Who’s afraid of emerging markets?

In the mind of many investors, emerging markets used to be synonymous with the Wild West. These were lands where you could get rich in no time – provided you knew where to dig for gold, could dodge a few political bullets and navigate a complex business climate. EMs are now less wild than they used to be, but investors’ risk aversion remains: it is rare to see them cohabitate with OECD markets within an infrastructure or PE mandate. Mostly, they remain the purview of specialists.

Ag and timber appear to be an exception. In January, Hancock Timber Resources Group purchased 12,250 hectares of forestland in central Chile, its second acquisition in the country. The rest of its $11 billion portfolio covers the US, Canada, Australia and New Zealand, which pretty much captures the asset class’s most mature markets. So why Chile? “The majority of these lands were established several decades ago as timber plantations,” says HTRG president Brent Keefer, hinting that these assets may be safer than their EM label suggests.

Ag managers have similar views. Last November, we reported that Milltrust Agricultural Investments, the ag division of UK- and Singapore-based Milltrust International, was mulling a Latin American fund as it sought to expand its Buy & Lease strategy beyond New Zealand and Australia. Griff Williams, CIO of the firm, cited Chile and Uruguay as potential first stops; Paraguay and Brazil were also on the list. He reckoned those countries were safer bets than peers in the Northern Hemisphere, which he described as “overanalyzed, overowned.”

HTRG and MAI are no exceptions. Once investors decide they want to take their ag strategies beyond domestic borders, says Luciana Aquino-Hagedorn, a partner at Goodwin, they also tend to put emerging markets on their radar. Brazil is often among the first that crops up on the list, she adds.

There are serious caveats. When observers speak of emerging markets, in the ag context in particular, they often mean Latin America. Finding private institutions willing to invest in Africa remains an arduous task: Herman Marais, the boss of South African PE firm EXEO Capital, told us last month that sub-Saharan agriculture is still too reliant on DFI funding. Investors exposed to African markets, Aquino-Hagedorn says, typically have “a very different profile.” Emerging Europe is attracting more capital. But a small poll we conducted this week suggests many remain unconvinced by the risk/return trade-off.

Yet Brazil itself is not an easy place to invest, and still it is popular. So why do investors seem to think emerging market risk, at least in LatAm’s case, counts less in agri? Part of the answer lies with returns: EM assets continue to generate a premium (Aquino-Hagedorn places it at about 300 basis points). Justin Ourso, head of natural resources at Nuveen, told us last year that he expected to find “better relative value in less-developed non-US markets, despite higher risks.”

That may be true of other asset classes. What most don’t have, however, is a physical reality – and one that’s not subject to permitting or concession terms. Eva Greger, a partner at The Rohatyn Group, says investors are simply reassured by the security of land ownership. “In private equity, it’s entirely possible to lose 100 percent of an investment. If land ownership is secured, that’s hard to do in a farming or forestry investment.”

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