Guest article by Aaron Desatnik, Fractal Ag
I vividly recall the first farmland investing memo that I wrote in 2011. In a CNBC interview that March, Warren Buffet famously said “I’d rather have all the farmland in the U.S. than all the world’s gold.” The firm’s goal was to balance the portfolio with real asset exposure that generated current income, appreciated in value, and was a hedge against a weakened dollar. While we were early, we were not alone. Since 2011, 50 new agriculture and farmland investment managers have launched with AUM of on average ~ $1 billion in AUM per manager[1].
The regenerative investment landscape has rapidly developed but confusion remains
In 2012, when I attended my first of many Global AgInvesting conferences, there wasn’t a single regenerative food systems investment vehicle or presentation. Fast forward to last week’s fifth annual Regenerative Food Systems Investment Forum in Denver, and more than $10 billion in investable capital was represented from family offices, institutions, individuals, RIAs and foundations that are actively investing in the regenerative investment thesis.
Yet the conversations indicated that even in this self-selecting group, significant confusion on what investing into regenerative food systems still exists. Several family offices sought to understand Fractal’s business case for incentivizing better soil health practices through a reduced cost of capital.[2] Nearly everyone had a different take on the definition of regenerative practices. The curiosity and interest was palpable, but it indicated that a great deal of navigation is needed before anyone fundraising or allocating capital will fully bear fruit.
At Fractal, we’re excited about the diversity of solutions and capital allocators because we believe all are needed. Our approach is to invest in regenerative U.S. row crop farmland to drive scale in these practices. We love seeing intensive agroforestry, organic conversion, and dedicated BIPOC vehicles out there. We think both the impact and the financial returns are complementary to many capital allocators, but it will take time for the market to sort itself out.
Defining the core positioning of a regenerative product is key to fighting through confusion to help farmers and investors
Anthony Corsaro’s presentation illustrated that the range of regenerative food systems investing is far and wide. Allocators are investing in farmland and forests, in supply chains and infrastructure, in ingredients, in technology, and in consumer packaged goods. They’re investing in venture capital, private equity, private credit, and other alternative investment vehicles. They’re investing in the U.S. and globally. They’re investing for market-rate returns and in concessionary vehicles, and everything in between. They’re defining impact in terms of climate, soil health, social justice and a myriad of other frameworks.
Several investors indicated that this diversity of opportunities created confusion and made it more difficult to get deals approved. “How your investment is bucketed matters almost more than anything else for whether or not you’ll be successful at getting funding,” said one large allocator. Another expressed a concern that framing as an impact investment would slow down the investment committee process. That said, fund managers have to embrace what they are, as most allocators have clear lines in the sand that positioning cannot solve for.
For example, Fractal is a U.S. row crop farmland fund, so the return projections are more akin to real assets than venture capital. Beyond that, we believe the platform has the potential to drive adoption of regenerative farming practices at the scale of tens of millions of acres in a short period of time while also driving returns beyond that of traditional farmland investing. Does that make the fund an impact investment or a real asset investment? Ultimately, we think the answer is both, and the positioning depends on the priorities of the allocator. Defining this is crucial to understand as early as possible in the fundraising process.
There’s still not enough capital ready to invest in regenerative food systems, yet
“Reforming [global food and agriculture] systems along more sustainable lines to address wider social and environmental impacts will require investments between $300 and $400 billion each year.”[3] The investment gap is real, yet it’s also solvable and there is precedent. When I worked for Stephen Ross, founder of The Related Companies, he told stories about being a pioneer in commercial real estate investing in the 1970s. Today, 20% of wealth held by North American family offices is in real estate, and interest is higher than in any asset class except private equity.[4] More recently, renewable energy has gone from relative obscurity to an institutionally-dominated market in less than two decades. We believe that today is as good a time as any in modern financial history to institutional alternative asset classes. “Alternative managers around the globe raised $1.3 trillion in private capital during 2022… That brought the five-year total to a staggering $6.4 trillion, dwarfing any five-year period in the industry’s history.”[5] So how do we mobilize this capital for the regenerative opportunity?
A theme among allocators at RFSI was an acknowledgement of the need to work within the current market by building “hybrid systems” that can fit into the investment landscape as it is today and drive change. Eric Smith, CEO and Co-Founder of Edacious, reminded attendees that one way to accomplish this is to work with the producers who are the ones managing the 250 million acres of U.S. farmland and that no fund manager can raise enough money to directly control how that land is operated. To drive change across those millions of acres, we believe that we need a way to provide incentives to producers to make their own decisions. In his recent article Why We Started Fractal, CEO and Founder Ben Gordon explains that at Fractal “we don’t tell farmers how to farm.” Fundamentally, we at Fractal believe that farmers are best positioned to manage the operation, deliver higher returns, and drive climate impact at scale.
Thinking back to that first farmland investment memo I wrote in 2011, it’s unfathomable both how far we’ve come and how far we need to go. We need to continue to work with allocators and peer fund managers to scale the regenerative investment opportunity, position our investments right, and build investment products that leverage the partners that we already have, such as farmers. At Fractal, we’re heeding these lessons and building an investment product that we believe can scale to tens of millions of acres and hundreds of millions of tons of CO2 sequestered. We know that we must earn the right to be trusted fiduciaries by delivering on our financial and impact targets. There’s massive potential impact if we get this right. A decade later, Warren Buffet couldn’t agree more.[6]
[1] Preqin Pro; AUM data is based on 16 fund managers listed
[2] https://www.nature.com/articles/s41893-023-01131-7
[3] CapShift’s “How to Invest in Sustainable and Regenerative Food and Agriculture”
[4] https://rsmus.com/insights/industries/real-estate/family-offices-emerge-as-real-estate-investment-power-players.html#:~:text=Family%20offices’%20love%20for%20the,term%20wealth%20appreciation%20and%20preservation.
[5] Bain & Company’s Private Equity Outlook in 2023 report
[6] https://www.cnbc.com/2022/04/30/warren-buffett-gives-his-most-expansive-explanation-for-why-he-doesnt-believe-in-bitcoin.html
If you’d like to learn more about what Fractal is up to, please visit fractal.ag or reach out to Aaron directly here.
All opinions expressed in this article are those of the author and do not necessarily reflect the opinions of RFSI or its parent company.