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Ideas

Ideas is a collection of articles that look at the emerging trends in the global and South American agribusiness sector.

The articles bring insightful analysis in the following areas:

  • Key international & regional developments that will shape the future of the business
  • Strategic analysis of market trends along the whole agribusiness value chain
  • Business profiles of established and emerging companies in the region
  • Green perspectives that reflect the dynamics of agribusiness with the green world
  • Analysis of trade flows to discover market opportunities

 

Asset management - Private bankers meet agribusiness


23.12.2011

Insight topics:  

  • Wealthy investors turn to real assets as financial markets struggle
  • Agribusiness assets can be a good option for HNWI investors
  • Private bankers can build a solid investment offering

The ‘08/’09 financial and economic crisis and the current volatility in financial markets sparked by the European sovereign debt crisis and concerns about the health of the global economy have taken a hit on the portfolio of high net worth individuals (HNWI), core customers of private banking institutions along the world.

In times of such uncertainty, investors are re-discovering the qualities of real assets, as those opposed to financial assets like equities, bonds, currencies, derivatives, etc. But not every real asset looks attractive today, the best example being the residential and commercial real estate in several developed markets which continue to slide as well as potential bubbles in some emerging markets.

Among the qualities pursued, investors are looking for assets that protect value from inflation in the long term, have cash flows linked to fundamentally strong demand, bring diversification into their portfolio and have reduced counter party risk. The agribusiness asset class fits well into this profile, and through its broad range of investment options is attracting increasing attention from fluent investors

Agribusiness assets can offer attractive opportunities

Investments in agribusiness are not a complete new area for HNWI, as these fluent investors often own farmland along the world. It is common to find that large farmland operations in South America are owned by wealthy European families.

However, a new wave of investments is emerging as investors become more confident on the long term, positive outlook for the agribusiness industry. Investors are particularly interested in the mega trend of scarce food, land and water and the implications of asset values along the agribusiness value chain. We see HNWI typically investing in a mix of assets from commodities and publicly traded equities to farmland and new ventures in bioenergy and clean technologies.

Asset managers are responding to this growing interest by broadening the investment offer along products and regions. Based on our research, there are close to 100 active funds with assets under management above $ 21 billion. And this figure does not include many investment vehicles that manage farmland and timberland in North America and Australia among other relevant markets, as well as direct investments by sovereign funds, pension funds and government agencies and also funds which are privately owned and not opened to investors.

The buzz around agribusiness keeps growing. An empirical evidence of this interest is the growing number of agribusiness conferences along North America, Europe and Asia and the numerous family offices and wealthy investors attending. But still there are more questions than answers.

After talking to several of them, our conclusion is that HNWI have a genuine interest in learning about the existing opportunities in the agribusiness industry and understanding the value drivers and the associated risks. However as they are not insiders in this business, they need expert advise and clear investment cases to evaluate. How can they properly evaluate investments in soybean farmland in Brazil, in cattle farms in Ukraine or in private equity offerings targeting Sub-Saharan agriculture markets?

The fact is that for many HNWI agribusiness is a new asset class and an induction is required. They are told that mega food trends are supportive of agribusiness assets but they struggle to find convincing businesses cases among the growing offering that spreads through different regions and agricultural products.

We agree on the positive outlook for agribusiness investments in the long term and we believe they are poised to grow considerably among HNWI portfolios. However it will be a gradual process which will require active development from the financial advisors´ side. This is a call to private bankers to begin positioning their offering and services to help customers in this investment process.

Private bankers can proactively build a successful investment offering for their customers

We believe that private banking institutions can position ahead of this trend and attract additional assets if they develop a suitable offer of agribusiness investments to their customers.

Below we highlight some of the key areas to focus on when developing a portfolio of agribusiness investments for HNWI:

 

  • Attract and build knowledge to build internal capabilities. Investing in agribusiness has its unique risks and rewards. In order to build the required market insight and investment intelligence, it is critical to bring on board agribusiness investment specialists that master the asset class, not just the financials but the full aspects of the business. These people can lead the internal development and help relationship managers to promote and advise customers.
  • Understand your customers’ needs. Despite the growing enthusiasm for agribusiness, financial advisors should be aware of the forces at work in agribusiness investments and how they fit in customers´ investment profiles. Agriculture activities have their own specific risks in terms of weather events, commodities´ price volatility, governments´ production and trade regulations, among others. Agribusiness is also typically a long term activity and the investment term may need to fit accordingly.
  • Propose a diversified agribusiness portfolio. Diversification is at the heart of portfolio selection and agribusiness is no exception. It is critical to take a proactive role in developing a comprehensive proposition for customers, which covers the different regions and investments alternatives. There are more traditional options like equities and commodity funds, but alternative investments in farmland, trade finance, private equity and venture capital are also available. Spreading risk is an essential skill in agribusiness and should also be reflected in any investment offering.
  • Consider launching specific investment vehicles for customers. Because of the typically larger investments required in some agribusiness segments like farmland and private equity funds, it could be effective to develop special investment vehicles that are dedicated to individual customers or that can be offered as an investment pool to a broader group of customers. Farmland funds and niche private equity funds in South America can typically be launched starting with $20 Million in raised capital.
  • Evaluate partnerships with agribusiness operators. Agribusiness operators that have the focus and skills to run agribusiness operations may become partners of private banking institutions to develop and manage dedicated investment vehicles. Finding the right partner is a key success factor and any serious candidate should have a successful operational management record.

 

We end this article with a note of caution. We recognize that every private banking organization is unique and so are their customers. No standard solution will fit all; instead it is required to make a proper assessment of the best way to approach this opportunity in the specific context of each organization.

In particular, private bankers should find the right balance between developing internal capabilities and leveraging on external partnerships to build a sustainable and profitable business around the agribusiness asset class. Time will tell if investors will load their portfolios with more and more agribusiness assets. Patience, a virtue of farmers, may well be a virtue for growth and success in agribusiness investments.

 

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