When the Teacher Retirement System of Texas combined assets from its private equity and real asset portfolios to establish its energy, natural resources and infrastructure (ENRI) allocation in 2013, farmland prices were very high.
As the $152 billion pension pursued a diversification effort that included initial steps into agribusiness, anti-corporate farming laws and personnel constraints have also played a role in keeping TRS away from farmland assets.
Now, the senior investment manager of its $9 billion ENRI portfolio says asset price moderation has helped inspire a review of the sector.
TRS committed $100 million to a Paine Schwartz Partners-managed separate account in July. Senior investment manager for ENRI, Carolyn Hansard, tells Agri Investor the fact that farmland would be complementary to Paine’s strategy also played a role in the rethink.
Although TRS is fully committed for 2019, the potential re-entry is part of the pension’s plans for 2020 and beyond, Hansard explains. She declines to identify a range for any potential commitments, beyond saying TRS has made investments as low as $50 million in the past.
“As the farmland prices have started becoming a little more reasonable, it’s becoming of interest to us again,” says Hansard. “We are talking to a few people to figure out where is a good entry point for us and what is a good strategy for us.”
Though the portfolio was created primarily to look at opportunities in the energy sector, ENRI’s focus on inflation and downside protection means her team investigated agricultural real estate. However, in addition to high prices and anti-corporate farming laws in the Midwest that limit the geographic scope of where TRS could invest, its 7.25 percent actuarial rate of return also disqualified many farmland funds.
“What we were seeing was opportunities on the coasts [of the US] and in Brazil,” says Hansard. “We looked more at where can we invest and get at opportunities in the sector, but maybe not based on the real estate price and that is where we looked at agribusiness.”
It was this focus on agribusiness that led to TRS’s initial investment with Paine Schwartz – a $150 million commitment to the firm’s flagship Food Chain Fund V in December 2018.
Ag within ENRI
Agriculture investments are housed within TRS’s real return grouping that makes up 22 percent of the overall portfolio. It is designed to protect against inflation through investments in US Treasury inflation-protected securities and real estate, in addition to ENRI.
Despite an initial strategy that aimed to divide the portfolio between 45 percent allocations to energy and infrastructure, alongside 10 percent of investments in ag, Hansard explains that blurring lines between the asset classes helped inspire a shift towards a more risk-oriented organization of the portfolio.
“This whole world has morphed,” she says. “For example, we will see infrastructure funds that are doing cold storage. Agri funds come in and are saying: ‘We’re vertically integrated and within that is cold storage’.”
Given that a significant portion of investment opportunities in transport infrastructure are in part related to the movement of commodities, Hansard says it made sense to move towards a more holistic framework that could help identify risks and ways of mitigating them.
She says TRS has now moved towards a risk/return assessment of its potential agricultural investments, similar to one used widely in traditional real estate.
That framework seeks a balance, Hansard said, between “core” exposure to row crops, “value-add” investments into permanent crops already producing cashflows, and an “opportunistic” grouping for agribusiness and other investments requiring longer development times, such as establishing a new permanent crop property.
TRS’s move towards a farmland re-entry take place amid a broader effort to expand its capabilities in “principle investments,” which include structures where staff co-invest or co-underwrite alongside a GP.
Hansard was not at TRS in 2010 when it completed its one existing farmland investment – a $250 million commitment to the AG Real Value Fund, a vehicle managed by Teays River Investments that would later convert to a corporate structure focused on organic dairy, seed production, table grapes and row crops.
Hansard explained that in the past, it was difficult for the team of two managing TRS’ ENRI portfolio to devote resources necessary to evaluate individual deals, some of which were relatively small.
“A lot of the ‘farmland funds’ are really a series of SMAs [separately managed accounts],” said Hansard. “The SMAs typically distribute opportunities on a rotating basis among investors, which can create challenges in getting specific exposures.”
As TRS continues to build its team, Hansard says she is looking to add executives who have either experience in the relevant sectors or a long history evaluating investment opportunities.
Looking ahead, Hansard says she expects the higher inflation rates, which the real return portfolio was established to protect against, to return “at some point.”
Although the relationship between inflation and oil prices is stronger than that which exists between inflation and agriculture, Hansard says her expectation is that TRS’ ag investments will outperform some other asset classes in producing growth that can at least keep pace with the rate of inflation in any future recession.
“People are not going to quit eating, they are not going to quit heating their homes and they are not going to quit driving; they may do less of it, or go to cheaper forms, but those will be necessary and so they provide downside protection,” she said.
Hansard declined to discuss the Paine Schwartz fund investment or separately managed account vehicle in detail. She did say, however, that she had long been familiar with Paine Schwartz, which met the criteria TRS uses to maintain a “premier list” of managers that share the pension’s philosophy and are capable of managing large institutional capital.
“We don’t just invest with a GP, we really partner with them,” Hansard says. “Part of partnering with them is making sure we have access to third-party materials. Making sure we are very involved in the sector and get, as I call it, ‘smart fast’.”