Presentation on theme: "Annual Meeting Istanbul 13-14 October 2010 Fund investments in Food and Agribusiness Recent trends in ECA."— Presentation transcript:
1Annual Meeting Istanbul October Fund investments in Food and Agribusiness Recent trends in ECA
2Outline of Presentation Key investment driversWhat’s being said about investment in agricultureWays to invest in agricultureInvestment structuresFund Investment processTarget marketsBroad classification of funds investingFunds active in ECA – overviewFunds – illustrative examplesFarmland funds – current issues/revised strategies/ outlookImpact of farmland fundsAdditionality of funds/ private equity expertiseExamples of other fund strategiesFuture trends/ issues
3Key Investment Drivers - Food Sector 1/2 BASIC PREMISE“A looming imbalance in the supply and demand of food commodities will result in a prolonged period of higher food commodity prices”Factors affecting DEMANDPOPULATION GROWTHGlobal population increase - from 6.5 BLN to 9.0 BLN by 2050Middle class increase - from 430 MLN to 1.15 BLN by 2030CHANGING GLOBAL FOOD CONSUMPTION TRENDS - as incomes riseEsp. in China and IndiaSwitch from starch-rich to protein-rich dietsProfessionalization of meat industries will demand more grainMove towards processed/ branded foods offers higher profit margins and adds further impetus to investments
4Key Investment Drivers - Food Sector 2/2 Factors affecting SUPPLYSUPPLY CONSTRAINTS:PRODUCTION LIMITS: Industrialization, urbanization, water limitations, climate changeSLOWING PRODUCTIVITY GAINS: GMO acceptance low … only corn (USA) and soya (USA/ South America)IMPACT OF BIOFUELSDiversion of crops and farmlandThough impact less than initially anticipated
5HJ Heinz Company Anticipated growth in Emerging Markets “Emerging Markets are on track to deliver at least 20% of our total sales by 2013, more than double their contribution of just five years ago,” Mr. Johnson said. “Heinz is already well-established in Emerging Markets like China, India, Indonesia, Latin America and Russia, where we have strong brands, local marketing expertise and the infrastructure necessary to sustain strong growth.”“Emerging Markets are key to unlocking future growth because their economies are growing at a significantly higher rate than developed markets; the middle-class in Emerging Markets will eventually outnumber the combined populations of the U.S. and Europe; and per capita consumption of packaged foods in Emerging Markets has significant upside.”William R. Johnson, Chairman, President and CEO,H.J. Heinz Company, Pittsburgh, 31 August 2010
6Key Investment Drivers - Farmland Perception that farmland is fundamentally UNDERVALUEDGains to be achieved from:CAPITAL APPRECIATION (Russia ~ $700/ha vs Brazil ~ $3500/ ha)PRODUCTIVITY IMPROVEMENTS (e.g. wheat yields 2.5t to 5.0t+)LONG TERM HIGHER COMMODITY PRICESFarmland an UNCORRELATED/ COUNTER-CYCLICAL ASSETFarmland an INFLATION HEDGEFSU has 13% of global arable land – up to 30 million hectares may be idle[Farmland is second oldest form of investment – after the family cave]
7What’s being said about investment in agriculture Jim Rogers, the hedge fund manager who predicted the start of the commodity rally in 1999, said global warming will hinder crops and has advised purchasing farmland for at least a decade. ``Because of the disruptions, agricultural prices will go through the roof,'' he told reporters in Melbourne on 7 February 2007 ``I am extremely bullish on agriculture.’’“The race is on not only to feed the world, but also to produce more quality food to meet the changing nutritional needs of an increasingly affluent population.” Bill Barbour, Investment Specialist at DWS Investments."Sell banks, buy cheese," Crispin Odey, Odey Asset Management. Financial Times 25 April 2008“My boss wants to create the first Exxon Mobil of the farming sector”. Joe Calvin, Altima One World Agriculture Fund
