Why are US LPs so domestic?

Various indicators suggest institutional interest in agri is on the rise. Yet, so far, the appetite of the asset class’s largest investors does not extend much beyond their borders.

It took a while to take root, but it is finally happening. Barring a few notable exceptions, the agri manager universe has so far been largely populated by firms unique to the asset class, with little overlap with other private markets. In other words, agri fund managers have tended to be specialist, rather than generalist, masters of their vast, fragmented space.

Yet, conversations we’ve been having in recent weeks indicate a change is under way. Established players in real estate or infrastructure are now starting to think seriously about agriculture – and beginning to secure commitments under the radar. To us, that only suggests one thing: a growing cohort of LPs are looking to expand their mandates beyond traditional real asset classes, where returns and accessible dealflow have been pressured by that ever-growing appetite for yield.

Earlier this month, placement agent Probitas Partners put a tangible measure on this trend after polling close to 100 investors on their appetite for various areas of private markets. Just under 10 said they were considering investing in the agri sector, with a similar proportion looking at timber. That came on top of the nearly 30 percent of LPs surveyed that already have exposure to either of these sectors.

Though increasingly global, that investor pool remains dominated by North American investors. That’s true of private equity at large – 55 percent of Probitas’s respondents were based in that region – but other indicators, from conference attendance to fund commitments, suggest that may apply to agri even more. ‘North American investors’, however, is a deceptive label. As far as agri is concerned, market sources make a clear distinction between US pensions and their Canadian peers.

The latter already count sizeable players in the international agricultural scene, which are not shy of going public about it. As we reported last week, PSP’s agri portfolio in Australia may well surpass a billion dollars over the next few years; a private markets specialist we spoke to today said Canadian pensions feature prominently among other LPs keen to start deploying money in Australia-focused funds. Yet, when asked if he’d seen the same trend among US pensions, he said those willing to venture overseas were few and far between.

This echoes the words of Nick Tapp, chairman of New Zealand-focused Craigmore Sustainables Group, who told us last month that, despite many conversations with potential LPs, the firm’s previous fund offerings had not gained much US traction.

You can’t really blame American investors for being largely domestic. After all, theirs is the largest private farmland market in the world, and a number of US LPs have built an experience investing in it. In their view, going abroad would probably be a double leap of faith – requiring them to both discover new markets and expose themselves to currency risk.

But it might also be that US investors are looking for something different. Griff Williams, chief investment officer of Milltrust Agricultural Investments, recently hinted that US investors tend to have a greater focus on income generation, with a lesser emphasis on capital development. Craigmore has just hired a strategic advisor to help it design products targeted at US LPs.

As a seasoned market observer recently noted: “All managers are guilty to a degree of selling what they have, rather than selling what the marketplace wants and what the investors are looking for.” America is a tough nut to crack; listening more carefully to what US LPs need is probably a good place to start.

Write to the editor at matthieu.f@peimedia.com