Agricultural Finance: The Hottest and Most Overlooked Asset Class in the World?
When you hear the words “agricultural finance,” your first thought might be:
“Who cares? I don’t want to be a farmer!”
I had the same reaction when a reader contacted me about this one.
But as I started to learn more about it, I got really interested:
- It’s possible to earn 20% IRRs without leverage…
- The sector has outperformed broader stock indexes (in certain periods)…
- Few professional investors have started paying attention…
- And most importantly: even if there’s a zombie invasion, people still need to eat.
And if all the humans are wiped out, the zombies will still need to eat – so agriculture will be a great opportunity no matter the outcome.
Read on to learn about everything above, plus how you can go from “Theoretical Physics Major” in Australia to agriculture financier in emerging markets:
From Physics to Farming… and Finance?
Q: Let’s get started with your story and how you broke into finance, because I think parts of it would make for an excellent TV episode.
A: Sure – I was originally an aerospace engineering and theoretical physics major in Australia.
I liked the problem solving and abstract thinking, but I didn’t like the sheer number of super-intelligent people wasting their time chasing grants and doing administrative nonsense.
As an engineer, you’re either a project manager or you’re pigeonholed into designing a small part of a big system.
A few people recommended finance to me, but I didn’t really understand the industry.
A friend described it to me as a fish bowl: everything looks warped from the outside looking in, and also from the inside looking out.
At the time, though, I was woefully unprepared and the job market was tough, so I took a grad role at an engineering services firm and planned to stay there for a few years before switching into finance.
Q: The fish bowl analogy is great.
A: Since it was a massive company with many different departments, I was able to push for a financial rotational position when I started working.
So I began in the commercial / legal department and planned to move to the corporate development team, work there for 3-4 years, and then score well on the GMAT and get into a top 5 business school.
After 6 months of working there, though, I hated it and desperately wanted to leave.
That’s when I started a hardcore networking effort, including looking up fund managers in my region and anyone else connected to finance that I could find on LinkedIn and cold-emailing all of them aggressively.
That resulted in… a grand total of 0 responses.
Q: Not surprising. Were you contacting the wrong people, or using the wrong message?
A: Some of both.
I should have worked harder to come up with a 30-second pitch (or 1-2 line email) that grabbed their interest, and then prepared 5-10 minutes of interesting material to speak to after that.
When I contacted people on LinkedIn, I focused exclusively on fund managers and investors because the buy-side was a better fit for my personality.
I would find the person and company name on LinkedIn, and then I would start Googling “@companyname.com” to figure out the email syntax.
Then I would send out cold emails to firstname.lastname@example.org, or whatever the actual email format was.
I kept these emails very short – 1-2 lines at most – and wrote something like: “Hi, I’m [Name] and I attended [University Name] and am now at [Company Name]. I’m interested in finance and what your firm does, do you have time to speak with me?”.
My majors (Aerospace Engineering and Theoretical Physics) were “eye-catching,” if nothing else, and helped me stand out a bit more than an accounting or finance grad.
Q: But it sounds like this approach didn’t work too well.
A: It didn’t at first.
I finally got a reply from ONE fund manager who was traveling through Australia and who was in town briefly. He offered to meet for coffee.
Coffee turned into a 2-hour meeting, which was really a 2-hour interview in which he asked lots of pointed questions.
And then he made me a job offer at the end.
I knew very little about his firm or the opportunity going into it – just that he was in Southeast Asia and did “agricultural investing.”
So I asked how long I had to decide and he said, “30 seconds.”
A few weeks later, I was on a plane to Asia to work at his firm.
Q: Are you sure you didn’t take that story out of a 90’s money movie?
A: Positive – I didn’t quite believe it at the time, either!
I remember the conversation with my father while I was walking back to work:
“Dad, I’m moving to Singapore in a fortnight.”
“You’re doing what?!”
Q: OK, I’ll suspend my disbelief for now… anyway, what questions did he ask you at this 2-hour meeting?
A: He knew I didn’t have an accounting / finance background, so most of the questions were focused on more general points:
- What’s a good deal to you? (A: …when both parties feel or perceive that they’ve “won”. You want to do ten deals, not one.)
- How can you add value to my business? (A:…I think the financial aspect of analysis is only a small part of the story. I have operational experience, so while I sharpen my skills as a financial analyst, I think I can add value to the research process by evaluating business models and management teams).
The offer was a pay cut over what I was currently earning, which surprised me since I (mistakenly) thought “everyone” in finance made bank.
But that was actually part of the process: he wanted to see how hungry I was.
Q: I still find your story incredible, but let’s move on.
What is the “agricultural finance” industry like?
Who invests in agriculture, and how do PE firms and hedge funds there differ from what you see in more traditional industries?
