Insights from the 2019 Global AgInvesting Conference in NYC

Day 1: Water and sustainability

Water and sustainability were the dominant themes on the first day of the Global AgInvesting conference in New York.

"A decade ago sustainability was about reputational risk. Today it's an inherent part of strategies. It's just good business," observed one presenter. This goes for PE, too, where sponsors are seeing the most attractive opportunities in emerging companies that are solving big problems and going after big markets with inherently sustainable business models (eg haulage savings, land use, waste minimisation and water access).

The highlight of the day for me was a session on the challenges associated with structuring investments to fit the asset class, limited partners' abilities and constraints and general partners' depth and breadth. There are legal and commercial complexities in this 'alignment of interests': minimum commitments, liquidity, control, resources, performance, fees, valuations, governance, deal structure, key persons, asset class and LP/GP rights.

The day concluded with a panel on industry consolidation and M&A in the agricultural sector. The key takeaways:

• There has been massive consolidation in the agricultural input segment since 2013/14, with regulator impacts driving further M&A activity in 2017/18.
• The next wave of consolidation / integration is in the distributor channel segment. We are seeing this in Australia right now with Nutrien's proposed acquisition of Ruralco. Keep an eye out also for producers looking to disintermediate channels and create direct relationships with farmers through digital ag.
• On digital ag, there has been no blockbuster AgTech yet (although I can think of one or two Australian businesses that are potential game changers). The answer is probably a services model that plays somewhere in the intersection of data, predictive analysis, banking / finance, risk management and insurance / reinsurance.

Day 2: Private Equity

What's the ag value proposition for private equity?

It's not about allocating capital to a sector. It's not a capital-driven model. It's about adding value to business owners through contributions to talent, strategy and execution. "Knowledge and networks," as one presenter put it. "A higher touch model than capital allocation."

Globally, ag PE strategies are seeing funds partner with best in class operators across the value chain. They are building companies, growing companies and buying companies.

The best opportunities are in fragmented sectors where there is opportunity to grow market share even when markets are flat.

But a fragmented market isn't enough. You need to look for strategics that are active in the sector because even if the fundamentals are good, if there's no natural buyer you're going to struggle on the exit.

So, what's hot right now?

Globally, biologicals and digitisation are attracting interest. Biologicals, particularly on the animal feed and agricultural input side, are offering great margins and showing growth opportunities. It's a subsector that has matured in recent years. Digitisation, on the other hand, while attracting a lot of interest, has not really matured and requires a private equity player to take a VC-style risk, for which most funds are not geared.

The strategies require disciplined execution:

• You buy well by knowing what you're looking for, which takes a lot of research and thesis-driven work, and by implementing a rigorous process to scrutinise targets.
• By 24 to 30 months you need to have 90% of your professionalisation done as buyers may start approaching. It's difficult to predict when a buyer may come, particularly in transforming sectors.
• You incentivise management so that the business is geared for an exit. This means management incentive arrangements and robust exit provisions including puts, drag alongs and rights to initiate processes.
• You sell well by finding that scarce buyer that will value the 'build' you've done for them or the big problem you've solved for them (compared to running a generic sales process). This makes the multiples discussion a lot easier.
• "Don't confuse 'exitability' with price expectations," warned one presenter. It's a fair point and means there is a lot of work to be done on valuation.

Aside from PE, I found the session on institutional perspectives on agriculture quite interesting. The key takeaway for me: at the institutional level there's a gradual shift away from a pure diversification rationale for ag investment to a returns-based approach. This is hugely encouraging but squarely puts the focus on getting the deal right (as it should be, as many would contend).

Day 3: AgTech

A couple of thoughts on valuation and exits:

• AgTech has different valuation dynamics than regular tech because value is built through iterations and the iteration cycle in AgTech is generally longer than regular tech (ie products get fewer iterations compared to a regular tech play). This means a different exit potential - you're unlikely to get many billion dollar exits.
• Exits in AgTech have predominantly been through M&A involving strategics, rather than IPOs. This again highlights the importance of finding alignment with strategics.

A question from the floor on data prompted some interesting panel discussion. How do you value the data side of AgTech? The panel's answer: Very high. But there are some important questions investors ask: what have you done with the data? What can you do with it? Does the team 'get' the data play?

The conference concluded with three predictions of value drivers:

1. AgTech that can make a big change, rather than incremental improvements.
2. AgTech that uses repurposed technology.
3. AgTech that unites several technologies (eg farm management).

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