Investing in the agriculture value chain
Why invest in the agriculture value chain?
Real assets provide several potential portfolio benefits, including diversification, low or negative correlation to stocks and bonds, and a natural hedge against inflation. Agricultural assets provide additional exposure to key macro food and agriculture demand trends including population growth and increased middle-class formation in emerging markets.
Growing populations—and a larger middle class—will require more food
Global aggregate demand for food is expected to be 50% higher by 2050.* This forecast is being driven by the combination of population growth, middle class formation, and associated increases in disposable income. Viewed from a total food demand perspective relative to 2009, 2050 demand is expected to be 70% higher. The reason that food demand is projected to outpace population growth is due to the impact of the growing global middle class and associated increases in disposable income.
As incomes rise, people tend to purchase more and better food, leading to a rise in per capita calorie and protein consumption. Increased protein consumption, in particular, creates exponential grain demand, as each kilogram of animal protein requires multiple kilograms of feed. The further expansion of the global biofuels industry may create additional demand for agriculture products.
Investment is needed to support supply
Agriculture production is limited by several factors including land, water availability and the pace of crop yield enhancement. Broadly, each of these is coming under increased pressure as the rapid farmland expansion and crop technology gains of the twentieth century have begun to slow.
If these trends persist, per capita farmland under cultivation will continue to decline and yield growth gains will continue to flatten. This will create a greater need for investment in crop inputs and protein production, as well as processing, storage, and distribution assets that improve efficiency and limit food waste.
Agricultural opportunities exist in key developed markets
Although demand growth is relatively low in developed nations, these countries are net exporters that enjoy large primary production footprints and advanced infrastructure and processing capabilities. They will play a key part in supplying the food needs of developing countries. The relevant privately owned agriculture value chain universe in the United States, Australia and New Zealand generates over $600 billion in annual revenue.
Nuveen and AGR Partners have prior agriculture value-add investing experience in these key developed markets, and believe they represent an attractive potential opportunity to realize strong risk-adjusted investment returns.
Businesses in the agriculture value chain often have attractive qualities
- Substantial tangible asset base
- Volume-driven revenues with limited exposure to commodity price fluctuations
- Solid, business-to-business relationships with end customers, with limited reliance on consumer brand recognition
- Ability to generate attractive levels of free cash flow which provides investors with current income via dividends and/or interest payments
The agriculture value chain needs institutional capital agribusinesses
We believe a mutually beneficial opportunity exists to provide growth capital to privately held agribusinesses. This form of investment supplements the two predominant liquidity sources— senior debt and control equity— with a third option that does not require companies to relinquish control or increase leverage.
Historically, growth capital investments into privately owned agribusinesses have been limited, largely due to the lack of institutional understanding of and focus on the sector. Furthermore, among the very limited institutional equity providers that have focused on the sector, the historical preference has been for control equity investments. In a sector with a high proportion of privately owned businesses, many of which are not for sale, this capital landscape has resulted in fewer ways to finance growth. As a result, many private agribusinesses have only two main options for capital: senior debt provided by traditional agriculture lenders or a majority sale to a larger competitor or financial buyer.
For privately held agribusinesses that seek capital for a range of reasons—to fund growth or acquisitions, to reduce leverage, or to buy out minority shareholders or family members— this limited menu of options has been and continues to be problematic. This dynamic has limited capital availability and growth, and prolonged the fragmentation of many agribusiness subsectors.
A limited number of agribusiness-focused private equity funds have launched in recent years, but these typically pursue control equity deals and do not represent a fundamentally different option for companies seeking financing. In our experience, many privately held agribusinesses are generally reluctant to sell to private equity firms or industry buyers due to their desire to continue to operate and grow the business. Indeed, the volume of private equity deals is light relative to the large size of the sector.
