September 5, 2024

By Gerelyn Terzo, Global AgInvesting Media

Since launching its farmland capital technology platform to farmers and investors in 2023, Minnesota-based Fractal Agriculture’s fundraising tally has surpassed an impressive $15 million. Fractal as a business raises money for two distinct purposes. As a VC-backed company, Fractal raises capital to fund business operations. Fractal also raises money in support of its farmland product offering, for which the $15 million supports.

After deploying more than half of that total to farmers across the American Heartland, Fractal is putting the balance to work by expanding the reach of its flagship farmland co-investment product into more U.S. farmland acreage. Fractal’s strategy is also two-pronged, delivering equity capital and support to farmers while generating potentially enhanced returns for LPs.

Fractal Ag, whose seed-round backers include Trailhead Capital, Serra Ventures, Groove Capital and Virta Ventures, takes an innovative approach to farmland financing that strikes a chord with institutional investors and growers alike, particularly in the current capital-constrained environment. Fractal invests alongside farmers, taking passive, minority stakes in land owned by growers.

In exchange, farmers gain access to critical capital to continue or expand their operations. Meanwhile, LPs score exposure to diversification through high-quality farmland assets that are managed and owned by farmers themselves. Those farms that practice approved regenerative ag practices for healthier soils and the long-term financial viability of the operation are entitled to certain discounts.

In a call with GAI News, Fractal CEO Ben Gordon described the company’s platform, which invests in row crops across the Great Plains, as the “Zillow of farmland” because Fractal harnesses similar data science technology in its experience to better underwrite fields. Plus, its partnership model with farmers allows the company to collect much of their operational data, which growers are incentivized to share to achieve a potentially better valuation for the investment. Here’s more from GAI News‘ conversation with Fractal’s Gordon:

1.) GAI News: What was the inspiration for the Fractal Ag platform?

Gordon: Growing up in a rural community, I saw firsthand how the farmer’s need for capital became very, very apparent. I’ve also spent enough time working in agriculture, including at a large agribusiness company, to realize that farmers are fundamentally capital constrained. In speaking with farmers, I would continually hear about how fantastic land is as a real asset, yet how low institutional ownership of it is today. Coming at this from a personal background made a lot more sense, thinking about solving some of the investment challenges by working with farmers vs. being an arms-length partner.

We take a fundamental and sensical approach to investing. Who is the best steward of the land? We think the answer is the farmer. This means creating an alignment of incentives so that when the farmer wins, the investor wins. You’re more likely to generate higher returns with the farmer performing asset stewardship and risk management.

2.) GAI News: Can you explain more about the technology powering the Fractal platform?

Gordon: We leverage technology and large datasets to help our underwriters make great decisions quickly. We still use humans for all the underwriting and don’t fully automate the decision-making, but we access so much data that is often not utilized in traditional investment models. We bring everything together — from satellite imagery to yield estimates to machine data collected from John Deere combines and tractors. We then combine that data from our partners in one centralized place, which is often a challenge for traditional investment folks. We also do some general data collection around weather patterns in irrigated areas. For example, when we’re doing water due diligence analysis, we incorporate weather patterns using similar data science.

3.) GAI News: Who are the investors providing the capital deployed to the farms and what type of returns can they expect?

Gordon: Our capital providers are the LPs. We have received the most traction from institutional family offices and foundations so far. This is the first of an even larger capital-raising effort we expect to do over the next 12-18 months, given farmer demand as well as investor demand that’s out there. When you look at Fractal’s investments, it’s row crop farmland returns, similar to other investments. But what’s different is that we can charge slightly higher income rates because we’re meeting farmers’ needs for equity capital. So it’s farmland risk with an extra boost to returns because of what the farmer is able to do with the capital and what they’re willing to pay for meeting their needs.

4.) GAI News: Can you share more on the supply/demand dynamic?

Gordon: I’d say right now, there’s greater demand for Fractal capital from the farmer side, given our scale. But we expect that to flip given the attractiveness and scalability of our strategy for farmland investors. We’re a newer platform. But as we establish a track record and investors recognize the potential for favorable comparable differentiated returns compared with the traditional investment model, we believe more capital will follow. What investor doesn’t want to see the potential for 100-300 basis points (bps) of greater return on the same asset? It comes down to proving our model to investors and farmers.

5.) GAI News: With the Federal Reserve widely expected to lower interest rates, how might that affect your business if at all?

Gordon: We can adjust where we are with rates vs. other macroeconomic cycles. In a low rate environment, farmers still have a big need for equity investment capital to get their down payments for new fields. There’s still a great deal of value for Fractal. Also, there’s a lot of value when rates are higher. It comes down to how much Fractal vs. how much bank debt the farmer needs. We have a lot of flexibility in our product. The farmland market may be softening, but as minority investors, we can shift the return from income or appreciation in an apparent way for farmers. It’s a win/win. We have more flexibility than traditional whole land investors who buy an asset to improve, rent or sell it. There’s a limit to how much they can do. We work with the farmers to create the best structure and come up with something that meets investor and farmer needs at the same time.

GAI News would like to thank Ben and the Fractal team for their time and contribution!

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