Why CPPIB’s ag investment pivot is a savvy move

In 2014, the Canada Pension Plan Investment Board launched a strategy designed to help protect the C$409 billion ($297 billion; €262 billion) fund from structural and innovative disruption emerging across its investment portfolio.

The Thematic Investing Group, which started investing in 2016, was needed because the typically-used forecasting method of “linearly extrapolating future financial models” based on past performance could not be totally relied upon in a rapidly changing world, group managing director Leon Pedersen told Agri Investor.

“If we suddenly hit these disruptive or structural changes, there was a risk that we could get that [financial model] wrong,” explained Pedersen. As well as deploying capital, carrying out in-depth research into industry changes that are on the 15- to 20-year horizon and sharing that knowledge across the pension is another key part of the team’s job, he added.

Now, the C$6 billion Thematic Investing portfolio has turned its attention to disruptive ag companies, with the launch of its Climate Change Opportunities strategy. Introduced at the end of 2019, it is split into three “structural drivers” and will seek out opportunities created by physical changes, such as temperature and sea level increases, policy and regulatory “transitions,” and shifting food consumption behavior.

The strategy deployed capital for the first time this month, placing a $50 million direct investment into alternative dairy producer Perfect Day.

This is a noteworthy development for several reasons. For a start, this is a large pension fund that now has a clear mandate to invest in agtech companies either directly, through funds or co-investments. CCO will link up with CPPIB’s venture capital program also established last year – based in San Francisco – which has already deployed C$203 million and has a mandate to “make fund commitments and co-invest alongside top-tier VC managers,” the pension’s 2020 annual report said.

With Pedersen expecting CCO to have amassed around 15 investments over the next 12 months in ag-facing disruptors, the pension fund could very well be sitting on a portfolio worth several hundred million dollars full of innovative ag firms by this time next year.

The MD added that CCO will follow in the footsteps of the wider Thematic Investing Group’s approach of investing in both public and private markets – only one-third of the C$6 billion portfolio is exposed to private markets while the remaining two-thirds is public.

This, Pedersen hopes, will help convince budding start-ups that the pension is in it for the long haul. “We will be very happy investors once these companies also go public and will keep holding them into the public space,” he said. “So, again, supporting that idea we are truly long-term investors in these companies.”

What is also intriguing is that the pension is pursuing innovation in ag through a climate change strategy – two topics that increasingly find themselves intrinsically linked in the eyes of policymakers and investors.

The Global Impact Investor Network’s survey of 294 investors with a combined $404 billion under management found that 57 percent of respondents have some allocation in food and ag while a further 54 percent said they planned to increase that allocation. The indicators continue to point long-term sustainable investors in the direction of food and ag.

But perhaps the most intriguing aspect about this latest play from CPPIB is how many boxes it appears to tick for the pension fund: the strong ESG targets naturally baked into the business models of every agtech firm would have to aid the fund’s sustainability credentials; the strategy gives the pension a direct route into the nascent but rapidly growing alternative protein space before inflated valuations make commitments prohibitive; and it has the potential to help fulfill the Thematic Investing Group’s main goal of future-proofing the pension fund’s portfolio.

If it pays off in the way Pedersen and his team hope it will, the Canadian pension fund will have made a very savvy tweak to its ag investment strategy.

Write to the author at: binyamin.a@peimedia.com