by Greg Bright
This trend means a lot for Australia and also for Australian funds managers. bfinance, the manager search firm, produced an important summary of the emerging agriculture and timber asset sub-classes globally last week. The firm also provided extra info for Australian investors.
bfinance (with an annoying lower-case ‘b’), the UK-based global manager search firm, indicated in its report that there was an increasing appetite around the world among institutional investors for agriculture-based strategies and funds.
These include what are developing as sub-classes: agriculture (what many call ‘farmland’), timber, livestock and ‘other’ or ‘diversified’. It’s a nascent asset class which is rapidly developing because of investor demand.
The report followed a study of fund managers which are in the asset class that were identified by bfinance in response to pension fund client searches. The universe, globally, is just 70-90 managers, depending on how you define their interest. It draws several similarities with the more-developed infrastructure asset class, another favourite in Australia.
Several key features from the report include:
- The majority of funds are closed-ended, with a 10-15-year horizon, which is line with their infrastructure counterparts. Open-ended vehicles normally feature a two-five-year lock-up.
- The secondaries market is evolving, although there are more opportunities than agriculture. There are just a handful of multi-manager and fund-of-funds products.
- Most funds and strategies are regional, although there are some global vehicles.
The report says that the fund sizes tend to be small – mostly under US$500 million – and with low minimum investment sizes. Importantly, for the fee-conscious (rightly or wrongly) Australian investors, it is interesting to note that fees tend to be high by real-asset standards.
“On the plus side, managers tend to set hurdle rates in line with performance targets rather than – as happens elsewhere – below them. In other words, investors pay performance fees only on outperformance,” the report says.
According to Guy Hopgood, a senior associate of bfinance in London and co-author of the report, there is a number of managers which focus on the Australian market. He agreed that Australia was bigger on farmland (agriculture) investment than timber.
He said: “Although timber has a relatively long heritage, the overall ‘Agriculture/Timber’ institutional market is relatively immature, certainly in terms of ‘global’ investing. This, combined with the relatively small value of individual assets (farms, forests etc), means that funds have remained relatively small, with most in the sub-$350m range. Many of these are focused on specific geographies. As the industry matures there will be more firms with larger scale global platforms and strategies.
“With new investors to the assets class (those who have historically looked at real estate and infrastructure for their real assets portfolio), we are seeing them looking to mixing the two. Our experience with investors who have previously invested in timberland is that they look at them as two distinct asset classes. Whilst there are differences in the expected cashflow profile of each, there are strong similarities through both land ownership and the growth of organic matter.”
He said that none of the closed-end funds in the bfinance search universe was listed, because of the investor mandates.
The report provides an example of a search by an un-named Canadian pension fund. The search was a wide one.
Asked whether this was typical, Hopgood said: “We are unable to comment on the specifics of the search on the record. I would be happy to talk you through what I can in a bit more detail off the record on a call. Having said this, we are finding a growth of interest in the asset class from a diverse range of investors (particularly public and private pension funds and endowments/foundations) and countries (particularly Canada, UK and the Nordics, as well as Australia).
“Many of these investors are investing in the asset class for the first time, seeking to benefit from diversification, cashflow and some form of inflation protection. They often cast the net fairly wide, across sectors and geographies, and across risk strategies, as part of the process for educating themselves on the market.”
In summary, he said, bfinance was seeing interest from managers looking to deploy into North America, South America and Australasia. There were also some European opportunities, but to a lesser extent.