August 8, 2019

This article will be featured along with other articles addressing agriculture investment opportunities and surrounding themes in the GAI Gazette, Volume 6, Issue 3, which will be distributed in conjunction with the annual Global AgInvesting Asia event, to be held in Tokyo on 12-13 September 2019. Join us in Tokyo to hear valuable insight and best practices from the expert speaking faculty. Learn more and register.

By Chipo Muwowo, Savvy Investor

In recent years there has been a marked increase in institutional investor interest in farmland and forestry (or timberland) investing. Following the global financial crisis, the race to “real assets” has intensified with investors seeking long-term, stable, low-risk assets in which to invest. It is therefore not surprising that the farmland and timberland asset classes have been receiving closer than usual attention from large institutional investors.

While some large funds have been allocating capital to these sectors for a long time now, the number adding farmland and forestry to their investment portfolios has grown considerably over the last decade. In 2005 fewer than 20 farmland funds were operating globally. By 2017, that number had increased to over 130, with estimated aggregated assets under management of US$32 billion.¹

The primary attraction for investors are the portfolio diversification benefits that farmland and timberland assets provide, particularly an inflation hedge and above average ROI. According to the U.S. National Council of Real Estate Investment Fiduciaries, during the years 1993-2017, the country’s timberland and farmland sectors provided annualized total returns of 8.4 percent and 11.8 percent respectively.²

In emerging markets, African and Africa-focused investors are in an excellent position to benefit from this global surge in interest. The continent still holds vast swaths of unproductive arable land which, with the right kind of management and planning, can rapidly increase productivity. The continent holds 60 percent of the world’s uncultivated arable land and of that, only 8 percent is currently under managed water and land development.³ In addition, a population of 1.2 billion and fast-growing urban centres provide investors with the opportunity for significant ROI in a classic high risk-high return scenario. In May this year, the introduction of the African Continental Free Trade Agreement (AfCFTA) marked the culmination of a long-standing conversation around the need to lower trade barriers and unlock the potential of intra-Africa trade.⁴

Akinwumi Adesina, president of the African Development Bank, often speaks of how Africa’s future millionaires and billionaires will likely be farmers. He’s right. In addition, over 60 percent of the continent’s population are below the age of 25.⁵ Young people not only need jobs, they’re also technologically-savvy and with increasing purchasing power, form an important consumer class.⁶ According to the United Nations, the world’s 10 fastest growing cities between 2018 and 2035 will be in Africa. “472m people in sub-Saharan Africa [currently] live in cities,” said David Pilling in the Financial Times newspaper. “High birth rates and migration from the countryside mean that by 2040 Africa’s urban population will more than double to 1bn, a rate that far outpaces urbanisation elsewhere in the world.”

These important investment industry megatrends haven’t escaped the gaze of investors. Phatisa, a pan-African private equity firm, is investing in food and agri-focused businesses across the continent. Armed with its US$300 million Food Fund 2, the firm aims to invest in anything across the food value chain. In 2012, the company bought Zambian poultry business Goldenlay for US$24 million. “An egg is the cheapest source of protein, so it’s got a huge development impact in terms of people coming into the food value chain and starting to move up that,” said Stuart Bradley, founding partner. Phatisa does not invest in farmland as an asset class. The firm only invests in land needed for the production of specific products. “Africa’s food and beverage markets are projected to be worth US$1 trillion by 2030,” said Duncan Owen, joint managing partner. “They offer the prospect of a three-fold increase, greater prosperity and significantly more opportunity for African farmers to compete globally. There is ample opportunity to invest in relatively early stage investments, where private equity firms can lend governance support, grow business financially and present them to corporate FMCG [Fast-Moving Consumer Goods] companies as an exit play.”

To make the most of the opportunity, institutional investors need to find the right way in. According to bfinance, the investment consultant, there are three main strategies: (1) leasing, (2) traditional, and (3) private equity. First, the leasing strategy involves buying land and leasing it to farmers. In some cases, these are cash leases delivering a fixed coupon every year. In other cases, the returns are aligned with the profits of the operating partner who leases the land. Second, the “traditional” strategy is about ownership/direct operation of the land, with involvement in various parts of the value chain depending on the investment. And third, the PE strategy (as already discussed) involves taking stakes in companies which are involved in various parts of the agricultural value chain.

But what about going for a two-pronged strategy? A report by Manulife, the asset manager, explores what a combined timberland/farmland investment portfolio might look like. It provides a fascinating comparison of the risk/return profile of a combined portfolio to commercial real estate and other financial assets. The report’s authors argue that having a broader investment mandate across both sectors enhances an investor’s ability to act opportunistically.

It’s worth noting however that while farmland and timberland provide huge promise, responsible investing considerations need to be thought through seriously. Deforestation, crop disease, rule of law issues, etc. are just some of the areas that investors should take particular note of.

In recent years, “ESG” has become a ubiquitous industry term. “Environmental, Social and Governance” issues are coming to the fore for many fund managers, with vast amounts of ESG and Ethical Investing research being conducted.⁷ The spill-over effects are significant for everyone involved. “Simply put, the more sophisticated investors become regarding ESG, the more sophisticated managers become. And in Africa, where the scope for impact is enormous, the outcome of these developments can have significant consequences that extend beyond investee companies to the communities and countries they operate in,” said Paul Boynton, chief executive of Old Mutual Alternative Investments.

ABOUT THE AUTHOR

Chipo Muwowo is head of content at Savvy Investor, the world’s leading “knowledge network” for institutional investors. The Savvy Investor team provides the global institutional investment community with the best white paper research on farmland investing. Visit www.savvyinvestor.net for more details.

SOURCES:

¹ Balter, Keith.“Timberland and Farmland: Working Together in a Mixed Asset Portfolios”. https://www.savvyinvestor.net/sites/default/files/node/paper/file/Timberland%20and%20Farmland%202019.pdf. Hancock Natural Resource Group. Taylor Francis Online. 18 July 2018.

² Ibid.

³ New Partnership for Africa’s Development, NEPAD (2002). “Comprehensive Africa Agriculture Development Programme”. http://www.fao.org/nr/water/aquastat/sirte2008/NEPAD-CAADP%202003.pdf

⁴ Farahat, A. Magdi. “African Continental Free Trade Area: Policy and Negotiation Options for Trade in Goods.” https://unctad.org/en/PublicationsLibrary/webditc2016d7_en.pdf. United Nations Conference on Trade and Development. 12 December 2016.

⁵ Brookings Institution (2019).“Foresight Africa: Top Priorities for the Continent in 2019”. https://www.brookings.edu/wp-content/uploads/2019/01/BLS18234_BRO_book_007_WEB.pdf

⁶ McKinsey & Company (2017). “Lions (still) on the move: Growth in Africa’s consumer sector.” https://www.mckinsey.com/~/media/McKinsey/Industries/Consumer%20Packaged%20Goods/Our%20Insights/Lions%20still%20on%20the%20move%20Growth%20in%20Africas%20consumer%20sector/Lions-still-on-the-move-Growth-in-Africas-consumer-sector.ashx

⁷ Savvy Investor (2019). “ESG and Ethical Investing”. https://www.savvyinvestor.net/investment-process/esg-and-ethical-investing

About the Author

Chipo Muwowo is head of content at Savvy Investor, the world’s leading “knowledge network” for institutional investors. The Savvy Investor team provides the global institutional investment community with the best white paper research on farmland investing. Visit www.savvyinvestor.net for more details.