This week Equilibrium Capital closed on a new fund. The $250 million ACM Permanent Crop Fund was oversubscribed — it had a hard close at $250 million — and its investors include foundations, endowments, funds of funds, multifamily offices and public pension funds. In a coup for a first-time fund, the $103.6 billion Washington State Investment Board and the $13.2 billion Maine Public Employees Retirement System each committed $50 million.
With ACM, Portland, Oregon–based Equilibrium is benefiting from institutional investors’ growing appetite for real assets, a category that includes infrastructure, real estate, farmland, timber and commodities. In a survey of 201 institutions published in January by BlackRock, the $4.3 trillion U.S. asset manager, 46 percent of respondents said they had boosted their allocation to at least one type of real asset in the past three years; 60 percent said they expected to do so over the next 18 months. Helping drive this interest are the return profile of the asset class, macroeconomic factors, the desire for income-producing assets and inflation concerns.
As the BlackRock study notes, agriculture is a small subsection of the real-asset universe. But last November, Stamford, Connecticut–based consulting firm Greenwich Associates highlighted its appeal by releasing the results of a survey of 100 institutional investors and investment consultants from the first and second quarters of 2014. Thirty-three percent of participants said they might invest more in farmland over the next year, and 36 percent of defined benefit pension participants said they would consider a farmland allocation during that time.
Global agriculture and consumer trends — a growing population requiring a high-protein diet and demanding better-quality produce — add to farmland’s potential as an investment. Another contributing factor is climate change: Shifting weather patterns could harm crop yields in some places but create growing opportunities in others.
ACM operates as part of Equilibrium, which manages $1 billion in assets. The ACM Permanent Crop Fund has some unique characteristics. It focuses on crops that don’t have to be resown regularly — citrus, berries, table grapes and nuts — in California, Oregon and Washington state. The fund not only owns the farmland but controls the growing, processing, packaging and marketing of the crops.
“Typically, institutional capital is coming in, owning the property and collecting the lease payments,” says Equilibrium principal Rob Hurlbut, head of the firm’s sustainable-agriculture strategies and one of ACM’s managers. “We gain real benefits by coming in and actually farming the land such that we can improve its value over the life cycle” of the fund, he adds. By taking products such as blueberries all the way from the ground to market, ACM has greater control over the process and further diversifies its revenue stream.
ACM’s five principals have deep roots in Pacific states farming. Hurlbut brings more than 25 years’ experience in the food and agriculture industry, including a stint as CEO of Niman Ranch, a San Francisco Bay–area producer and distributor of high-quality natural meat (free-range, given no hormones or antibiotics, fed a vegan diet). Principal Tom Avinelis, who has a 30-year farming background, built Homegrown Organic Farms into one of California’s largest organic-product marketing firms and serves as vice president of the California Blueberry Association. He’s also co-founder of AgriCare, a Porterville, California–based farm management company.
ACM is an impact investment: It’s concerned with the impact its fund makes, in this case both environmental and social. The fund’s credentials include using all-organic farming techniques and protecting the livelihood and well-being of its laborers. In recent years impact investing has gained popularity with high-net-worth individuals and some foundations. Although all of the funds on Equilibrium's platform, six plus a multifund strategy, have a beneficial social or environmental impact, the firm regards itself as an institutional investment manager focused on sustainable investment strategies that deliver alpha.
But many larger institutions remain wary, fearing that funds with a stated mission-based focus such as green investing or community development will produce lower returns or, worse, sacrifice yield for impact. The Equilibrium team argues that impact investing is not only institutional but can be a source of alpha. In theory, growing a high-quality agricultural product and managing farmland sustainably should deliver better results. The ACM Permanent Crop Fund has projected current income from crop operations of 8 to 10 percent and a total internal rate of return on capital of 12 to 14 percent net with a ten-year lockup, plus the option of two one-year extensions.
Allan Emkin, founder and managing director of Pension Consulting Alliance, a Portland, Oregon–based institutional investment consulting firm with $1 trillion in assets under advisory, says that in the right context, institutions can allocate to impact funds. For such pension investors, “the single most important impact is generating returns that will support the fund’s ability to pay benefits in a timely manner,” he cautions. “In that context, making investments that have a beneficial impact on the economy is good for the capital markets and therefore good for the client” or investor, Los Angeles–based Emkin says.
In ACM’s case the theme of sustainable agriculture, along with the so-called organic consumer and technological innovations in farming, can strike a chord with investors — even those who might not otherwise be interested in funds with a social or environmental impact. Jackie VanderBrug, Boston-based senior vice president and investment strategist at $100 billion U.S. Trust, the Bank of America–owned private bank, says such “thematic” investing is emerging as a sweet spot for impact because it combines a compelling social thesis with an economic argument that can attract commercially minded institutions. More people will want to eat organically farmed blueberries, which are cheaper to grow domestically than to import; permanent cropland is more profitable over time; and responsible farming and labor practices are more sustainable and productive in the long haul.
ACM’s approach has its challenges, in particular the sourcing and managing of land as well as hiring and training people in organic farming. In drought-stricken California water remains a problem. But Brooke Randall, also a principal with Equilibrium in the firm’s sustainable-agriculture group, says that although not all investors in the ACM Permanent Crop Fund were interested in the sustainability angle at first, it often became a compelling part of their reasoning for committing capital. When interests align, everyone wins.
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