What does TPG Sixth Street’s ag strategy tell us?

TPG’s gradual entry into agriculture has certainly attracted a lot of speculation over the past three years.

For a time, many expected that the firm’s interest in the space would be expressed through its impact investing Rise Fund series. The first in this lineage was a $2 billion 2017 vintage fund that was followed, in 2019, by a successor targeting $3 billion. From the outset, TPG’s managers had identified ag as one of several sectors in which the debut fund would pursue its impact goals.

Since the start of this year, it has become clear that another unit of the Dallas-headquartered private equity giant – its credit- and special situations-focused affiliate TPG Sixth Street Partners – is pursuing a far more direct play in the ag space.

Agri Investor reported in January that TSSP had raised at least $350 million for an ag-focused strategy. Sources have since confirmed that the TSSP Agricultural Partners Fund will focus on citrus- and water-related dislocation and large-scale organics.

It is important to note that the move comes as Sixth Street is reportedly aiming to formally separate from TPG – and distance itself from the negative connotations associated with the ‘special situations’ moniker, which was part of its name before a 2017 rebranding to Sixth Street.

Among the dislocations Sixth Street’s TAP Fund is understood to be targeting are properties challenged by groundwater regulation in California and citrus-greening in Florida – markets  that sources have long told Agri Investor would eventually produce significant opportunities.

In looking to optimize properties whose economics have been altered by a market event such as SGMA and incorporate them into new supply chains, Sixth Street enters ag at a time when financial engineering may prove as important as agronomic acumen.

Sixth Street’s move to drop ‘special situations’ from its name and the gradual change in the wider use of the label in the years since the financial crisis certainly complicate any attempt to draw too direct a line between the TAP Fund’s strategy and a ‘distressed investing’ approach.

Indeed, a source familiar with Sixth Street’s strategy clarified that it is not “necessarily a distressed or special situations strategy, thematically.”

Nevertheless, a second source was keen to point out that the firm is pursuing agriculture from a unique perspective that is hard to imagine is well-suited to a boom, and at a time when the source considers the sector to be suffering at least some distress.

“Lenders are willing to write off 10, 20, 30 percent of par just to pay off debt,” said the second source, who has visibility across a wide swath of agricultural investing markets. “That is going to bring a lot of opportunistic players into the market that have never seen a corn field in their life.”

The first source Agri Investor spoke to also suggested that Sixth Street’s pitch to investors has focused as much on its cost-of-capital advantages as it has on its teams’ agricultural expertise.

By partnering with ag-focused asset manager SLM Partners and farm management consultancy Midwestern BioAG (among others) to scale and manage organic production, Sixth Street has signaled its intention to marry its own broader view of key markets and trends with established agricultural investing expertise.

A combination of market factors have conspired to create a widespread impression, held for several years now, that sooner or later the small group of private equity firms exclusively devoted to ag will see increased competition from their larger, more generalist peers.

Sixth Street’s fund is just one more indication that those expectations may be correct.

It will be intriguing to see how many deals the TAP Fund strikes under the ‘dislocated investments’ banner, compared with the number that are more forward-looking responses to consumer trends.