a more old school approach. I get a feel for the management team, dig into their past and ensure their principles are embedded in their thinking. Because things will change; companies grow and projects develop so you need to know the people you are partnering with have the same values because the business plan will undoubtedly change and you need to know that sustainability will remain a core part of what they do.
What I liked about Geoff Burke, co-founder at Agro Ecological, is that he can talk the more hard-nosed financial talk but he also understands ecology and sustainability to a degree I haven’t come across in others.
Why is sustainability so important to you as an investor?
It is always something that has been important to me. Investing sustainably makes sense. From the risk management point of view it makes sense to protect your investment against climate change, rising fossil fuel prices and stricter environmental legislation. So sustainability to me is self-evident from an investment point of view but also as a matter of simple logic: in the same way I wouldn’t deliberately destroy my own house I am not going to damage the ecosystems on which we all depend for our existence.
There is a fundamental generational change that is going on here; some financial folks get it, some don’t. But I wouldn’t want to be on the wrong side of history.
What other agriculture investment opportunities are you considering?
Moving further up the value chain is definitely of interest because there is a lot of value to be captured there. For example, with my investment in New Zealand I could process the fruit into consumer products that gain a good mark up in supermarkets, or market medicinal crops as health supplements. Those are two possibilities.
As far as social and environmental impact is concerned there is a very strong case to be made for doing some of the processing on, or near, the farm itself; shorter supply chains – whether geographically or in terms of number of intermediaries – means that as much value as possible is flowing back to the people who have ultimate responsibility for the land.
Both my farming and forestry projects have the potential to grow into vertically integrated businesses. In Brazil, we are currently delivering to a select group of clients but once we have the logging operations and the saw mill running at full speed, there are any number of companies to whom we could be supplying timber. And we are already moving into the production of finished products as well.
We would seek to expand by buying more land or acquiring logging rights and by buying degraded ranch land to replant. If you plant and extract timber in a rational and sensible way you can show that sustainable forestry isn’t a contradiction in terms – you can have a rich and bio-diverse forest which generates healthy returns and creates employment for rural communities.
Energy production is an area that interests me too. Energy generated from forest residues is carbon neutral and can be switched on and off at will, so it is a necessary complement to other less predictable forms of renewable energy. It also allows you to use as close to 100 percent of the tree as possible – if nothing is wasted, that’s better for everyone.