September 9, 2024

By Gerelyn Terzo, Global AgInvesting Media

Conservation Resources (CR), an impact investment firm specializing in real assets, has announced the final close of its inaugural North American farmland private equity fund. Introduced in 2019, the Conservation Resource Capital VI fund has committed to an impact focused strategy in which it seeks to both develop and generate cash flow from the agricultural and environmental assets in which it invests. More than four-dozen LPs flocked to the fund, comprising both institutional and high-net-worth investors, for a final close of $47 million.

Conservation Resources has already deployed 100 percent of the fund’s committed capital across a combination of directly operated and leased permanent crop, row crop and pasture land investments in the U.S., all of which are farmed using organic and/or regenerative practices. Among the fund’s notable impact-driven results has been the establishment of one of the biggest bee pollinator habitats in the Pacific Northwest region.

As a firm, Conservation Resources has raised a total of $1.3 billion for real assets across both farmland and timber with dedicated funds in each of those buckets. Stavros Koutsantonis, COO and portfolio manager for CR’s agricultural investment strategies, spent some time with GAI News to provide a look under the hood of the fund’s innovative ‘impact capital’ strategy, the capital fundraising environment and more.

1.) GAI News: Can you explain the Conservation Resource Capital VI fund’s investment strategy, particularly as it relates to impact capital?

Koutsantonis: “Our overall theme is impact capital. For us, this means serving two equally important purposes. First, it means delivering meaningful and measurable environmental outcomes. Second, it means outperforming the asset class and achieving above-market returns. That’s why we do what we do. We see this as an extremely meaningful and sizeable multi-billion opportunity ahead of us.

“Our interpretation of impact capital is funds flowing toward addressing the unintended environmental consequences of industrial agriculture. The U.S. is the world’s biggest agricultural exporter. Looking back at industrial farming over the past six decades, there have been steady increases in agricultural productivity. The good thing is we are feeding more people with fewer resources. The ag industry has done a lot of good for the world. But there have been unintended consequences created along the way. The arable land acre base is declining. By our internal estimates, there is impact capital flowing to the tune of $3 billion a year that we bring together with our LP investor capital to invest in institutional quality farmland in the U.S.”

2.) GAI News: How do you navigate this market considering there are no real climate or impact guardrails at the moment?

Koutsantonis: “Right, it’s not mandated. We’ve got principals who hail from the conservation and environmental world, and who have track records of implementing impact transactions since CR was founded 20 years ago. They know what’s important and how to work in a mutually beneficial way with conservation and environmentalist groups to unlock impact capital and put it to work. On the other hand, is that something easy to do? No. But we benefit from having folks from that world to do so.”

3.) GAI News: How would you compare the impact investing opportunity in the U.S. vs. other jurisdictions?

Koutsantonis: “The U.S. stands out because it has a very large, privately funded conservation and environmental community. There’s obviously government-sponsored conservation and environmental programs. However, the scale of the privately funded conservation industry in the U.S. provides a meaningful opportunity. When you layer it on top of almost 900 million farmland acres in the U.S. — an area larger than the country of India — in our opinion, this leads to a multi-billion-dollar opportunity to invest in our impact-focused strategy for U.S. farmland over the next few decades. And we’re just at the beginning of it.”

4.) GAI News: How would you characterize LP demand for real assets currently? Many in the fund are existing CR investors. How can the industry cast a wider net?

Koutsantonis: “It’s a tough fundraising environment. Is there any other kind? Joking aside we believe our current farmland fund is the only closed-end U.S. farmland fund to reach a final close thus far in 2024, according to an Agri Investor H1 2024 fundraising report. We’re quite proud of that.

“When we think of the fundraising environment, we think of both cyclical and secular combined. Cyclical represents the financial market and economic conditions in general. And then there are thematic drivers. Looking at the cyclical part, before COVID, we saw benign inflation at Goldilocks levels followed by very high levels afterward. Now it’s subsiding pretty quickly. The financial markets have been a similar story – from bear markets in equity and fixed income, to stocks hitting all-time highs and everything in between. It’s hard to predict cyclical drivers. With that, our results varied over the fundraising period, which met our expectations. Secular drivers, from our view, were much more stable. The common investor themes LPs are drawn to are food safety and security, regenerative agriculture, climate change and water. We’d say interest in all those areas has increased steadily and exceeded our expectations.

