The sovereign wealth fund dilemma

State-backed vehicles have good reasons to invest in agriculture. Can they do it at scale without running into political hurdles?

Yesterday, PwC published a report highlighting the “rising attractiveness” of alternative asset classes among sovereign wealth funds. That story is not new. Despite headwinds caused by dwindling hydrocarbon prices, SWFs’ assets under management have been growing steadily since the financial crisis. Low interest rates have led them to look for better returns away from mainstream asset classes; hedging their country’s fortune against future crises has prompted an appetite for diversification. Private equity, real estate and infrastructure have all benefited.

Agriculture has also been in SWFs’ cross hairs. Between 2005 and 2015, 14 state-backed vehicles deployed more than $11.1 billion in the asset class through 51 deals, the Sovereign Wealth Center estimates. That appetite has remained unabated since, with “commodity-driven funds” taking the lead, says PwC sovereign fund strategy expert Tarek Shoukri. “SWFs investing in commodities prefer to devote resources to water and agricultural projects,” and 56 percent and 54 percent of SWFs are already exposed to these, respectively, the report notes.

SWF ag investments span global markets. The Philippines, for instance, hosts capital from all six members states of the Gulf Cooperation Council. Saudi and Emirati investors have been looking at farmland in the US, Canada and Mexico. African SWFs, such as Nigeria’s and Angola’s, have targeted agriculture in their domestic markets. But deal activity has mainly been underpinned by institutions emanating from countries that do not own a lot of land themselves, says Shoukri, citing funds from Singapore and the GCC.

That hints at a major difference between agriculture and other alternative asset classes. Rather than looking at farmland on an opportunistic basis, SWFs often purchase it for strategic motives tied to food security – their own, and that of others. As the world’s population grows and develops new eating habits, supplies are likely to get tighter. SWFs are acting today to help ensure their own countries can access needed resources in the future. They are also positioning themselves to be market makers for when scarcity moves the terms of trade in their favor.

This strategic rationale explains why SWFs tend to face greater local opposition than others when attempting to buy large tracts of land. “There is a geopolitical aspect to these investments,” says Shoukri. “The question for a target country is, ‘How much of my food security do I want to be owned by other governments?’” For SWFs, this line is a particularly fine to tread as most only tend to consider deals above a certain size threshold: they like to get a lot of money out the door at once.

That requirement often makes their moves particularly visible. Lately, these have been concentrated on two large markets: Australia and Brazil. In both countries, greater controls have been imposed on foreign takeovers of farmland or livestock. Such restrictions are not limited to agriculture – Australia’s critical infrastructure is also out of touch for most outsiders – but controversy in the sector has played a major role in turning the issue into a political hot potato. In today’s populist mood, it’s hard to imagine a government losing many votes over a tightening of foreign investment rules.

Faced with such a dilemma, SWF will continue to grow their agricultural assets, but they’ll probably do so at a more moderate pace than their strategic thinking would dictate. More often than not, they will also join forces with local partners, helping them navigate the perils of a given market and defuse the scrutiny they would have faced if they had gone it alone. Another wise strategy to hedge sovereign risk.

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