8What’s being said about farmland "I'm convinced that farmland is going to be one of the best investments of our time. Eventually, of course, food prices will get high enough that the market probably will be flooded with supply through development of new land or technology or both, and the bull market will end. But that's a long ways away yet." - George Soros, June 2009"People are obsessed with real assets now. They want things they can touch," said Olivier Combastet, founder of Paris-based Pergam Finance, which has $1 billion in assets and two years ago formed Campos Orientales, a fund that buys farmland in Argentina and Uruguay. ``Three years ago people were skeptical about investing in farmland …. (now) it's become much more sexy.'’ – Reuters, 22 June 2009“Corn Farms Replace New York Lofts as Hottest Property” - Bloomberg 20 Feb 2007
9Ways to invest in agriculture Agricultural commodities (futures, options, ETFs)Direct investment in agricultural equitiesPublicly quotedPrivate equityDirect farmland investmentCollective investment funds
10Example: Investment Structures Funding SourcesInvestment ManagerFUNDInvestmentsExample: Alpcot AgroFunding SourcesInvestment ManagerInvestmentsExamples: Trigon Agri, Black Earth FarmingFunding sources – may include private equity, sovereign wealth funds, high net worth individuals, family offices, other institutional investors, etc
11Fund Investment Process Optional structures: special purpose fund vs direct investmentReturns created through one or combination of three factors:debt repayment, or cash accumulation through cash flows from operationsoperational improvements that increase earnings over life of investmentmultiple expansion - selling investments for higher multiple of earnings than originally paidFund investments typically realized after some period of time, varies depending on the investment strategy (farmland 5- 7, now up to 12 years ?)Investments typically realized through:Initial Public Offering (IPO)Merger or acquisitionRecapitalization
13Target markets - Global SEGMENTS/ SECTORSLand and cropsFood processingAgri-sector linkages (fertilizer, logistics, other inputs)Commodities (ETFs etc)GEOGRAPHIC FOCUSDEVELOPED MARKETSUSA/ CanadaAustralia/ New ZealandEUEMERGING MARKETSECA (Russia, Ukraine, new EU countries)Latin America (Brazil, Argentina, Uruguay, Paraguay)Asia (India/ China)South AfricaFRONTIER MARKETSAfrica (Sudan, DRC, Angola)
14Target Markets - ECA LAND AND CROPS Russia and Ukraine – large scale farmingFarming in Romania, Slovakia, Bulgaria (e.g. AgroTerra North) – target opportunity to exploit EU subsidiesBulgaria REITs (e.g. Advance Terrafund) (IFC an investor)Latvia, Lithuania (existing agro holdings)GENERAL FOOD AND AGRIBUSINESSRussia and Ukraine, listed equities (no specific region-focused funds)New EU countries (e.g. REEEP fund – partially targets food companies)CENTRAL ASIA/ CAUCASUSGenerally only SEAF fundsRecent example: East Capital Explorer investing in Georgian food retail chain Populi
15Broad Classification of funds Typical Defining Features BY MANDATEDirect Mandate (private equity funds)Discretionary (e.g. SEAF) how to describe REEEPBY STRUCTUREFund structureDirect investments (through investment manager)BY INVESTMENT FOCUSLand and cropsEquities – listed/ unlistedCombinations (listed/ unlisted equities, or physical assets)REITs/ only farmlandBY GEOGRAPHIC FOCUSCountry/region specificGlobalBY DEVELOPMENT FOCUS: SEAF
16Funds active in ECA – General Food and Agri funds Examples of GENERAL FUNDS targeting food and agri in ECA (and globally):GAIA – invests in “up-stream farming companies, farmland, equipment and technology, and related businesses in emerging regions where scale and costs offer competitive advantages and growth rates are high”Altima One World Agriculture Fund – invests “primarily in farmland and in world class farm operators ("agro champions" with strong franchise value), both in listed and unlisted investments” [IFC invested $75m]Pharos Miro Fund – creates returns “through acquiring agricultural land, supporting infrastructure assets, and distressed operational farm holdings”Trigon Emerging Sector Agri Fund – invests in listed food and agri coysDWS Global Agribusiness Fund - a managed portfolio of global agribusiness companies (currently 2.6% in Ukraine)There are no dedicated geographic/ thematic funds in food sector in ECA, so far
