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Annual Meeting Istanbul 13-14 October 2010 Fund investments in Food and Agribusiness Recent trends in ECA

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Annual Meeting Istanbul 13-14 October 2010 Fund investments in Food and Agribusiness Recent trends in ECA Ray Goldberg, Harvard University The food system has to ... – PowerPoint PPT presentation

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Title: Annual Meeting Istanbul 13-14 October 2010 Fund investments in Food and Agribusiness Recent trends in ECA


1
Annual MeetingIstanbul 13-14 October
2010Fund investments in Food and
AgribusinessRecent trends in ECA
2
Outline of Presentation
  • Key investment drivers
  • Whats being said about investment in agriculture
  • Ways to invest in agriculture
  • Investment structures
  • Fund Investment process
  • Target markets
  • Broad classification of funds investing
  • Funds active in ECA overview
  • Funds illustrative examples
  • Farmland funds current issues/revised
    strategies/ outlook
  • Impact of farmland funds
  • Additionality of funds/ private equity expertise
  • Examples of other fund strategies
  • Future trends/ issues

3
Key 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 DEMAND
  • POPULATION GROWTH
  • Global population increase - from 6.5 BLN to 9.0
    BLN by 2050
  • Middle class increase - from 430 MLN to 1.15 BLN
    by 2030
  • CHANGING GLOBAL FOOD CONSUMPTION TRENDS - as
    incomes rise
  • Esp. in China and India
  • Switch from starch-rich to protein-rich diets
  • Professionalization of meat industries will
    demand more grain
  • Move towards processed/ branded foods offers
    higher profit margins and adds further impetus to
    investments

4
Key Investment Drivers - Food Sector 2/2
  • Factors affecting SUPPLY
  • SUPPLY CONSTRAINTS
  • PRODUCTION LIMITS Industrialization,
    urbanization, water limitations, climate change
  • SLOWING PRODUCTIVITY GAINS GMO acceptance low
    only corn (USA) and soya (USA/ South America)
  • IMPACT OF BIOFUELS
  • Diversion of crops and farmland
  • Though impact less than initially anticipated

5
HJ Heinz CompanyAnticipated 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

6
Key Investment Drivers - Farmland
  • Perception that farmland is fundamentally
    UNDERVALUED
  • Gains 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 PRICES
  • Farmland an UNCORRELATED/ COUNTER-CYCLICAL ASSET
  • Farmland an INFLATION HEDGE
  • FSU 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

7
Whats 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

8
Whats 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

9
Ways to invest in agriculture
  • Agricultural commodities (futures, options, ETFs)
  • Direct investment in agricultural equities
  • Publicly quoted
  • Private equity
  • Direct farmland investment
  • Collective investment funds

10
Example Investment Structures
Example Alpcot Agro
Examples Trigon Agri, Black Earth Farming
Funding sources may include private equity,
sovereign wealth funds, high net worth
individuals, family offices, other institutional
investors, etc
11
Fund Investment Process
  • Optional structures special purpose fund vs
    direct investment
  • Returns created through one or combination of
    three factors
  • debt repayment, or cash accumulation through cash
    flows from operations
  • operational improvements that increase earnings
    over life of investment
  • multiple expansion - selling investments for
    higher multiple of earnings than originally paid
  • Fund 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 acquisition
  • Recapitalization

12
Typical fund investment structure
13
Target markets - Global
  • SEGMENTS/ SECTORS
  • Land and crops
  • Food processing
  • Agri-sector linkages (fertilizer, logistics,
    other inputs)
  • Commodities (ETFs etc)
  • GEOGRAPHIC FOCUS
  • DEVELOPED MARKETS
  • USA/ Canada
  • Australia/ New Zealand
  • EU
  • EMERGING MARKETS
  • ECA (Russia, Ukraine, new EU countries)
  • Latin America (Brazil, Argentina, Uruguay,
    Paraguay)
  • Asia (India/ China)
  • South Africa
  • FRONTIER MARKETS
  • Africa (Sudan, DRC, Angola)

14
Target Markets - ECA
  • LAND AND CROPS
  • Russia and Ukraine large scale farming
  • Farming in Romania, Slovakia, Bulgaria (e.g.
    AgroTerra North) target opportunity to exploit
    EU subsidies
  • Bulgaria REITs (e.g. Advance Terrafund) (IFC an
    investor)
  • Latvia, Lithuania (existing agro holdings)
  • GENERAL FOOD AND AGRIBUSINESS
  • Russia and Ukraine, listed equities (no specific
    region-focused funds)
  • New EU countries (e.g. REEEP fund partially
    targets food companies)
  • CENTRAL ASIA/ CAUCASUS
  • Generally only SEAF funds
  • Recent example East Capital Explorer investing
    in Georgian food retail chain Populi

