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EXCLUSIVE INTERVIEW: Making Strong Returns With Farmland At Aquila Capital

Tom Burroughes

3 December 2013

A firm making a bit of push to stir up investor interest in the farmland sector is Aquila Capital, part of Hamburg, Germany-headquartered Aquila Group, a global investment firm. Recently, Aquila Capital issued research showing, it said, that 23 per cent of institutional investors want to raise their exposure to farmland over the next year and a further 74 per cent will maintain it where it is. Strikingly, farmland – perhaps one of Man’s oldest asset classes – makes up only 1.3 per cent of investor portfolios, the survey showed.  

Of those who have invested in farmland over the past 10 years, 57 per cent said they were disappointed with the performance of closed-end funds, 42 per cent with specialist investment funds, 29 per cent with club deals and 14 per cent with direct ownership of farms. This has forced a rethink in the investment models used by investors, Aquila Capital said. One of the firm's funds, the Aquila Capital Farms business, domiciled in Singapore, has, according to company literature, clocked up a 14.3 per cent average realised internal rate of return, and a 12.5 per cent average IRR of current farm investments. 

With these figures in mind, this publication recently spoke to Detlef Schön, managing partner of farm investments at Aquila Capital. He spends a great deal of his time travelling to see farmland around the world.  

Please set out a bit of the history of Aquila Group its main members and what has led to it being set up. I see from some of the material that it was founded in 2001 and now has offices worldwide. What is the relationship between Aquila Group and Aquila Capital?

Established in 2001, Aquila Capital is a leading provider of alternative and real asset investments. The firm focuses on distinctive areas of investment that are supported by macroeconomic fundamentals and offer the potential to generate uncorrelated, above average returns on a sustainable basis. Concentrating on these areas, Aquila Capital draws on the expertise of highly qualified, independent investment teams to generate a long-term edge.

Aquila Capital is part of the Aquila Group, headquartered in Hamburg with investment management and operations in nine offices including Zurich, London, Frankfurt and Singapore. The group has over 250 staff and €7.2 billion of assets under management.  

What sort of interest do you see from high net worth and ultra high net worth clients and advisors? How do you think people perceive farming and its investment characteristics? What sort of misconceptions do you come up against?

We are seeing significant interest in farmland investments by HNW/UHNW clients and advisors, with investors increasingly recognising the potential that actively managed investments in agriculture offer.  There are plenty of good reasons to invest. First of all, the purpose of farmland is to produce food. An investment in farmland therefore encourages the production of additional food for the population. This is the ethical component.

In addition, investment in farmland – if done properly – has the potential to generate attractive returns. By investing in agriculture, investors can gain access to steady long-term cash flows from the production and sale of commodities such as wheat or milk. These commodities are linked implicitly to inflation through food prices and therefore produce a strong inflation hedge for investors worried about the current expansionary monetary policy occurring globally. Farmland is well supported by strong market fundamentals and backed with the value of a very well understood asset – land.

We seldom come up against any misconceptions by investors. The global macro trends - expanding population growth, richer diets in emerging economies, diminishing farmland supply and environmental degra­dation - all interface with food production and underpin the investment case for agriculture.

We also find that many investors are becoming increasing attracted to the concept of real assets. That is, tangible assets that you can see, touch, smell etc…Productive farmland is a simple asset for most investors to understand. 

What are the most promising regions to be in, and why? What areas do you avoid?

The countries that we prefer are OECD/investment-grade countries that fulfil a certain set of key criteria. Countries must offer access to foreign capital, secure land titles and sustainable land ownership. We therefore consider countries where we feel secure and where we can be the least cost producers. For us these countries are Australia, New Zealand and Latin America – particularly Uruguay. The sectors that we favour are pastoral production of meat and dairy products. Our particular focus lies on milk farms in Oceania.

Countries that we avoid and would never invest in are countries where secure land ownership is impossible. It is also important for us to invest in countries where there is a surplus supply of the agriculture commodity being produced and therefore exported. This gives us the support of the local industry and exposure to global trends. For example, over 50 per cent of the dairy products produced in Australia are exported.

How many of these agriculture funds are there in your offering? I see that in the case of the Australia Dairy Fund that most of its investments are not in Australia at all, but New Zealand.

In the past years we have launched four agriculture funds for German retail clients as well as numerous club deals for HNW individuals. These previous funds, which are closed to new investments, made investments primarily in the New Zealand dairy sector.

We currently offer institutional investors a specialised investment fund structured as a Luxembourg SICAV which invests in milk farms in Australia. The focus lies on Australian dairy, which currently is more attractive from a cost perspective than New Zealand and therefore offers superior yields and capital gain potential.

As far as the Australia Dairy Fund is concerned, is it fully launched yet? What is its status?

The fund currently has a registered prospectus and is open for subscriptions . The fund is 100 per cent dedicated to investing into Australian dairy assets and has a pipeline of over $600 million of available farms at various stages of due diligence. To ensure a relatively short investment period and quality portfolio, we have capped the fund size at $400 million equivalent.  

We have an existing team on the ground in Australia and more members of the team will be moving in the coming months.

On the Aginvest performance of non-Aquila Investments II, is this data any longer relevant to your firm?

Aquila Capital has been offering investors farmland investments since 2008. AgInvest, our partner, has been active in farmland investments since 1992. This is certainly still relevant as the team members who delivered the performance are still part of the team.

We spoke a bit about how, due to succession issues and the like, would-be buyers of farms have problems getting bank finance and need help to "mind the gap". Can you talk about this issue in more detail?

The need to finance generational change in the ownership of farms is creating an “equity gap” that offers unprecedented investment opportunities for institutional investors and family offices to fill. 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.

Our 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. The buy-and-lease strategy relies on continued capital growth of land. Aquila’s strategy is to generate returns from an operating return, productivity and capital improvements as well as the underlying capital growth of the land.

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.

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.

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 per cent are about 50 per cent better than the rest.

Can you give a broad comment on the case for agriculture investing in the way you do it?

Aquila Capital has been offering investors farmland investments with a focus on milk farms in Oceania since 2008. The key aim of the Aquila Capital Farms Team, which consists of practicing farmers with more than 100 years of combined experience in farming and/or agri-business, is to optimise farm productivity. This includes installing state-of-the-art farming systems and infrastructure as well as transferring knowledge regarding efficient sustainable cultivation methods.  As a signatory of the Principles for Responsible Investment in Farmland, all our investments focus on the responsible development of a global productive agricultural system. 

We are one of the few managers who can demonstrate a track record in delivering on the mandate as we have purchased, managed, improved and exited investments.