17Funds/PE active in ECA - Land and Crops Examples of funds active in LAND AND CROPS in ECA:NCH (Russia/ Ukraine). FUND. ~ 425,000 ha +. UnlistedBlack Earth Farming (Russia). DIRECT. ~ 330,000 ha. Listed FirstNorthRencap (UAFL) (Ukraine). DIRECT. ~ 330,000 ha. UnlistedAlpcot Agro (Russia/ Ukr). FUND. ~ 175,000ha. Listed FirstNorth.Trigon Agri (Russia/ Ukraine). DIRECT. 169,000 ha. Listed FirstNorthLandkom (Ukraine). DIRECT. ~ 74,000 ha. Listed AIM.Volga Farming (Russia). DIRECT. ~ 60,000 ha. UnlistedAgro Generation (Ukraine). DIRECT. ~ 50,000 ha. UnlistedFirst Farms (Slovakia/ Romania). DIRECT. ~ 15,400 ha. Listed FirstNorth.Northbridge (France/ Romania). FUND of FUNDS. ~ 550 ha. UnlistedBulgaria REITs (6 funds). FUNDS. ~ 50,000 ha. [Ceres Agrigrowth Investment Fund listed on Bulgaria Stock Exchange (IFC an investor)]
18Context of land holdings by funds within Russia and Ukraine Total arable land in Russia: 121 million ha (45m ha grains)Total arable land in Ukraine: 32 million haTotal land acquired by funds: ~ 1,7 million ha (~1.1% of total)Top 10 Russian agro holdings control ~ 3.5 million ha +Largest fund/PE investor: Black Earth Farming (~323,000 ha)Largest land holder in Russia ~ 570,000 ha (Prodimex)Largest land holder in CIS ~ 1.1 million ha (Ivolga)Definitions of land in control and land in ownership:Land in control is registered land and land where a subsidiary of the company, either itself or in the name of agents, has registered a lease agreement or is in the process of registering a lease agreement with local authorities.Land in ownership is registered land and the indirect ownership of land within the Russian Pai system. The Pais can be registered either in the company's subsidiary's name or in the name of an agent acquiring Pais on behalf of the company's subsidiary within the framework of legally binding contracts, or is in the process of entry into the land register with local authorities.
19Funds/PE - Illustrative Examples (7) FARMLANDAlpcot Agro – Russia and UkraineTrigon Agri – Russia and UkraineInsight Global Farmland Fund – GlobalGENERAL FOOD AND AGRIAgriSar – Global food and agribusinessPictet - Global food and agribusinessTrigon Emerging Agri-Sector FundResource Eastern European Equity Partners Fund
20Alpcot Agro Established 2006/7 Six share issues to raise ~ SEK 1.34 billionFund Objective “.. to generate an attractive return on invested capital by acquiring and farming agricultural land in Russia and other CIS-states. Operational strategy is to engage in highly efficient integrated agriculture in accordance with Western best practice, in three parts of the value chain: cultivation of the land, storage and sale”.Alpcot controls190,000 ha in Russia9,800 ha in UkraineOf this, approx 72,000 ha harvested in 2010Listed on NASDAQ OMX First North Exchange in Oct 2009
21Alpcot: investment strategy Investment opportunities evaluated on:Quality of the soil and precipitationSize of farm - at least 10,000 hectares needed to achieve efficient scaleProximity to urban centers to facilitate recruitmentProximity and access to infrastructureGeographical diversification to reduce exposure to local weatherGeographical extension along a north-south axis to extend planting and harvest seasons and enable optimal utilization of machineryStrong relationships with local decision makers and stakeholders
22Alpcot: shareholders Example to illustrate shareholders profile Alpcot had approx. 1,000 shareholders at 31 March 2010
23Trigon Agri Established in 2006 by Trigon Capital investment group Integrated cereals and dairy producer, storage and tradingStrategy:focus on large-scale farming clusters within small geographical areasclusters between 40,000 and 100,000 hadevelop integrated production and trading by acquiring grain storageintegration enables profit maximization throughout value chainOperations in Ukraine, Russia and EstoniaStart-up equity capital (€19.6m) from Trigon Capital and Finnish high net worth individualsTotal equity raised €175 millionCurrent market cap ~ €84 millionListed on Nasdaq OMX First North exchange - May 2007
24Insight Global Farmland Fund Fund of farmland holdingsEstablished Target $300mInsight’s view: “Farmland provides the complete thematic exposure”Target return 15% per annumAchieve diversification from geographical spread and commodity range3 components to investment return:Rising commodity pricesLand value appreciationActive AlphaVariety of holdings:stakes in vehicles incorporated exclusively to hold farmland assetslisted farmland companiesdirect ownership of farmlanddebt covenants over farmlandstakes in existing farmland funds