15
Broad Classification of fundsTypical Defining
Features
  • BY MANDATE
  • Direct Mandate (private equity funds)
  • Discretionary (e.g. SEAF) how to describe REEEP
  • BY STRUCTURE
  • Fund structure
  • Direct investments (through investment manager)
  • BY INVESTMENT FOCUS
  • Land and crops
  • Equities listed/ unlisted
  • Combinations (listed/ unlisted equities, or
    physical assets)
  • REITs/ only farmland
  • BY GEOGRAPHIC FOCUS
  • Country/region specific
  • Global
  • BY DEVELOPMENT FOCUS SEAF

16
Funds 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 coys
  • DWS 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

17
Funds/PE active in ECA - Land and Crops
  • Examples of funds active in LAND AND CROPS in
    ECA
  • NCH (Russia/ Ukraine). FUND. 425,000 ha .
    Unlisted
  • Black Earth Farming (Russia). DIRECT. 330,000
    ha. Listed FirstNorth
  • Rencap (UAFL) (Ukraine). DIRECT. 330,000 ha.
    Unlisted
  • Alpcot Agro (Russia/ Ukr). FUND. 175,000ha.
    Listed FirstNorth.
  • Trigon Agri (Russia/ Ukraine). DIRECT. 169,000
    ha. Listed FirstNorth
  • Landkom (Ukraine). DIRECT. 74,000 ha. Listed
    AIM.
  • Volga Farming (Russia). DIRECT. 60,000 ha.
    Unlisted
  • Agro Generation (Ukraine). DIRECT. 50,000 ha.
    Unlisted
  • First Farms (Slovakia/ Romania). DIRECT.
    15,400 ha. Listed FirstNorth.
  • Northbridge (France/ Romania). FUND of FUNDS.
    550 ha. Unlisted
  • Bulgaria REITs (6 funds). FUNDS. 50,000 ha.
    Ceres Agrigrowth Investment Fund listed on
    Bulgaria Stock Exchange (IFC an investor)

18
Context 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 ha
  • Total 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.

19
Funds/PE - Illustrative Examples (7)
  • FARMLAND
  • Alpcot Agro Russia and Ukraine
  • Trigon Agri Russia and Ukraine
  • Insight Global Farmland Fund Global
  • GENERAL FOOD AND AGRI
  • AgriSar Global food and agribusiness
  • Pictet - Global food and agribusiness
  • Trigon Emerging Agri-Sector Fund
  • Resource Eastern European Equity Partners Fund

20
Alpcot Agro
  • Established 2006/7
  • Six share issues to raise SEK 1.34 billion
  • Fund 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 controls
  • 190,000 ha in Russia
  • 9,800 ha in Ukraine
  • Of this, approx 72,000 ha harvested in 2010
  • Listed on NASDAQ OMX First North Exchange in Oct
    2009
  • www.alpcotagro.com

21
Alpcot investment strategy
  • Investment opportunities evaluated on
  • Quality of the soil and precipitation
  • Size of farm - at least 10,000 hectares needed to
    achieve efficient scale
  • Proximity to urban centers to facilitate
    recruitment
  • Proximity and access to infrastructure
  • Geographical diversification to reduce exposure
    to local weather
  • Geographical extension along a north-south axis
    to extend planting and harvest seasons and enable
    optimal utilization of machinery
  • Strong relationships with local decision makers
    and stakeholders

22
Alpcot shareholders
  • Example to illustrate shareholders profile
  • Alpcot had approx. 1,000 shareholders at 31 March
    2010

23
Trigon Agri
  • Established in 2006 by Trigon Capital investment
    group
  • Integrated cereals and dairy producer, storage
    and trading
  • Strategy
  • focus on large-scale farming clusters within
    small geographical areas
  • clusters between 40,000 and 100,000 ha
  • develop integrated production and trading by
    acquiring grain storage
  • integration enables profit maximization
    throughout value chain
  • Operations in Ukraine, Russia and Estonia
  • Start-up equity capital (19.6m) from Trigon
    Capital and Finnish high net worth individuals
  • Total equity raised 175 million
  • Current market cap 84 million
  • Listed on Nasdaq OMX First North exchange - May
    2007
  • www.trigonagri.com

24
Insight Global Farmland Fund
  • Fund of farmland holdings
  • Established 2008. Target 300m
  • Insights view Farmland provides the complete
    thematic exposure
  • Target return 15 per annum
  • Achieve diversification from geographical spread
    and commodity range
  • 3 components to investment return
  • Rising commodity prices
  • Land value appreciation
  • Active Alpha
  • Variety of holdings
  • stakes in vehicles incorporated exclusively to
    hold farmland assets
  • listed farmland companies
  • direct ownership of farmland
  • debt covenants over farmland
  • stakes in existing farmland funds

25
Sarasin AgriSar Fund
  • Fund launched March 2008. Current AUM - GBP 109m
  • Global focus across full spectrum of equities,
    land and commodities
  • Sarasin 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 consumer
  • Targets 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
  • www.sarasin.co.uk

26
Pictet Agriculture Fund
  • Fund established May 2009.
  • NAV 126m (71 positions)
  • Invests in listed companies operating in
    agribusiness value chain
  • Provides investors with a high exposure to pure
    agriculture
  • Favors companies operating in production,
    packaging, and supply, also in manufacture of
    agricultural equipment
  • Also 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
    zone
  • IN ECA so far, investments in Agroton (Ukraine)
    and Linas Agro (Lithuania)
  • www.pictetfunds.com