A: The “big picture” story around agriculture is as follows:
- It’s a fundamental supply vs. demand story, with limited supply (there’s only so much arable land) and rapidly rising demand due to increasing consumption in emerging markets.
- Since the “Green Revolution,” production capacity increases have been extremely limited – technology has helped, but it can only do so much in this market.
- There are also tons of under-capitalized projects in emerging markets that desperately need funding to get off the ground.
As an asset class, agriculture hasn’t received much attention so far, though that is starting to change.
In developed markets, most farming is commercialized and highly automated, but in places like sub-Saharan Africa and Asia, it’s still done by families living on the farm.
The kids want to move out and go to big cities, which creates a big labor shortage. The average age of farmers in many countries is 50-60, and that’s increasing rapidly.
For more on the industry as a whole, you can take a look at these two PDFs:
In terms of how private equity operates, essentially we invest in both projects (farms of all types) that need growth capital as well as distressed assets that are poorly structured and haven’t performed well, but which might have great assets or locations.
A lot of the value comes from changing the lease types or deciding what to buy outright vs. lease.
Q: So the PE side of agricultural finance invests directly in the farms themselves, but what about hedge funds?
A: The hedge fund side of our firm invests only in equities and commodity futures, and takes only long positions. They may also buy options occasionally.
There aren’t exactly “publicly traded farms,” but there are plenty of agricultural commodities that are traded on the markets; larger agriculture-related companies may also own farms or farm-related assets.
These are generally very, very small companies, and they’re even smaller since we work in emerging markets.
Q: So how does the actual investment process differ?
A: The process and deals are very different from the traditional LBO model employed by PE firms.
Cash flow is mercurial but the underlying asset value is high, so leverage is not a great idea and metrics like ROA and ROE are low.
Deals can often take 1 year or longer to go from origination to close – there is a lot of due diligence involved, even more so than with normal companies.
That’s due to a few factors:
- The quality of corporate governance in emerging markets tends to be poor to non-existent, especially for SMEs.
- Farms are subject to agricultural risks such as floods and hurricanes in ways that normal companies are not – so a lot of time is spent assessing those risks.
- Finally, record-keeping tends to be poor compared to what you see for publicly listed companies.
The hedge fund side is closer to what you see at hedge funds anywhere else.
One difference is that our business truly is global, so I could easily be calling a broker in São Paulo at 5 AM to enter or exit an investment, based on an idea I just read about.
Many traditional hedge funds, by contrast, might invest locally or focus on certain geographies.
Agricultural Wheeling and Dealing: Got Agronomists?
Q: Right… what else can you tell us about the process and how deals are sourced and done?
A: Sure… the main difference is that details are much more granular here.
In the same way that a tech analyst or engineer might look at software / hardware companies’ products and operations, we have an agronomist that spends time with farm management teams, understanding the business from an agricultural perspective.
A few more facts about deals here:
- We rarely use leverage; if we do use debt, it’s 15-30% at most.
- Valuation multiples are fairly low – maybe several times annual cash flow. You would never see a 5-10x multiple here as you might with a normal company’s EBITDA multiple.
- The range for returns is very wide, and we’ve seen everything from negative 5% to positive 50%+; the median is an unlevered IRR of around 15-20%.
In terms of sourcing deals, you have to be immersed in the market. It’s a network and word-of-mouth industry, so online research doesn’t work so well.
Once we hear about an interested seller, the due diligence process begins and we take a high-level look at the numbers and qualitative factors to see if it would work out or not.
After that, we might send someone in on the ground to meet with the seller and do more work around the upside and downside potential for the deal.
The process moves very slowly because investing directly into land-rich assets can be complicated from a regulatory standpoint – there’s a lot of political “capital” at stake in some regions.
Q: Wow, where to begin. Well, let me start with the obvious question first: how can you consistently get IRRs of 20% or more without using leverage?
A: Because you’re going into places that other investors avoid. And it helps that farmland asset values have been rising so much over time.
There are also meaningful ways to reduce costs and improve the strategic position and marketing / distribution of almost all these farms – you’re actually adding value instead of just playing “financial engineer.”
Q: So what qualities do you look for in an agricultural investment?
A: The “value factor” is very important.
As an example of what I mean, the crop yields in Western Europe are the highest anywhere in the world – sometimes 30%, 50%, or 100% higher than in places like Russia or Africa.
But the land there is also 30x more expensive than in those places, so we stay away from those investments and focus on cheaper assets, even if the yield is lower and the sovereign risk is much higher.
Q: Thanks for explaining all that.
This sounds like such a niche industry that I’m assuming there are only a few firms doing it?
A: Yeah, it’s very small. There are only a few funds in this space, though there are quite a few sovereign wealth funds with a mandate to invest a certain amount into agriculture.