25Sarasin AgriSar Fund Fund launched March 2008. Current AUM - GBP 109m Global focus across full spectrum of equities, land and commoditiesSarasin & Partners LLP: London-based investment management firm.Bank Sarasin listed on Swiss Stock Exchange - majority shareholder Rabobank.Invests at all stages of agricultural production - from land, fertilizer, pest control and seed inputs, through irrigation, mechanization and production technologies, to storage, processing, distribution and consumerTargets two key trends:the need to invest to increase productivity (includes supporting infrastructures e.g. seeds, technology, etc)the growth in volumes throughout the agricultural chain (strategy more sophisticated than protein only – seeks broader consumer patterns, also aspects like branding, obesity, etc)Not a commodity price play, but rather trends in food consumption
26Pictet Agriculture Fund Fund established May 2009.NAV €126m (~71 positions)Invests in listed companies operating in agribusiness value chainProvides investors with a high exposure to pure agricultureFavors companies operating in production, packaging, and supply, also in manufacture of agricultural equipmentAlso addresses resource efficiency (favors companies that produce more food with lower inputs)Targets 3 key segments:FARM INPUTS (e.g. Yara fertilizer),FARM PROFESSIONALIZATION (e.g. Tyson, Nutreco)SUPPLY CHAIN SERVICES (e.g. Brazil railroads, testing company Neogen)Invests not restricted to a specific geographical zoneIN ECA: so far, investments in Agroton (Ukraine) and Linas Agro (Lithuania)
27Trigon Emerging Agri-Sector Fund Launched May 2008/ fund domicile EstoniaFund size €15.7m (22 positions)Trigon Capital is leading CEE investment firm, manages ~ USD 1 billion assetsTrigon Emerging Agri-Sector Fund invests inlisted food and agribusiness companiesin emerging markets with high growth potential and imbalance in supply and demand in agricultural producefocus on smaller companiesMay also invest into developed markets provided these companies have substantial business interests in emerging marketsFund combines Trigon's operational farming experience with emerging market portfolio management expertiseInvestments so far mainly China (Asian Bamboo, Asian Citrus) , Russia (Chergizovo), Ukraine (Kernel), Turkey, Poland
28Resource Eastern European Equity Partners Fund NEW FUND: established 2010Fund target size is €200 millionEBRD and Rabobank each investing €25 millionFocus on mid-cap agribusinesses in Poland and EU countries in Central and South-Eastern Europe, operating in the food processing, manufacturing, retail and logistics sectors "which have been historically underserved by private equity”.
29Farmland funds – current issues Most formed since 2005/6INITIAL MOTIVES: Land appreciation, productivity gains, new crop price paradigmREALITY HAS SO FAR BEEN DIFFERENT:Land appreciation expectations scaled back … horizon now up to 12 years ?Valuations now on DCF/ PE basis, rather than land appreciationProductivity gains not achieved so far … not as easy as it seemedMost funds underestimated complexity of investment … esp. working capital requirements and “soil correction cost”Paradigm on crop prices deferred ... stocks (were) back at record levelsMost funds are trading well below investment valueMany funds have listed – Nasdaq OMX First North is most popular optionIFIs have not invested in farmland funds (except in Bulgaria Agri REIT)Total investment so far > $1.0 BLN
30Farmland funds - revised strategies FOCUS NOW ON:RETHINKING INVESTMENT MODEL AND KEY ASSUMPTIONSquality and location of assets/ more selective entryconsolidating land bankchanging structure of land bank/ developing mega clustersfundamental assumptions on yields and pricesinfrastructure like storage and logisticsfocus on vertical integration using low price grain (beef, milk, poultry, etc)developing grain trading to leverage local opportunitiesCONSOLIDATING operational competencies and asset synergiesGenerally, lowered investment return expectations and longer investment horizons ?
