Preqin | 14 July 2014
Buyout firms look for cash cows in agricultural assets
Private equity firms own a wide range of companies, from obscure industrial manufacturers to healthcare operators, retail brands and tech firms. But growing interest in agriculture is paving the way for more unconventional deals, from the cultivation of farmland to the ownership of rich soil.
Investment in the sector remains in its infancy. According to data provider Preqin, there are 25 private equity funds targeting agriculture investments, with a total target of $1.1 billion. A total of two funds have raised $400 million for agriculture-focused private equity deals in 2014.
Yet some are attempting to invest to take advantage of trends in farming and consumption, such as the rise in popularity in almond milk as a healthy alternative to dairy. Swiss firm Adveq, best known in Europe for its investments in other private equity funds, has become one of a few private equity firms pioneering investment in so-called real assets, which can include the acquisition of farmland, crop production or tangible, edible, drinkable assets.
It has been monitoring the growing popularity of almonds among the western world’s health conscious people, and the falling levels of production in California, the world’s largest almond producer. So when the opportunity arose to invest in one of the world’s largest almond farms in Australia, the firm assembled a team of co-investors to secure the deal. And in February this year it bought 50% of Australia’s almond producing farmland from the commodity supplier Olam. Now, three million trees are owned by Adveq and its partners. The group will lease the land back to Olam for the next 18 years.
Berry Polmann, executive director at Adveq Real Assets, said the £116 million deal provided stable, long-term returns. “Urbanisation will continue, and have an effect on commodity demands”, he said. US public pension fund Municipal Employees’ Retirement System and Danish fund Danica Pension joined Adveq on the deal, which was its first from the real asset co-investment strategy.
In the past five years, Adveq has ramped up its presence in the real assets space, looking for deals like the almond agreement. Institutional investors believe real assets deals provide a useful alternative to buyouts, which can be higher risk and shorter term. William Gilmore, head of investments, private equity funds at Scottish Widows Investment Partners, said: “Real assets deals fit between private equity and infrastructure. To some extent they are assets you can hold for a longer period of time. I think it is a yield play as much as anything else.”
Range of deals
Adveq is not the first to have spotted wider trends that have led to opportunities in the space. Private equity giant, Kohlberg Kravis Roberts bought a stake in 2008 in China Modern Dairy, an industrialised agricultural company, and in early June, it struck one of its first African deals, investing $200 million from its European fund to buy Afriflora, an Ethiopian company that grows 730 million roses each year.
The rose farm deal has similar drivers to Adveq’s almond investment, with Western demand driving a need for greater supply, according to people close to the deal. According to the International Association of Horticultural Producers, Ethiopia’s rose exports have more than doubled from €62 million in 2008 to €131 million in 2012, amid rising demand from large supermarkets in Europe.
Similarly, Terra Firma’s $278 million deal for Australia’s second largest beef producer in 2009 was also struck “on the basis of strong macroeconomic trends impacting the long-term price for the asset [beef]”, according to a person familiar with the matter. The private equity firm took control of more than 300,000 cattle and five million hectares of land in Australia. A person familiar with the deal said Terra Firma recognised the demand for protein and beef products from emerging economies. According to the Rabobank Global Beef Price Index, beef prices rose 58% between April 2008 and April 2014. The investment, under the name Consolidated Pastoral Company, remains part of Terra Firma’s portfolio, but the buyout firm declined to comment on the current status of its investment.
More recently in Asia, Yunfeng Capital last month bought dairy products manufacturer Inner Mongolia Yili Industrial Group. In February, Hong Kong-based buyout firm RRJ Capital invested in Shanghai Bright Holstan, a dairy farming joint venture with Shanghai-listed Bright Dairy & Food.
But challenges remain for buyout firms hoping to break into the sector, according to market experts who say it is already dominated by specialist investors.
Chris Erickson, managing director at agricultural advisory firm HighQuest Partners, said he had seen a notable increase in interest among private investors since 2008. “We launched our first conference [for agricultural investment] in 2009, and 220 people showed up. In the past year, that had risen to 650 people, ranging from Canadian pension funds to Municipal Employees’ Retirement System,” he said.
But he added that despite growing interest from institutional investors for agricultural real asset funds, there had been a slow take-up among global private equity firms. “It has been slow going for these guys. There has been sporadic interest from the larger groups, and have been more traditional mid-stream assets [storage and transportation], rather than necessarily the land.”
Erickson added private equity firms would face challenges to break into the sector, because few investors had the necessary expertise. “One of the challenges is understanding farm economics. People think farming is an easy thing, It is a very technical business these days, between technology and everything else. Having people with a farming background as well as a financial background is something very few people have, and that is one of the major difficulties.”
He believes investments with a longer term, albeit lower yield than buyouts, would be attractive to pension funds, insurance companies and other institutional investors seeking stable returns.
Some private equity executives remain unconvinced that buyout firms without the expertise will swap the lure of quick-fire deals for the heavy toil of farming investments anytime soon. “The sector is so much work,” one dealmaker said. “It is so slow compared to the high octane environment of traditional private equity. It takes time to build these platforms, and it is not an area for firms which want to deploy capital easily.”
John Gripton, a managing director at private equity investor Capital Dynamics, said he had noticed several private equity firms marketing funds for investment in the timber sector but said there were currently few other offerings for real asset funds. He said investors were often unsure whether to include investments in these funds under private equity, real estate or infrastructure allocations.
For now, institutional investors are taking matters into their own hands, rather than waiting for private equity firms to offer up opportunities in the sector. Last month, a major US pension fund Illinois Municipal Retirement Fund, mandated Hancock Natural Resource Group to manage its agricultural investments, with an option of giving the manager $100 million for new investments.