Disclaimer: the statements and opinions expressed in this document are solely those of the author and are not intended to be construed as legal advice. Farmfolio assumes no legal responsibility for any investment based on this document. Always consult with a third party advisor on how to invest in any opportunity.
The great American investor Peter Lynch once said, “Know what you own and why you own it.” When it comes to alternative investments, this concept is especially prescient. Investors look to alternatives for many reasons: diversification, inflation hedging, long-term appreciation, income, and transparency, to name a few. Alternatives are a vast category, ranging from ETFs to fine wine, and the goals of investors in alternatives are equally diverse.
In a financial world in which many asset classes are becoming more correlated, diversification takes on even greater importance. In the hunt for alternative investments, there is a sector that stands out for its stability, essential nature, and diversification potential: agriculture.
But not all agriculture investments are right for all investors. There are a plethora of factors to consider when thinking about how to invest in agriculture. Let’s examine a few asset classes within agriculture and the investor profiles that suit them.
Private equity investment in the ag spaces comes with a wide range of benefits. One of the most significant is that these assets are not publicly traded, and therefore are not as vulnerable to the whims of the market. Many agribusinesses perform perfectly well even during down markets, so the potential for diversification is high for this type of investment.
Another major benefit of private equity investments in agriculture is their return potential. Getting in on the early stages of an agribusiness that goes on to see success can offer investors significant returns. Private equity investors can realize considerable appreciation and cash yields if they pick a winner, especially if they do so early on.
But private equity investment has its limits. First and foremost, the space is not available to retail investors. Accreditation is a must. Prohibitively large capital requirements mean the space is reserved for accredited and institutional investors.
Secondly, liquidity is a concern. The non-publicly traded nature of private equity investments is, for some, a double-edged sword. This type of investment is better suited to investors with a longer time horizon, who aren’t going to need the capital right away.
Lastly, investing in private equity requires an especially intensive due diligence process. In agriculture, this means asking a number of questions. How is the business valued? Where is the project located? Who is the operator? What stage of the supply chain does the business focus on? Is the commodity in question viable in the long term? Is there a commercialization strategy in place? What about logistics? The list goes on and on, and it is vital to have clear answers to these questions when deciding how to invest.
Overall, private equity in agriculture is ideal for accredited investors who are looking for appreciation and cash flow over the long term. Depending on the opportunity, a low aversion to risk may be needed, but the return potential is significant. Due diligence is particularly important in this case, as is a base level of trust in the General Partner.