Growth capital is especially needed
In addition to the normal challenges facing capital-constrained businesses that are seeking to grow organically or expand through acquisitions, agribusinesses often face challenging internal dynamics
- Many businesses in the sector are privately owned, small- to medium-sized enterprises. Company ownership may be split among numerous family members or other minority shareholders who are not aligned in their vision for the business.
- Succession planning can be difficult. While family-owned businesses often prefer to stay independent, younger generations may not be interested in running the business.
We believe a mutually beneficial opportunity exists to provide growth capital to privately held agribusinesses. This form of investment supplements the two predominant liquidity sources—senior debt and control equity— with a third option that does not require companies to relinquish control or increase leverage. In these cases, minority equity can be a valuable tool that serves many purposes.
- It can fund growth initiatives, acquisitions, or debt repayments.
- It can be used to buy out existing minority shareholders, freeing up the ownership and management team to pursue a clearer or more desirable strategic direction.
- It can professionalize the business through board-level guidance.
We have found that AGR Partners’ sector expertise, investment and operating experience and agribusiness network are all attractive selling points to potential partners who recognize who recognize the advantages of partnering with AGR.
Operating businesses are an attractive supplement to farmland holdings
As global food demand grows and supply factorsremain constrained, the agriculture value chainwill continue to serve as a critical link betweenprimary production assets (farmland) and endcustomers. For investors with existing farmlandholdings (for example, via the TIAA-CREFGlobal Agriculture vehicles), investing in theseintermediate assets provides supplementalexposure to the global food production anddistribution systems. As these businesses tend tobe volume driven with limited commodity priceexposure, equity investments in this portionof the value chain can serve as a natural hedgeagainst short-term commodity price weakness.
Taking a focused approach to the agriculture value chain
The broader agriculture sector produces, processes, distributes, and sells food. It includes primary production (agricultural commodities), protein production (animal husbandry), processing, storage and distribution, and retail sales.
We focus on the subsectors most attractive for private equity investments into companies with substantial real assets.
Diverse opportunities exist with subsectors
The agriculture value chain universe covers hundreds of subsectors serving myriad crops, livestock, processing activities, and customer needs. These subsectors are exposed to broadly similar macro trends. Each, however, has unique supply, demand, and competitive situations. This can create attractive investment opportunities within the agriculture value chain where growth outpaces that of aggregated food demand.
Farmed salmon production, for example, has expanded exponentially the last two decades as demand for healthier proteins, especially fish, has grown and wild catch volumes have plateaued. Similarly, egg consumption in the United States is growing, driven by consumer demand for low-cost, healthy sources of protein. Within this segment, demand for cage-free hens is also remaking the landscape of egg producers.
1 FAO, 2009
2 United Nations, 2015
3 United Nations, 2015
4 United Nations, 2015
5 OECD-FAO 2013-2022 Agriculture Outlook
6 FAOSTAT and the World Bank
7 FAOSTAT. Reflects 5-year rolling average yieldimprovements
8 Revenue from all food and agriculture relatedindustries, including inputs, primaryproduction, processing, manufacturing, retail,and restaurants. Excludes transportation andwarehousing. Sources: US Bureau of EconomicAnalysis, CANSIM, Australian Bureau of Statistics,Statistics New Zealand, S&P CapIQ
9 Excludes revenue from primary production, retailfood sales, and from publicly-traded companies
10 Preqin, Private Equity Deal Value by Industry, 2017
11 Kontali Analyse
Risks and other important considerations
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Agribusiness portfolios are subject to certain risks such as market and investment style risk. Agribusiness investments are subject to various risks, including operating risks, management performance, fluctuations in property values, higher expenses or lower income than expected, and potential environmental problems and liability.
AGR Partners provide investment management, sources minority equity transactions and conducts due diligence in the agribusiness space exclusively for the TIAA General Account. TIAA has sole approval rights over each investment and maintains ownership of all investments recommended by AGR. TIAA pays AGR a quarterly management fee, and AGR may earn carried interest on certain transactions. The TIAA General Account is not an investable vehicle.
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