“Buy land, they’re not making it anymore.”
Mark Twain's advice isn't lost on the growing number of institutional investors scouring the earth for new opportunities. According to a new study by Preqin, these investors "seek to diversify their portfolios and position themselves to take advantage of growing demand for food arising from global population growth and increased consumption by the emerging middle classes in developing countries.
They're investing in farmland, agricultural business and AgTech (agricultural technology) as a way to gain exposure to these demographic changes.
The Prequin report, released in mid-September, found that:
$22.2 billion was invested in agriculture/farmland- focused private equity funds between 2006 and 2015
90% of investors in agriculture/farmland are open to landowner-focused opportunities
67% of investors with a preference for ag/farmland funds are interested in investing in AgTech
Prequin, a data and intelligence company focusing on alternative investments, also found that assets in ag/farmland funds have been increasing steadily, from 18 unlisted funds with $1.6 billion in assets in 2013 to 17 funds with a record $4 billion raised in 2014. In 2015 10 funds raised $3.9 billion.
Granted, compared to other sectors such as the $2 trillion REITs market, these funds comprise a small arena, but there are fundamentals that boost the category’s attraction.
A Morningstar report noted that by 2050 the world’s population will grow to 9.7 billion from 7.4 billion, and mainly in emerging markets.
The report on the VanEck Vectors Agribusiness ETF (MOO) states, “Although weather can have an unpredictable impact on supply and prices of agricultural commodities in the short run, long-run demographic shifts are favorable for agricultural industry. Global population growth and increasing meat consumption in emerging markets are sustainable trends that should increase the demand for food during the next few decades.”
To date, most of the ag/farmland funds are directed toward North America. For example, of the 77 funds closed to new investment since 2011, 25 are primarily focused on North America and together they have raised $5.7 billion or 35% of the total capital.
Seven funds are diversified and multiregional and have raised $4.4 billion. The largest focus outside North America is not surprisingly Asia, with 13 closed funds holding $1.8 billion in assets, and Australasia, with seven funds having a total $1.2 billion in assets. (Australasia is comprised of Australia, New Zealand, New Guinea and neighboring islands in the Pacific.) Europe is the least focused area of investment, having only three funds worth $300 million.
The largest of these unlisted funds is the TIAA-CREF Global Agriculture II fund, which has $3 billion in assets, while its older affiliate has $2 billion. And while the agriculture/farmland slice of the natural resource pie is much smaller than that of energy funds – the unrealized value for energy funds is $188.4 billion vs. 14.5 billion for agriculture/farmland and $13.8 billion for timberland funds -- it’s an area with some promising returns.
For example, the Ag Real Value Fund, covering the U.S., has $478 million in assets and an internal rate of return (IRR) of 15.6%, while the Black River Capital Partners Fund (FOOD), covering emerging markets, has $455 million and a net IRR of 9%. The VanEck (MOO) ETF, which invests in global agricultural stocks, is up just over 5.5% this year after a loss of almost 9% loss in 2015. One of its best years was 2010, when it returned 23%.
Of the 2,000 investors surveyed in the Prequin study, 88% preferred energy among natural resource sectors, while 26% also expressed a high preference for agriculture/farmland strategies. Of that 26%, one-fifth were public pension funds, 14% endowments, 12% foundations and 12% private sector pension funds. Most of these invest in agriculture/farmland as part of their real assets strategy.
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