31Farmland funds – medium term outlook KEY ISSUES:Limited access to equity and debt on attractive terms – stopped further land acquisition/ expansionHow will initial investment drivers play out esp. yield and price trends, also land appreciation ?Infrastructural/ Logistical bottlenecks ?Political awakening to large foreign land holdings ?Russia mortgage market developments ... likely impact on land prices ?Ukraine – land title issue ?Exit prospects – via IPOs/ strategic sales ?Operational risks (weather, markets, management) ?Relatively unproven as an investment opportunityFund interest in farmland is now returning .. ?
32Impact of Farmland Funds Articulating/ catalyzing opportunities in agricultureNew investors bring in financing, know-how, professional standardsBenefits of scaleSpecialized fund management enables more efficient capital allocation in agriculture/ better diversification of riskEfficiencies from consolidation, scale, capital renovationPotential for substantial crop yield gainsDriving improvements in land rights processesEmployment, management and other skills developmentCREATING NEW ASSET CLASS TO INTERNATIONAL BENCHMARKS
33Additionality of funds/ private equity expertise Provide expertise in structuring investments/ unlocking valueExpertise to identify, assess and acquire farmlandExtensive due diligenceImproved strategic focus/ management/ asset utilizationCorporate governanceInvestor disciplineUnderwrite funding without burden of debt paymentsEnhance leverage/ borrowing capacityCorporate Governance: facilitate development of private/ (often) family run businesses into institutionalized companiesImproves efficiency of market information for farmlandFacilitate exchange of know how between similar businessesExit/ liquidity: Prepare the business for IPO/ other exits
34Ray Goldberg, Harvard University “ The food system has to be put back together by big global companies that look ahead many years in their planning rather than governments that view the world from one election to the next. These large-scale firms have become quasi-public entities responsible to society in order to survive in a world that holds them accountable for nutrition, food security, food safety and economic development. ”Professor Ray Goldberg, Harvard University, speech at IFAMA 10 March 2010
35Examples: other fund strategies CLIMATE CHANGE CAPITAL LAND FUND - PROPOSED Fund “.. will forecast physical impacts of climate change on land productivity around the world and seek to implement sustainable management practices that increase the land’s capacity to adapt to climate change and maintain or increase productivity ..”ALTIMA ONE WORLD AGRO FUND targets global agricultural businesses, primarily in farmland and in world class farm operators ("agro champions" with strong franchise value), both in listed and unlisted investmentsINDIA AGRIBUSINESS FUND targets all sectors of food and agribusiness and agric-infrastructure, with focus on SMEs and companies in rural areasAGRO-ECOLOGICAL FARMLAND FUND invests in farmland in New Zealand (also South America, Southern Africa, USA), acquiring conventionally-managed farms and converting them to organic production
36Future trends/ issues Farmland Funds consolidating operations/ refining strategymore operationally focused/ less land bank speculationfurther focus on improvements in technology/ infrastructure/ skillsSignificant scope for further investments in Russia and UkraineFarmland as new asset class/ concept needs to be proven ?IFIs - future interest in supporting farmland investments ?Food fundsno specific geographic or thematic food funds so far in ECAprospects in Russia, Ukraine, other CISlikely merger and acquisition/ consolidation of strong regional playersOther CIS:limited or no prospects in farmland?Maybe Kazakhstan (title issues?)Belarus (investment climate?)Other Central Asia/ Caucasus too fragmented/ complex ?REIT-type consolidations in smaller countries ?
37Thank you Ian Luyt NOViROST Moscow, Russia email@example.com