27
Trigon Emerging Agri-Sector Fund
  • Launched May 2008/ fund domicile Estonia
  • Fund size 15.7m (22 positions)
  • Trigon Capital is leading CEE investment firm,
    manages USD 1 billion assets
  • Trigon Emerging Agri-Sector Fund invests in
  • listed food and agribusiness companies
  • in emerging markets with high growth potential
    and imbalance in supply and demand in
    agricultural produce
  • focus on smaller companies
  • May also invest into developed markets provided
    these companies have substantial business
    interests in emerging markets
  • Fund combines Trigon's operational farming
    experience with emerging market portfolio
    management expertise
  • Investments so far mainly China (Asian Bamboo,
    Asian Citrus) , Russia (Chergizovo), Ukraine
    (Kernel), Turkey, Poland
  • www.trigoncapital.com

28
Resource Eastern European Equity Partners Fund
  • NEW FUND established 2010
  • Fund target size is 200 million
  • EBRD and Rabobank each investing 25 million
  • Focus 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.

29
Farmland funds current issues
  • Most formed since 2005/6
  • INITIAL MOTIVES Land appreciation, productivity
    gains, new crop price paradigm
  • REALITY 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
    appreciation
  • Productivity gains not achieved so far not as
    easy as it seemed
  • Most funds underestimated complexity of
    investment esp. working capital requirements
    and soil correction cost
  • Paradigm on crop prices deferred ... stocks
    (were) back at record levels
  • Most funds are trading well below investment
    value
  • Many funds have listed Nasdaq OMX First North
    is most popular option
  • IFIs have not invested in farmland funds (except
    in Bulgaria Agri REIT)
  • Total investment so far gt 1.0 BLN

30
Farmland funds - revised strategies
  • FOCUS NOW ON
  • RETHINKING INVESTMENT MODEL AND KEY ASSUMPTIONS
  • quality and location of assets/ more selective
    entry
  • consolidating land bank
  • changing structure of land bank/ developing mega
    clusters
  • fundamental assumptions on yields and prices
  • infrastructure like storage and logistics
  • focus on vertical integration using low price
    grain (beef, milk, poultry, etc)
  • developing grain trading to leverage local
    opportunities
  • CONSOLIDATING operational competencies and asset
    synergies
  • Generally, lowered investment return expectations
    and longer investment horizons ?

31
Farmland funds medium term outlook
  • KEY ISSUES
  • Limited access to equity and debt on attractive
    terms stopped further land acquisition/
    expansion
  • How 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 opportunity
  • Fund interest in farmland is now returning .. ?

32
Impact of Farmland Funds
  • Articulating/ catalyzing opportunities in
    agriculture
  • New investors bring in financing, know-how,
    professional standards
  • Benefits of scale
  • Specialized fund management enables more
    efficient capital allocation in agriculture/
    better diversification of risk
  • Efficiencies from consolidation, scale, capital
    renovation
  • Potential for substantial crop yield gains
  • Driving improvements in land rights processes
  • Employment, management and other skills
    development
  • CREATING NEW ASSET CLASS TO INTERNATIONAL
    BENCHMARKS

33
Additionality of funds/ private equity expertise
  • Provide expertise in structuring investments/
    unlocking value
  • Expertise to identify, assess and acquire
    farmland
  • Extensive due diligence
  • Improved strategic focus/ management/ asset
    utilization
  • Corporate governance
  • Investor discipline
  • Underwrite funding without burden of debt
    payments
  • Enhance leverage/ borrowing capacity
  • Corporate Governance facilitate development of
    private/ (often) family run businesses into
    institutionalized companies
  • Improves efficiency of market information for
    farmland
  • Facilitate exchange of know how between similar
    businesses
  • Exit/ liquidity Prepare the business for IPO/
    other exits

34
Ray 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

35
Examples 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 lands 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 investments
  • INDIA AGRIBUSINESS FUND targets all sectors of
    food and agribusiness and agric-infrastructure,
    with focus on SMEs and companies in rural areas
  • AGRO-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

36
Future trends/ issues
  • Farmland Funds
  • consolidating operations/ refining strategy
  • more operationally focused/ less land bank
    speculation
  • further focus on improvements in technology/
    infrastructure/ skills
  • Significant scope for further investments in
    Russia and Ukraine
  • Farmland as new asset class/ concept needs to be
    proven ?
  • IFIs - future interest in supporting farmland
    investments ?
  • Food funds
  • no specific geographic or thematic food funds so
    far in ECA
  • prospects in Russia, Ukraine, other CIS
  • likely merger and acquisition/ consolidation of
    strong regional players
  • Other 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 ?

37
Thank you
  • Ian Luyt
  • NOViROST
  • Moscow, Russia
  • ian.luyt_at_novirost.com
  • 7 495 774-1759
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