US Ag overcomes merger concerns, adds $25m to NMERB separate account

NMERB chief investment officer Bob Jacksha tells Agri Investor why a merger involving the farmland vehicle’s original manager, Halderman Agriculture, did not end up being a deal-breaker.

The New Mexico State Educational Retirement Board has added $25 million to a separate account managed by US Ag and extended that vehicle’s investment period by two years.

According to meeting minutes posted on its website, the $12.8 billion NMERB hired Halderman Agriculture to manage an open-ended, non-discretionary separate account of $50 million in February 2013. The vehicle had invested $37 million in five investments at the time of its April investment committee meeting, during which the above decisions were made.

“The NMERB was planning to bring this forward later in the summer, but in the meantime, US Ag has found some opportunities that are more timely,” according to the meeting minutes, which did not elaborate on what it had been planning to do and what the opportunities were.

Also discussed at the meeting were the implications of Halderman’s 2016 merger with Hageman Investments to create US Ag, which now manages the separate account.

“Staff had some initial concerns about the merger, not seeing it as accretive to the NMERB’s initiative to its investments, but the NMERB ultimately supported the merger,” according to the meeting minutes.

Merit of the merger

These showed that under the terms of the separate account, NMERB real-return group director Mark Canavan and consultant Howard Kaplan of Hamilton Lane review transactions and farm operating partners sourced by US Ag and retain final veto authority over investments from the vehicle. The pair found that because the individual fund US Ag is raising focuses on “more row-crop-type of farming,” it does not compete with NMERB investments, according to the minutes.

“He [Canavan] and Mr. Kaplan continue to be pleased with their operating partners, deal sourcing, underwriting and performance, and continue to be selective about investments. He commented it is still too early to assess returns,” the minutes read.

In addition to approving the recommendation that NMERB commit an additional $25 million to the account, the investment committee also cleared the proposed two-year extension of the vehicle’s investment period to February 2020 and its investment advisory and management agreement to December 2023.

NMERB chief investment officer Bob Jacksha told Agri Investor that his main concern was whether the merger detracted from the firm’s focus on its investments. Though agriculture is a nascent asset class from the managers’ perspective, Jacksha said that NMERB has experience dealing with similar situations as a result of mergers among other managers and consultants.

“This particular instance doesn’t influence our overall thinking about the asset class,” said Jacksha. “The reason we are in the asset class is more strategic from an asset allocation point of view, concerns like inflation protection, downside protection if there should be a downturn in other markets that this provides some diversification.”

First-come, first-served 

A source familiar with the use of separate accounts in agriculture told Agri Investor that, as is the case for commercial real estate and other sectors, managers often negotiate explicit allocation policies to address situations such as US Ag’s.

“You’re dealing with the classic challenge you have if you are buying for more than one account,” the source said. “If you are an LP, you want to get the manager’s allocation policy and see how they are running their shop.”

Allocation policies commonly used in agriculture, according to the source, include a “first-come, first-served” approach where suitable properties are distributed among vehicles sequentially, often in the order of how long the LP has been a client of the manager. Another allocation policy the source described as common in the market is a “best-fit” approach, where the manager retains the ability to decide where a specific property should be placed based on their analysis of the market.

“If you are an LP, you want to get the manager’s allocation policy and see how they are running their shop”

NMERB, an LP with significant experience in agriculture, retained ultimate discretion over US Ag’s specific investments, but the source said most investors will delegate that discretion to their manager. Managers are often reluctant to give up discretion over their purchases, according to the source, who added that some will give the accounts that give them discretion priority over others as part of their allocation policy.

“If you are a manager, a lot of the time, if you have a live deal and its moving and happening fast, now you have to give the authority to say no or yes to a third party,” the source explained. “If I’m selling my farmland asset, I want to deal with a principal that has the authority to do the transaction. I don’t want my acquisition guy out there saying: ‘We hope to do this deal, but it depends on our client’.”

US Ag declined to comment.