Stagflation fears drive institutional and retail farmland demand – Veripath

Family offices are the investor type seeking farmland exposure most aggressively in response to signs of potential ‘stagflationary’ conditions in the economy, said Veripath Farmland Partners director Stephen Johnston.

Johnston told Agri Investor family offices are well-represented among the LPs that Alberta, Canada-headquartered Veripath has secured commitments from in raising approximately C$70 million ($53.7 million; €45.2 million) across the two open-ended farmland vehicles it launched roughly one year ago.

Pensions are also among the potential investors increasingly interested in hearing about farmland’s performance during the 1970s, said Johnston, which was a period characterized by inflation and economic stagnation.

“There’s only a handful of things that generate positive rates of return in stagflation. Farmland’s one of them,” said Johnston, who also serves as partner with Calgary, Canada-headquartered Agcapita Farmland Investment Partnership, according to his LinkedIn profile.

“Farmland basically gives you a hedge from that [inflationary] event with a negative cost of carry, because we generate cashflow,” he explained. “It’s like getting your insurance and having the insurance company pay you the premium.”

Veripath’s open-ended funds, Veripath Farmland LP and Veripath Farmland (UR) LP, both target institutional and retail capital. Two separate vehicles were required, Johnston explained, due to regulations preventing farmland acquisitions in the provinces of Saskatchewan and Manitoba by pension funds.

Though most of the capital raised thus far has been from institutions that have included pension plans, he explained, Veripath has also listed its offerings on DealSquare, a venture capital-backed private placement platform designed to “make private markets better and more accessible.”

The DealSquare listing, said Johnston, provides exposure to a network of more than 18,000 firms licensed by the Investment Industry Regulatory Organization of Canada, to advise retail investors Veripath would otherwise not be able to access. Through average investments of about C$20,000, he added, Veripath anticipates retail investors will account for about half of the C$100 million it expects to raise annually.

“Retail investors are starting to say: ‘I want my portfolio to look more like an endowment, but I need alts that I can understand so I can make an informed risk decision.’ Farmland is exactly that strategy,” said Johnston.

“I think we will find that the first alternative that a lot of retail investors go into will be something like this [farmland], because it’s the easiest way to dip your toe in the water. You are not going to dip your toe in the water with a bond arbitrage fund that’s levered 75 percent and run by six PhDs.”

Johnston estimated financial investors make up less than 1 percent of an approximately $500 billion Canadian farmland market that sees about $20 billion in sales in a typical year. He said that in addition to widespread use of environmentally friendly farming practices that has helped feed investor appetite for properties in Western Canada, rising temperatures are among the factors gradually increasing the range of attractive farmland markets within the country.

“Whereas when I started 13 years ago, you couldn’t justify deploying capital anywhere but Saskatchewan because it was just so inexpensive on a productivity-adjusted basis,” he said. “That isn’t the case anymore. Now, a prudent manager can say my market is all of Canada.”

Veripath has a nonoperating investment strategy focused on upfront annual cash rent payments from tenant operators of row crop properties throughout Canada. The firm has already acquired 40,000 acres of Canadian farmland with capital raised into its open-ended funds.

The vehicles have an initial hold period of four years, after which LPs can choose their own duration, Johnston explained. He said Veriapth’s expectation is that the average investor in the funds, across both institutional and retail LPs, will remain for about seven years.

Amid widespread uncertainty regarding economic growth and potential inflation, he added, such flexibility is highly valued by investors.

“Liquidity is perverse,” Johnston said. “People want liquidity. If you give them liquidity, structurally, they typically don’t ask for it. They just want to know that it is available in principle.”