The need to finance generational changes in the ownership of farms is creating an ‘equity gap’ that offers unprecedented investment opportunities for institutional investors and family offices to fill, according to European alternative asset manager Aquila Capital.

But the failure of private equity-style investments into farms in recent years has forced a rethink in the investment models used by such investors. Aquila’s response has been to offer co-investment structures that give farmers a share in the operation to align investor and manager interests, rewarding farmers for high performance while giving them access to capital. The majority of funds invested in agriculture worldwide still follow a ‘buy-and-lease’ strategy with limited scope to capture alpha.

Research shows that less than half of farmers in the developed world have identified a potential successor. Fewer children are opting to take over their parents’ farms, preferring alternative careers instead. A shortage of successors has prompted a surge in M&A activity between farms that needs to be financed but a scarcity of bank lending means farmers are turning to investors they would have ignored just a few years ago.

The UN’s Food and Agriculture Organisation estimates that to finance this structural change $209 billion of private capital is needed every year for the foreseeable future.

Detlef Schoen, managing partner, farm investments at Aquila Capital, commented: "The first wave of investors into farms over the last 15 years was often left disappointed because they had the wrong managers in the wrong geographies with a misalignment of interests between asset managers and farmers. Many banks still demonstrate their ignorance of the fundamentals of profitable farming, making the mistake of treating farms as pieces of real estate rather than businesses, selecting poor projects, imposing bureaucratic and expensive administration and underestimating the complexities of farming.

"But we now have access to top class farmers who in the recent past would not have given us a look in and they are the ones offering excellent returns. For an investor the danger is to not pick the right farms – the top 25% are about 50% better than the rest."

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Several factors point to agriculture becoming more mainstream, including:

  • Several large institutions now invest in farms, including sovereign wealth funds such as Temasek and the China Investment Corporation
  • Agriculture is no longer a high risk-high return private equity investment but rather a much more conservative, yield-driven strategy. For example, Aquila Capital Farms’ agricultural fund for institutional investors is currently projecting pre-tax cash returns of 4-6% per annum as part of a double-digit overall internal rate of return
  • Investors are rapidly scaling the learning curve: the equity gap is attracting huge private capital inflows that will provide the necessary scale for institutional investors to allocate research and due diligence resources

Aquila Capital Farms consists of 12 practicing farmers with more than 150 years of combined experience in farming and/or agri-business. It believes that the best opportunities for institutional and family office investors over the next decade lies in farms in OECD/investment grade countries with secure land titles as well as former CIS countries such as Russia, Kazakhstan and Ukraine.

Aquila Capital Farms offers customized portfolio construction, structuring and management according to investors’ preferences for co-investments and direct and indirect investments. It offers a number of specialized investment funds structured as Luxembourg SICAVs; direct investments; managed accounts; and deal advisory. It is currently placing the Aquila Farms Fund.