There are also relatively few mid-sized funds in the space – they tend to be much smaller, or a part of much larger funds such as the SWFs above.
A Day in the Life… of an Agricultural Financier
Q: Well, thanks for telling us about deals and the industry as a whole.
I’m tempted to fly to Southeast Asia right now and start buying up farms, but that’s probably a bad idea.
So let’s move into a better topic… what’s your average day like?
A: I do more work on the hedge fund side of the business, so my days can be a little… volatile.
I generally get to work by 8 AM, and the local market opens shortly after that.
If there are no disasters, there’s a morning meeting between trading, research and the portfolio manager, which usually only takes 20 minutes. From there on, it’s not very structured.
I have 2-5 companies that I’m working on at any one time, as well as the 15 or 20 we’re invested in.
So a lot of my day is spent analyzing them, finding out more about them from “on the ground” sources, and monitoring ones we’ve invested in for new developments.
The hours are far beyond a normal job, but it’s also not that stressful as long as you can prioritize your workload properly.
Q: So even though you work a lot, it sounds like a pretty informal environment.
A: Yeah, definitely. People here work an average of 60-80 hours per week, and around 50-60 of those hours might be in the office, Monday to Friday, with the remaining 10-20 spent on travel, taking phone calls at bizarre hours, and so on.
No one wears ties or suits or anything like that, so it’s somewhat more relaxed than a bank.
But 14-hour days and weekend work are both quite common, so please don’t buy into that “All hedge funds have much better hours all the time! Really!” myth.
Q: And I hope they’re compensating you appropriately for that amount of work…
A: You need to aware of the business model at smaller buy-side firms: management fees support salaries and overhead, while all the upside comes from the performance fee.
So you can see how the bonus component of compensation would be highly variable.
I can’t give specific numbers, but expect your base salary to be in-line with what your salary would be at a reputable sell-side firm.
Your bonus could be $0 or a multiple of your annual salary depending on the fund’s performance and your contributions.
Getting On the Farm and Off the Farm
Q: What types of people end up working in agricultural finance?
A: It’s a VERY diverse group, which adds value to the day-to-day process, as well as to the conversations over drinks on a Friday night.
Our CEO used to work at a large bank, and took a lot of his team with him when he came here.
Then we have guys who worked at the IMF and IFS, and a few analysts from Southeast Asia that have all worked and studied abroad.
You’d like this field if you’re into exploring “uncharted waters” and you want higher-risk, higher-potential reward investments.
It’s not for you if you’re looking to follow the typical “Ivy League School –> Bulge Bracket Bank –> PE Mega-Fund” track.
Q: Speaking of that glorified “path,” what’s the typical recruiting process at your fund like?
I know you followed a very unconventional route to get in there, but what about normal people?
A: First off, note that we recruit very few people each year; maybe 1-2 at most since our entire investment team is only around 15 people.
We hire interns every few months and test them out on the job.
Most of the time, they’re no good and they move on at the end of 2-3 months.
We’ll keep the good ones on-board for 6 months or more, and then consider hiring them full-time if they’re good enough.
One issue I’ve seen repeatedly is that many interns are technical superstars, but can’t talk to people.
That’s a problem here because we’re a small firm, and you have to be a jack-of-all-trades type to get ahead.
Q: Thanks for sharing… so let’s say that an intern or entry-level person is going in for an interview – who would they speak with and what questions would they receive?
A: It’s a very flat structure here, so they could speak to anyone on the investment team, and they’d probably end up speaking with everyone by the end.
In general, it’s the same sort of questions you’d expect in any finance or hedge fund interview: pitching stocks, your views on this sector, why you want to be an investor in agriculture, and scattered technical questions.
Personally, I’m not big on the technical stuff, but you still need to be able to get over the fence.
So, I tend to sit candidates down in front of some CFA L1 practice questions to see where they’re at.
Then we go for a coffee. I like to keep it casual – I’m more likely to get accurate insight into what they’re really like.
Q: What about ‘getting off the farm’ and moving on?
Are there any exit opportunities from such a specific field?
A: I think there are some solid exit opportunities, even from something as specific as this:
- Business School: A great story! You have a unique background that can be shopped with an altruistic angle.
- Big Trading Houses: Agricultural commodities are opaque. Opacity = opportunity.
- PE Mega-Funds: Eventually, the KKRs and Carlyle’s of the world will get into agriculture just like they eventually got into other, “riskier” sectors like technology. So they may end up buying out some of the smaller agriculture funds – it’s difficult to structure and time this exit though.
There’s also a significant overlap with other natural resource funds, which also increases potential exit opportunities.
As for me, I’m still learning a lot and enjoying the work, so I’m not in any rush to leave.
Q: Awesome! Thanks for your time, I really enjoyed speaking with you.
A: My pleasure.
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