April 27, 2015

By Gerelyn Terzo

Advantage Capital Partners, with dual headquarters in St. Louis, Mo. and New Orleans, La., recently reached oversubscribed status with $154.5 million for Advantage Capital Argibusiness Partners, LP, the firm’s maiden agriculture fund, in a single round of financing. Advantage Capital targeted $150 million.

The fund, which will target private companies across rural America, has already made a couple of commitments and its pipeline is growing. Investors are comprised of nearly a dozen farm credit banks.

Timothy Hassler, a principal in the St. Louis office of Advantage Capital, described the unique nature of the fund, which is supported by the U.S. Department of Agriculture but contains no government capital.

“It’s a traditional private equity fund in the sense of the economic arrangement but atypical in terms of the LP base. The LPs are not endowments or insurance companies. Instead, they’re all banks specifically in the food and agriculture business,” said Hassler, adding that these LPs are all large institutions with billions in assets under management that provide lending services to farmers and other agriculture related companies.

The nine farm credit banks include: AgCountry Farm Credit Services in Fargo, N.D.; AgriBank in St. Paul, Minn.; AgStar Financial Services in Mankato, Minn.; Capital Farm Credit in Bryan, Texas; CoBank in Denver, Colo.; Farm Credit Bank of Texas in Austin, Texas; Farm Credit Services of America in Omaha, Neb.; Farm Credit Mid-America in Louisville, Ky.; and United FCS in Willmar, Minn.

The fact that Advantage Capital limited its investor base to farm credit banks and still managed to reach oversubscribed status suggests the private equity firm could have raised even more capital had it opened the floodgates to institutional investors and family offices. This time around, it was a conscious decision to limit the size of the fund amid uncertainty surrounding the appetite for agriculture investments, Hassler noted.

“The LPs and Advantage Capital wanted to start with a reasonable amount to see where things went. There’s an almost insatiable demand for this capital. I fully expect for this to result in future funds. Another fund may include capital from other institutions,” said Hassler.

The agribusiness fund has a five-year investment horizon. “We’re seeing a tremendous amount of opportunity to invest capital across the country in food and agriculture oriented businesses,” he added.

Investment Strategy

Advantage Capital oversees a combined $800 million in assets under management almost exclusively dedicated to impact investing across industries. The agribusiness fund is similar in that it has a social impact focus although by design impact investing in the agriculture sector is unique.

“Ultimately 75 percent of the investments we make out of the fund must be in rural areas. That’s the impact investing component of the fund. Many of the areas are low-income or in poverty and losing populations. We’re bringing capital to those areas, which will help bring jobs and growth,” according to Hassler.

The fund is designed to be split evenly between subordinated debt and equity, the former of which carries with it higher risk than traditional debt. “We expect market-based returns for both of those asset classes,” he said. “Today subordinated debt broad-based returns are 10-15 percent and equity is 15 percent-plus.”

So far Advantage Capital Agribusiness Partners has committed to invest in a pair of companies, and while the size of each investment was not disclosed, no single equity allocation can be more than 10 percent of the fund’s total worth.

The first investment is in a Goldfield, Iowa-based cage-free egg producer, processor and supplier. “There is a growing demand from the consumer community to purchase cage-free eggs even though they’re more expensive,” Hassler noted, adding that the fund’s capital purpose was to convert that facility from caged to a cage-free environment.

“We’re changing their M-O,” he said, adding that what cemented the investment was a combination of management’s industry expertise and a recently secured long-term contract with a buyer for a Fortune 100 company. “That significantly mitigated the risk of the investment,” Hassler said.

The second portfolio company, rural-Missouri based American Botanicals, a processor and distributor of natural products in which the private equity firm obtained a controlling stake.

The agribusiness fund plans to remain invested for up to a decade and will rely heavily on the owners of its investment companies to continue operating the businesses. “We’re not going to go in and run these companies,” Hassler said. “We are investing in the management team of the company to grow it, and we will assist them strategically and help sell the business at some point in the future.”

The Pipeline

Advantage Capital sees vast opportunity across the agriculture sector for impact investing. In fact, the firm has already turned down hundreds of companies for investment. “There are about five other companies we’re looking at right now that seem to be very attractive investment opportunities, one of which we signed a term sheet for,” explained Hassler, adding that he expects that investment, which will go toward a soil monitoring and irrigation management business, to close in the next 60 days.

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