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Roc Partners: The private equity approach to ag

Macroeconomic trends such as corporatization and climate change are driving investor appetite, with LPs now seeing agriculture as an attractive asset class of the future, says Brad Mytton, partner at Roc Partners.

This article is sponsored by Roc Partners.

The winner of our Global and APAC Fund Manager of the Year awards, as well as APAC Agribusiness Deal of the Year for its investment in Flavorite, Sydney-headquartered fund manager Roc Partners has built on 25 years of private equity experience to develop a successful food and agriculture strategy that is appealing to Australian institutions and offshore investors alike. Brad Mytton, a partner, tells us more.

How do you approach agriculture investing and how does this set you apart from others?

Brad Mytton

We have two distinct strategies in the agriculture space, which allow us to cover most of the market.

The first is our food-focused private equity strategy, headed up by our flagship Roc Premium Food Fund. This covers branded consumer products and vertically integrated food production systems. Generalist private equity firms have had pretty good success investing in branded consumer food businesses in Australia and New Zealand, but we have extended that to include the primary production part of the value chain.

It’s unique to take that sort of private equity approach to businesses operating in the upstream part of the value chain in agriculture, which we see as a vital part of our ability to add value, and we like that vertical integration for the security it brings.

This PE-focused approach allows us to target IRRs in the high-teens to mid-20s range by focusing on branded product businesses that are generally capital-light, meaning we can drive value through growing an operating business rather than hoping for land price appreciation or trying to time the commodity price cycle.

Primary production businesses typically produce commodities in a crowded market and are thus price-takers. By targeting businesses that have differentiated products and branding, we invest in companies which have higher bargaining power and are price-makers, creating greater control and stability of earnings. We also focus on near-term deliverable growth, not more speculative growth, and we look to back exceptional management teams, which is something of a given in private equity land but is very much the case here too.

Our second strategy is more asset-intensive, led by an open-end vehicle called the Roc Agri+ Infrastructure Fund. That fund targets food and agricultural supply-chain assets and leases them back to counterparties or makes investments in primary production assets that have an operational component to them with some degree of stability in their cashflows.

Our chicken broiler business ProTen is a great example of the latter, where revenues are underwritten by long-dated contracts with stable counterparties like Inghams. That fund targets an equity IRR in the low teens producing a high single-digit cash yield.

What was the rationale for launching the flagship Roc Premium Food Fund? And how is it performing to date?

Prior to the fund launch, our investments were generally made through separately managed accounts with existing clients, or by raising capital on a deal-by-deal basis. Formalizing the strategy to have it fronted by a flagship vehicle was sensible so that a wider range of investors, from smaller high-net-worth clients up to both domestic and foreign institutions, can get access to the same deals.

The fund is off to a great start, coming up to a final close in May. It is already marked up significantly and is sitting at an IRR of 41 percent as of the last valuation date, with a strong pipeline to deploy the balance of the fund. We’ll probably end up doing around seven or eight deals, and we then expect to be back in the market with Food Fund 2 within 12 months.

You’ve secured the support of local institutions for the Food Fund strategy, contrary to the perception that Australian superfunds are not interested in agriculture. How have you achieved this?

We have multi-decade relationships with these funds that have achieved great returns through the private equity programs. That helped to at least get the initial conversations going and provided a level of trust to identify and execute on sensible transactions.

I think our strategy hits a chord with the local market – many superfunds do want to access the asset class, but they’ve either had a poor investment experience previously or have steered clear because of headline risks around climate volatility or commodity cycles.

If they’re taking on some of that risk for a single-digit return, or even returns in the low teens, they’re more likely to focus on core property or infrastructure to get the same returns at a lower level of risk. Our Premium Food Fund looks to actively manage those risks, targeting returns that are significantly above the traditional sort of land-heavy agriculture investments.

What are the macroeconomic trends that make investing in agriculture attractive?

