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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:
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:
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).
A couple of thoughts on valuation and exits:
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:
This piece is designed to prompt thoughts of what changes may be required in private M&A documents in order to accommodate and allocate risks relating to COVID-19 and the fallout from this pandemic.
ASIC and ASX have both announced temporary changes to their respective regulatory regimes to facilitate capital raisings for listed entities in response to the economic impact of COVID-19.
Times are changing rapidly with the current flow of Coronavirus measures introduced to support businesses in debt and distress.