Year in review, 2023: Agriculture as infrastructure?

Ardian and Morrison & Co, two infrastructure fund managers, revealed nature-based investment strategies in 2023 that they say fit neatly within their infrastructure strategies – a trend that looks set to continue.

Trees in a forest at sunrise

Certain segments of the agriculture and forestry assets classes have always appealed to a subset of infrastructure fund managers.

Forestry, in particular, has often been seen as a natural fit within infrastructure portfolios for LPs that do not have a separate bucket for natural assets. It is seen as a long-dated asset with inflation protection built in and often comes with contracted revenue streams – in other words, quite similar to a core infrastructure asset like a toll road, for example.

But 2023 saw a handful of infrastructure GPs enter the space in a broader way, seeking to take advantage of the still-nascent natural capital asset class and sell it to their existing client base that it is familiar with infrastructure.

As Louisa Yeoman, a founding partner at placement agent Astrid Advisors, told us earlier this year: “Natural capital is coming on the radar for GPs focused on sustainability. Perhaps they have built an infrastructure or renewable energy platform and are now looking at this part of the market as their next step to build out. Over the next two to three years, we believe this will start being more important in people’s portfolios as they continue to build [them] out to target their climate commitments.”

There were two high-profile examples this year.

The first was Paris-headquartered fund manager Ardian, which partnered with aDryada, a fellow French developer of nature-based projects to launch Averrhoa Nature-Based Solutions, as reported by affiliate title Infrastructure Investor. The firm said it would be a fund strategy that would seek to raise €500 million to “finance projects to restore forests, wetlands and mangroves in order to sequester large quantities of carbon.”

Carbon was also central to another strategy launched quietly by Morrison & Co, which acquired Pastoral Partners Australia through its closed-end Growth Infrastructure Fund in 2022 and continued to add properties to its portfolio in 2023.

As Morrison partner and head of asset management Steven Fitzgerald told us on the rationale behind the investments: “Stepping back and looking at the fundamentals, we are investing in large-scale assets that will be absorbing carbon from the atmosphere for 25 years and beyond, and reliably generating tradable instruments that are needed by third parties to meet net-zero emission targets. That’s fundamentally why we consider this has the characteristics of infrastructure.

“The Australian government is a buyer of ACCUs through regular auctions and has committed to purchasing A$2.7 billion of ACCUs to date. This helps underpin the market. Some of the seed properties have an offtake agreement with government, so there is a contracted revenue stream there.”

Other investors will be more cautious in including farmland or forestry assets in their infrastructure buckets, no questions asked. The question of what constitutes an infrastructure asset is not going away, however, as the Asian Infrastructure Investment Bank joined the debate and proposed the “transformative concept of defining nature as infrastructure” in a December report.

These developments are a sign that the great hope stated to us by several GPs over the past few years – that the reframing of agriculture investment as a new natural capital asset class would unlock swathes of capital that until now would not have invested in this sector – is perhaps starting to come to fruition.