Sixth Street has quietly become one of the largest owners of avocado farms in the United States, thanks to a steady push into agriculture investing.  

The $60 billion investment manager has been allocating capital to agriculture investments since 2014 through its Tao platform — a private investment strategy that holds assets for longer than traditional private equity vehicles, allowing investors to recycle capital if they like. Today, the firm has a dedicated agriculture platform within its strategic capital group headed up by Matt Dillard, a cofounding partner.

Agriculture has historically been seen as an investment that hedges against inflation: After all, people always need to eat, even when prices rise. Amid record levels of inflation, investors are increasingly interested in the sector.  

But some critics argue that a plethora of options leaves consumers with the ability to choose cheaper foods over pricier ones. For instance, if apples hit $20 a pound, people would simply forgo the fruit, or they might buy oranges instead.   

“Ultimately, I think the observation that people make tradeoffs on what they want to eat is intuitive,” Dillard said. “But when you’re in a market like this and you’re seeing inflation across the board, it’s a different story.”   

At any rate, Dillard argued that the asset class has value beyond hedging against inflation. It “has the potential to be cash generative, but it is also an incredible store of value,” he said.   

There are also a significant number of investment opportunities, Dillard added. 

“One of the important things to remember is in the U.S., most farmland continues to be held on family balance sheets,” he noted. “Even though, fundamentally, the underlying assets might be performing better because we are on average in a higher commodity environment, that doesn’t mean the family’s balance sheets aren’t having issues away from the farmland.”  

Rising equipment costs or other high prices could drive families to sell off their land. According to Dillard, Sixth Street has preferred to work with these families to make changes at the farms. 

In 2014, Sixth Street made its first investment in avocado farms, when Dillard said prices were “depressed.” He’s pleased with the market’s turnaround: Today, some sell for as high as $3 a pound.   

Those early agriculture investments tended to need a lot of work or some type of transformation. These days, Sixth Street taps more “cash-yielding, day-one investments that are high quality” for the portfolio, according to Dillard. 

A key part of the strategy since the beginning has been building hyperlocal expertise via partnerships.   

“One of the decisions we made very early on was that in order to be successful in investing in agriculture, we had to get local,” Dillard said. “Showing up from San Francisco or New York City and knocking on a farmer’s door is not a successful strategy.”  

Sixth Street has since partnered with Jamie Johnson, a fourth-generation California farmer who founded Simpatica, an avocado farming organization based in the state. According to Dillard, Johnson is well-connected with other avocado farmers in the area.   

“The avocado industry in California is a small community,” Dillard said.   

Sixth Street also has invested in Californian almond farms, a project that required the firm to figure climate change into its due diligence process thanks to changing water regulations.  

“It’s hard to talk about water without talking about climate change,” Dillard said.  

Long a victim of drought, California recently changed regulations around farming and water usage that, in essence, would limit farmers’ access to water in the southern part of the state. This area of California is generally more productive for almond farmers — as long as they had access to water.  

But that access is drying up, leaving farmers to flee to the northern part of the state.  

Sixth Street had chosen to invest in farms in that area, given the long-term nature of almond trees. They have a 25-year asset life, but don’t produce any nuts for the first seven years after being planted. 

“It’s interesting because fundamentally those areas are less productive when it comes to almonds,” Dillard said. “But people don’t care. They’re focused on water assurance.”