Hedge fund firms often take their names from the natural environment: Bridgewater Associates, Lone Pine Capital and BlueMountain Capital are just a few examples. Last fall BlueMountain alumnus David Nicola went a step further by starting Blackdirt Capital, a specialist in sustainable agriculture that aims to reap robust risk-adjusted returns. Blackdirts first offering, the Gratitude Farmland Fund, launched in August with $40 million in seed capital from partner Gratitude Railroad.
Blackdirt is named after the Black Dirt Region, a stretch of New York State and New Jersey renowned for its rich soil. The Farmland Fund focuses on buying and developing undervalued agricultural land in low-income areas of the eastern U.S. (The water risk is too great, he says, in the Midwest and California, home to much of the countrys meat and dairy industry.)
Nicolas production system centers on growing grass and introducing cattle to graze on it. The end result: premium beef and milk products known on restaurant menus and in grocery stores as organic grass-fed.
Its sort of a hedge fund approach to thinking about sustainable agriculture, says Nicola, 36, who is Stamford, Connecticutbased Blackdirts lone employee. In a domestic market reliant on beef and dairy, the current model of using land to grow crops such as corn is less sustainable and less profitable, he argues, so hes creating an alternative by cheaply and easily maintaining organic soil: Thats how my brain operates, thanks to being both a tree hugger and hedge fund portfolio manager.
Nicola has always been environmentally conscious. The Chatham, New Jersey, native studied natural resources at Cornell Universitys College of Agriculture and Life Sciences; after graduation in 2002 he moved into an investment banking analyst program at Citigroup in New York, where he concentrated on basic industries like metals and mining.
From 2003 to 2009 at BlueMountain, Nicola managed index and fixed-income arbitrage for the $22 billion, New Yorkbased credit-focused alternative-investment firm. That job taught him how to invest, identify opportunities and manage risk, he explains.
Nicola has spent most of the past six years figuring out how to combine his investment experience with his passion for environmental conservation. During that time he earned an MBA in energy and environment from Duke Universitys Fuqua School of Business and did a two-year stint at Armonia, a Greenwich, Connecticutbased family office, managing investments in sustainable farming and other environmentally friendly businesses.
Nicola, who calls agriculture an underinvested sector, sees plenty of upside for his new fund. Last year was the biggest ever for the organic food industry, according to the Washington-based Organic Trade Association, with Americans spending more than $42 billion on such products. The organic industry grew 10.8 percent in 2015, while the overall food market expanded by only 3 percent. Consumption continues to outpace production. Still, organics comprised less than 5 percent of total food sales in the U.S., where less than 1 percent of cropland is devoted to organic agriculture.
As an asset class, farmland has proven to be a good long-term investment. From December 1991 through September 2015, the NCREIF Farmland Index posted a 12.10 percent average annual return, versus 9.26 percent for the Russell 3000 Index.
Conventional-agriculture funds are experimenting with organic and other sustainable techniques, but the sector is small probably less than $100 million, Nicola says. Attracting large institutions and scaling the Farmland Funds system is part of his long-range plan.
Nicola describes Gratitude Railroad, founded by Howard Fischer and Eric Jacobsen, as an impact-focused community of traditional investors with the resources to fund young managers who have an impact skill set but may lack the capacity to build a fund or an investment product themselves. Gratitude is the majority general partner of the Farmland Fund; Nicola plans to grow the portfolio by raising more capital from high-net-worth individuals, family offices and other investors.
The opportunity for a $250 million to $500 million fund is there, probably in year two or year three, says the Blackdirt founder, who concedes that institutional investors often overlook small vehicles like his in favor of those with track records: The opportunity is much larger than the fund size.
Financial and ecological value are connected for Nicola, who doesnt consider himself an impact investor. If youre not paying attention to the environment and social factors in an agriculture portfolio, particularly if youre an institutional investor with a 30- to 50-year time horizon, he says, youre setting yourself up for underperformance.
Follow Jen Werner on Twitter at @jenwernerr.