By Gerelyn Terzo, Global AgInvesting Media
Private equity firm Paine Schwartz Partners, which specializes in sustainable food chain investing, has published a report that should appeal to agriculture investors. The white paper, called “Investing in Real Assets With a Private Equity Approach,” explores how food and agribusinesses investments have the potential to deliver what it describes as “the best of both worlds.” Paine Schwartz Partners has been investing in the food and agri-business sector for the past 20 years, overseeing a massive portfolio of approximately $6.5 billion of assets under management.
In today’s uncertain economic climate, investors are hunting returns with more limited downside risk and stability now more than ever. In response, Paine Schwartz Partners set out to explore how private equity and real assets can bridge this gap for investors despite the seemingly siloed features associated with each asset class. Private equity is famous for handing investors exposure to risk, leverage and illiquidity in exchange for the potential for outsized returns, while real assets offer stability and less risk but with a similarly inherent illiquidity. It turns out the food and agri-business sector comprises many features of both private equity and real asset investing.
The PE model involves investing in private companies or buying out listed ones that are underperforming before improving their value and then exiting the business for a profit. PE’s annualized returns are famous for outperforming the traditional markets and can be in the ballpark of 15 percent or better. One of the key reasons private equity investors are able to deliver these types of returns is due to high-risk financial leverage, which can amplify both gains and losses. According to McKinsey & Company data cited by the report, “The use of leverage and market multiple expansion drove 67 percent of investment returns for PE buyout deals from 2010 to 2021.”
Real assets, on the other hand, represent tangible investments like real estate, infrastructure and natural resources. The real asset basket also extends to food and agri-business assets — a $17 trillion market — owing to characteristics like their physical and tangible nature.
Investors flock to real assets for features such as stability, income generation, inflation protection and lower volatility compared with stocks. Real assets tend to deliver returns in the ballpark of 7 percent to 10 percent, including both cash flow and value appreciation. Real assets face a different set of risks than private equity, mainly on the regulatory and environmental side, higher transaction costs and greater illiquidity. However, real assets have gained a reputation as a portfolio diversifier that can offset risk and deliver attractive returns when other asset classes are lagging.
Investing in the food and agri-business sector includes but is not limited to owning traditional real assets managed by growers and farmers, nor is it capped by owning farmland and production assets alone. Investors can gain exposure to this asset class through companies that provide value-add services to these farmers, growers and landowners across the ag industry spectrum, including genetics companies that support crop breeding or technology companies that deliver critical field data and products that strengthen soil health to bolster crop yields that farmers depend on.
The Paine Schwartz Partners report says that “By investing in these types of companies, capital intensity is often reduced while benefits may be derived from similar growth dynamics – all while usually capturing higher, PE-level returns” with the right strategy. The report points to “hybrid investment structures, operational improvements, moderate leverage, value-add strategies and sector diversification” as key mechanisms to strike the right balance.
In the PE firm’s experience, investing in businesses with both direct and tangential exposure to the food and agri-business sector produces returns that are comparable to those generated by traditional private equity investments. Investors can access Paine Schwartz Partners’ “Investing in Real Assets With a Private Equity Approach” whitepaper here.
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