There are several elements that have made it an attractive sector to invest in.
One interesting dynamic is that food production is becoming more corporatized, so there is an increasingly large role for investment like the kind that we provide. We target successful family operations or small corporates that can become even more successful before morphing into large corporates. We love partnering with those businesses that are doing well already and helping them to grow, often dealing with succession challenges and finding ways for them to actively retain that family legacy while moving to the next level.

Secondly, the climate is becoming more volatile, so we see our role in agriculture as preparing a portfolio for a world of increasingly frequent and severe weather events. Our investment in Flavorite, for example, was a move into protected cropping, which is a net beneficiary of more volatile climates in many ways, because it’s less vulnerable to climatic conditions than our counterparts involved in growing field tomatoes.

Next, we focus on food products that command a premium price and aim to maintain those premiums by outperforming in one of three areas: one, they’re extremely nutritious, such as our extremely high-anti-oxidant plum brand under the 555 Super Foods company we’re developing; two, they’re convenient, such as Flavorite’s successful snacking range of baby tomatoes, baby cucumbers and baby capsicum that are ideal for things like school lunchboxes; and three, food can be an experience, such as with Stone Axe’s premium wagyu beef which is of exceptional quality, or Australia’s Oyster Coast, another of our portfolio businesses that produces some of the best oysters on the market under the Appellation Brand.

Stone Axe and AOC are examples of high-end premium products with high barriers to entry – in Stone Axe’s case it’s around the genetics of wagyu beef, whereas in AOC’s case it’s around the oyster leases and the need to be diversified with oyster farms up and down the coast.

How strong is the ESG thematic in your agriculture investments and how are investors responding to that?

One of the great things that I like about investing in Australian agriculture versus some other asset classes is the massive potential for improvement, particularly around environmental and social objectives. On the environmental side, we invariably end up being the custodians of large tracts of land and water resources, or we might have intensive operations that have the potential to negatively impact the environment if we get things wrong. And on the social side, we can focus on issues like animal welfare and being a responsible corporation working in small rural communities.

There’s usually significant alignment between sustainability objectives and good farming practices, which is helpful, and our investors value the ESG thematic hugely. That in turn creates a wonderful backdrop to allow us to do the right thing once we have ownership of an asset, and the days of competing financial and ESG objectives are gone. We have the license from our underlying investors to push ESG initiatives to the maximum extent possible, and we integrate ESG very early on during the due diligence phase.

Assuming we complete an acquisition, we incorporate any identified actions and baselining work into our 100-day plan, creating a list that we can crack on with right out of the gate. We also tend to base a significant portion of management’s short-term incentives around agreed ESG metrics, which is the best way to focus minds on what’s important. We have companies where ESG metrics have the same weight as financial outcomes, so it is a meaningful part of how people are remunerated.

The returns from your agriculture investments in recent years are striking. What do you put this down to?

We’ve had a great run in the last five years. The portfolio is in great shape and a handful of our investments are performing exceptionally well. Every one of our newer investments has a clear growth path, too, so we are genuinely excited about them all.

Our high performers fall into two areas. One is where we have invested in the right sector, meaning one that is growing quickly or where we don’t have to compete directly with family farmers that might have an advantage over us. The second is making sure we have the right management teams in place, as having the right people in place can make all the difference, especially in smaller rural communities. It’s a cliché, but good people attract good people – so finding the right senior leaders and building around them is a private equity-style discipline that we continue to implement across our ag portfolio.

Has the pandemic reinforced the thesis behind ag investing?

The food and ag strategy has thrived during the pandemic. It’s been a challenging time from a labor availability point of view, and it hasn’t been easy overall, but there is now higher pricing and demand for our products across the board. It’s also been helpful to invest in companies which have the ability to exert influence on the sales price of their goods, to ensure that margin remains healthy at a time when prices for inputs such as labor, materials and freight are increasing across the world. The portfolio has performed exceptionally well, which speaks to its relatively defensive nature.