“We believe that if we do our jobs right, we will help to bring more and more LP interest and capital into the broader impact investing sector, which we think will do a lot of good.”

5.) GAI News: What is the target performance of the fund?

Koutsantonis: “Income and total returns. In our opinion, this is the differentiator. Europe has been historically and continues to be well ahead of the U.S. in implementing impact into their investment program. That’s changing; the U.S. is catching up. But it’s important to discuss what impact is vs. other popular terms, such as ESG and sustainable investing. Impact serves two purposes: 1.) Produce meaningful and measurable environmental outcomes. 2.) Produce competitive returns. We are looking to outperform the asset class by a minimum of 200 basis points (bps). Our primary source of returns comes from the impact component of that. In addition to the core agricultural values of the properties we invest in, we monetize the environmental values, looking to achieve a higher return for the farmland asset class.

“Let’s address the elephant in the room here. The onus is on any investment group that uses the term impact or impact investing to show that they can outperform other groups that don’t use those terms. It might sound unfair. But that’s the state of where we are to start to move some real capital into the impact investment strategies group from the deepest capital markets in the world. The group that uses ‘impact’ must show their strategies can outperform.”

6.) GAI News: Can you clarify if the farmland fund has been deployed alongside the final close?

Koutsantonis: “We’re fully invested at this time, indicating to us that there is a full opportunity ahead of us. Our investment pipeline was and is very full. The projects were already in place, and we were able to execute them very, very quickly.

“We’re seeing no shortages of investment opportunities across permanent crops, row crops and pastureland. We look to buy institutional quality properties in the U.S. that can stand on their own two feet regarding agricultural value, favorable crop supply/demand fundamentals and positive growth fundamentals. On top of that, they must also deliver environmental value that can be developed and -importantly – monetized through impact transactions that we execute to deliver additional non-commodities cash flow.”

7.) GAI News: Can you share more about the portfolio assets, including the bee pollinators?

Koutsantonis: “Everything in our investment program is farmed either regeneratively and/or organically for improved soil health. We implement what we believe to be the most stringent standards for both of those farming methodologies. Healthier soils produce positive benefits such as better water absorption, meaningful carbon sequestration and increased organic material, all producing wonderful environmental outcomes.

“The other transaction I’d include in this bucket is we have been able to earn payments for the carbon sequestration and methane reduction that we achieve on our pastureland and row crops investments in Texas and Arkansas. We’re at the forefront of market-based incentive payments making regenerative farming more economically beneficial. This is important because, in order for regenerative farming to scale, the economics must be superior to a traditional farming investment program.

“You asked about our bee pollinators. We’ve implemented this on our integrated organic and regenerative property in Washington state, which produces organic apples, cherries and row crops. We’ve developed one of the largest bee pollinator habitats in the region. This is part of our bigger focus on biodiversity, not only as it pertains to species biodiversity efforts that help the proliferation of bee populations but also vegetative biodiversity and getting away from land stuck in monoculture farms, producing the same thing year after year.

“The bee pollinators serve numerous purposes. There’s a shortage of bees in the region, and pollination is a problem. Pollinator habitat such as ours help alleviate and reduce the need for bee imports while supporting the broader region and farmers with their own pollination needs. They also increase soil health, which ultimately benefits our ability to grow crops on the property at higher yields.”

GAI News: Well, that brings us full circle. We would like to congratulate Conservation Resources on the final close of its inaugural farmland fund and thank Stavros for graciously taking the time to inform our GAI News readers.

*The content put forth by Global AgInvesting News and its parent company HighQuest Partners is intended to be used and must be used for informational purposes only. All information or other material herein is not to be construed as legal, tax, investment, financial, or other advice. Global AgInvesting and HighQuest Partners are not a fiduciary in any manner, and the reader assumes the sole responsibility of evaluating the merits and risks associated with the use of any information or other content on this site.