What returns on agri secondaries?

Stafford Capital Partners’ timberland business is going great guns.

Earlier this week, the UK-headquartered secondaries specialist held a third close on its eighth dedicated fund, collecting $329 million out of a $500 million target. It has now invested the whole of Fund VII vehicle in about three years, announcing full deployment through a $15 million deal on Monday.

No surprise, then, that Stafford is now branching out in agriculture. “We’re basically trying to replicate what has worked well for Stafford in timberland. That is low-risk countries, low-cost producer‎s and focused on secondaries,” Bernd Schanzenbaecher, a managing partner at the firm, told Agri Investor.

Also this week, Stafford announced its first investment in the asset class – a commitment to a permanent-crop fund, managed by a specialist US farmland manager. The pledge was made through a separate account on behalf of Swiss pension ASGA Pensionskasse, which invested $100 million with Stafford in May.

The account, which blends agriculture and timber, is a first for the firm. Schanzenbaecher said Stafford will be looking to raise an agri fund at some point. Separate accounts, in essence, are also a way for the firm to test the strategy.

Risk and reward

Schanzenbaecher is adamant that the sector offers a good pipeline for secondaries investors. He noted that Stafford has looked at 15 agri secondaries deals over the past three years. The firm currently has five prospective transactions in its database.

“Agriculture is today where timberland was 10 years ago,” he argued.

He cited a variety of reasons for why an LP might be looking to sell fund stakes. In one instance, the entity resulting from the merger of two insurance firms is looking to trim down the number of managers it works with; in others, LPs wanting to go direct are interested to divest.

What about returns? Net IRRs on underlying funds, Schanzenbaecher explained, tend to vary depending on the strategy. Row crops typically yield between 6 percent and 8 percent; permanent crops, once up and running, generate cash yields of 10 percent plus. Livestock and dairy funds, he said, generally sit in the middle, at 8 percent to 10 percent.

But that is not the whole picture. Stafford typically seeks to acquire agri stake at a 10 percent to 15 percent discount, which then translates into a 1 percent to 1.5 percent bonus in return – though, of course, price and expected return vary depending on the situation.

And sometimes Stafford finds merit in being flexible.

“We’re focused on doing co-investments and secondary investments, though occasionally we invest in primary funds because this gives us access to potential secondary deals in the future,” Schanzenbaecher concluded.