Townsend advises OP&F to look out for opportunities from ag distress

Ohio Police and Fire Pension Fund’s real assets consultant has suggested that the $17.4 billion pension should watch for distress-related opportunities to supplement its single permanent crop-focused agricultural investment, which it says is underperforming.

A presentation by consultant The Townsend Group given at an investment committee meeting in late January and provided to Agri Investor – with redactions – includes a recommendation for no new row crop or timber investments for the foreseeable future.

Overall, the firm, headquartered in Cleveland, Ohio, advised OP&F to pursue a real assets investment plan in 2023 that includes total commitments of up to $350 million, consisting of up to $200 million in closed-end commitments and $150 million into open-end vehicles. Within ag, Townsend suggested increasing its agricultural exposure beyond its single permanent-crop-focused investment with Agriculture Capital gradually over time, with a focus on opportunities created by “potential distress”.

“The potential for value adjustments continues to be an area of focus – both for reporting and as new investments are considered,” wrote analysts from Townsend, which declined to comment. “Position capital to take advantage of dislocation. Historically, vintages following market dislocations are good times to invest.”

OP&F, which also declined to comment, houses its agricultural investments within a real assets portfolio that also includes timber and infrastructure, and has a target of 8 percent of total assets. Townsend’s report explains that upon a reorganization of the historically timber-focused portfolio that began in 2016, the pension undertook a series of infrastructure investments that have resulted in that portion of the portfolio exceeding its target of 45 percent of real asset investments.

OP&F policy now calls for agriculture to remain the smallest portion of the real assets, well below its maximum target of 20 percent of the portfolio.

“Core infrastructure, farmland and timberland are expensive by historic metrics,” Townsend wrote. “The [OP&F] agriculture portfolio is going through a very prolonged J-curve and is underperforming.”

OP&F’s 2017 investment in Agriculture Capital Fund II has produced a negative 7.7 percent IRR since inception, according to Townsend’s report.

AC senior vice-president Atish Babu declined to address Townsend’s judgement that Fund II is underperforming and told Agri Investor his firm was not privy to the report. He stressed there are nuances that complicate current judgement of a long-term strategy that began well before the significant economic and operating environment changes experienced over the past 12 months.

“Given the vintages of both Fund I and Fund II, AC intentionally went long on permanent crop farmland development, which has, by design and definition, a very prolonged J-Curve,” said Babu. “Given the change in the macro environment, particularly around interest rates and inflation, we have skewed for focus on high-yield and income and away from development.”

AC is currently seeking $500 million for a citrus-focused strategy with plans for investments in California, Australia and Spain.

Babu agreed with Townsend’s judgement that farmland markets are currently expensive and highlighted that significant distress-related opportunities have been relatively rare over the past decade. He added that while financial consultants are expecting similar distress-related opportunities across markets, it’s not clear any have clear views about exactly what they are.

“If people have the same valuation expectation as 24 months ago, 18 months ago or even 12 months ago, it feels like that’s misplaced,” said Babu. “The same is true of real estate, infrastructure and almost every asset class, including public equities right now.”