January 7, 2015

By Shahnaz Mahmud

Paine & Partners has launched its first sector focus fund in food and agribusiness globally and claims it is the largest fund of its kind. Paine & Partners Capital Fund IV had its first closing on July 8, 2014, ending on December 18, 2014, with $893 million in capital investments.

Time to Come Back to Market

Fund IV was created because the firm had been investing from Fund III since it was raised in 2007. “It came time to come back to market and raise more capital, both because we continue to see interesting investment opportunities in food and agribusiness globally, and because Fund III was largely invested,” says Kevin Schwartz, President and Founding Partner of Paine & Partners.

Fund IV’s predecessors had some food and agriculture components to them – two-thirds of Fund III was dedicated to food and agribusiness, but Schwartz indicated that market movement warranted a more specialized fund. Fund IV, which had a minimum investment of $5 million, includes investors from the US, Europe and now the Middle East and is comprised of institutions, endowments and family offices. At the moment, the firm is looking at 30 investment projects.

Schwartz notes that the fund was oversubscribed. The fundraising result, he believes is due to a few factors. Paine & Partners longevity in investing in this space, which it has done for over a decade. That kind of a track record in this particular industry is unique, he adds, emphasizing that Paine & Partners has invested more than $1 billion of equity in food and agribusiness during that time. Schwartz also highlighted the industry drawing more attention, particularly from institutional investors, largely as a subset of their real assets strategies. “I think the macro dynamics are evident to most people now,” says Schwartz. “You have demand growing inexorably because you have a growing population and you have a more affluent population globally. And as affluence increases, that increases the demand for protein, in particular, which has a multiplier effect on the need for grain. So the demand for agricultural product is growing and the supply is somewhat constrained across a number of different metrics, whether it’s freshwater, more limited annual gains from some of the now well-known technology increase yield hybridization crops. So where you have that dynamic, strong demand, and that somewhat constrained supply, the opportunity for investment is quite significant.”

Paine & Partners sees Fund IV as something unique. “We’re offering the chance to invest in the segment in a private equity strategy where we’re investing in companies that are providing products and services to the food and agribusiness value chain that are primarily focused on driving productivity and are much more isolated from commodity-price volatility or some of the other headline agricultural risks that investors have always struggled with in the segment,” says Schwartz. “So not only are we generating higher returns, but we are doing so in a way that’s not taking direct risk.”

Private Equity Opportunities in an Underserved Market

Food and agribusiness has been underserved in the private equity sphere, mainly due to a very high degree of fragmentation, dominated by small family-owned businesses, as well as some headline risk associated with it, like commodity price volatility, says Schwartz. Paine & Partners feels it has “first mover advantage” from a private equity perspective having longevity of business.

The food and agribusiness space continues to intrigue the firm. “We think it’s a really interesting place to be deploying capital,” says Schwartz. “The food and ag industry has the wind at it’s back. The demand for these types of products will grow as population increases and diets change. So when you look at it from that angle, it’s a huge industry – it’s about $11 trillion of total global economic output. It’s both attractive and large from our perspective.”

The challenges? Always having to be cognizant of some of the obvious risks, like commodity-priced volatility and agronomic risk, such as the weather. Fund IV, says Schwartz, focuses on the parts of the value chain that protect its investments from those risk factors. Another challenge is finding the opportunities in a segment of the economy which isn’t well-traveled by intermediaries. Internally, the firm combines investment professionals with operating professionals who have had successful careers in the agriculture industry. That, in addition to labor-intensive primary research helps to uncover such opportunities, he says.

The attraction to the food and agribusiness space is the opportunity to build businesses – to invest capital, to partner with companies and “really professionalize them, invest in them and grow them significantly,” says Schwartz. Paine & Partners did this for most of the companies it invested in for Fund III, which Schwartz believes will hold true for Fund IV. Metrics-wise, Schwartz says the firm has been able to make approximately five add-on acquisitions on average for every company platform it bought. “So, in part through acquisition, we’ve been able to significantly grow and transform our companies,” he says. “We have also invested about half of the capital we invested in the companies we already own. The most rewarding part of what we do is when you not only create a lot of value for our LPs and our investors, but also significantly grow and transform companies. That’s what we enjoy doing. And there’s a lot of opportunity to do that in the ag space.”