Agricultural technology is a trending area for investment these days, but private equity firms looking to enter the sector successfully may need to tweak their typical strategies.
Broad factors like climate change and population growth create a compelling overall backdrop of increasing demand for ways to use land more efficiently. Shifts in consumer tastes toward healthier, local and organic options are also leading the industry to adopt new technologies—from greener crop-protection solutions to improved traceability of food after it leaves the farm.
Increasing venture capital investment and accompanying financial support for nascent agricultural technologies could result in more opportunities for private equity firms. But ownership and direct management of companies involved in crop production involve particular risks and require specialized skills and experience. For example, owning a milk producer that packages and distributes its own products requires the ability to manage not only facilities but also processing plants and distribution networks.
“INVESTING IN THE SUPPORTING ECOSYSTEM OF AGRICULTURAL PRODUCTION, AS OPPOSED TO FARM OWNERSHIP AND MANAGEMENT, MAY PROVE MORE SUITABLE FOR PRIVATE EQUITY MANAGERS IN THE SPACE.”
Private equity funds should be prepared for investment timelines that often exceed their typical holding periods. Exit opportunities vary considerably and can be especially sporadic based on the segment of agriculture, particularly those that rely heavily on natural resources or land use. Seasonality and protracted commodity cycles both play a role in the timing of exits.
A good example is the buyout of Nutrition Physiology Company by The Halifax Group, UNC Kenan-Flagler Private Equity Fund, Salem Halifax Capital Partners and New Canaan Funding. The group held the company for eight years before selling in 2016 for $185 million.
Investing in the supporting ecosystem of agricultural production, as opposed to farm ownership and management, may prove more suitable for private equity managers in the space. From investing in sustainable food chain technologies to providing growth capital for scaling enterprises, there is no shortage of approaches.
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These strategies can give investors exposure to businesses that develop the tools and technologies used by agricultural producers. Depending on the size of the enterprises or target markets, companies with more diversified lines of business (think of a farming operation that develops some of its own manufacturing equipment) can also fall within PE investors’ purview.
Business-to-business aspects of the space, such as seed production and equipment, are currently popular among investors. Based on PitchBook data, U.S. PE buyouts in the realm of agriculture and related segments have largely centered in the B2B segment, accounting for 42.7 percent of all activity since 2014. Software suites and services dedicated to agricultural use cases, such as assimilating and applying data generated by livestock monitoring equipment, are also attracting capital.
As methodologies and new types of data packages grow more robust and the price of miniature sensors drops, we’ll likely see increased interest in companies employing these technologies to make things like farm management and livestock monitoring more efficient.
Many of the investment themes that are prevalent in today’s private equity landscape carry over to the agtech space as well. Add-ons are common in response to a climate of high valuations. We’re seeing secondary buyouts, too, showing the depth of PE ownership in certain sectors and the segmentation of strategies among smaller firms that pursue small enterprises to build via platform tuck-ins, growing them to a size where larger buyout shops step in.
It’s logical that add-ons or pure growth investments are happening within niches of the agtech space, given the fragmented market for things like tillage systems or monitoring equipment. One relevant example is Tru-Test, which manufactures products for electronic identification and weighing of livestock. Australian private equity firm Kestrel Capital earlier this year committed additional capital to increase its stake in the company.
This edition of “Midpoints by John Gabbert” originally appeared in the Fall 2017 issue of Middle Market Growth. Find it in the MMG archive.