investing in the agriculture value chain - tiaa global asset management investing in the agriculture...

TIAA Global Asset Management

Investing in the agriculture value chain

For institutional investor use only. Not for use with or distribution to the general public.

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Table of contents1 Why invest in the agriculture value chain?

2 Agricultural opportunities exist in key developed markets

4 The agriculture value chain needs institutional capital

6 Taking a focused approach to the agriculture value chain

9 About TIAA Global Asset Management and AGR Partners


TIAA Global Asset Management | Investing in the agriculture value chain 1

Global population growth3

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Why invest in the agriculture value chain?Real assets provide several potential portfolio benefits, including diversification, low or negative correlation to stocks and bonds, and a natural hedge against inflation. Agricultural assets provide additional exposure to key macro food and agriculture demand trends including population growth and increased middle-class formation in emerging markets.

Growing populations—and a larger middle class—will require more foodGlobal aggregate demand for food (net of biofuels) is expected to expand 1.3% annually through 2050,1 faster than the 0.8% annual population growth over the same period.2 Viewed from a total food demand perspective relative to 2009, 2050 demand is expected to be 70% higher. The reason that food demand is projected to outpace population growth is due to the impact of the growing global middle class and associated increases in disposable income.

As incomes rise, people tend to purchase more and better food, leading to a rise in per capita calorie and protein consumption. Increased protein consumption, in particular, creates exponential grain demand, as each kilogram of animal protein requires multiple kilograms of feed. The further expansion of the global biofuels industry, which currently consumes 29% of sugar cane, 15% of vegetable oil, and 12% of coarse grains,5 may create additional demand for agriculture products.

Investment is needed to support supplyAgriculture production is limited by several factors including land, water availability and the pace of crop yield enhancement. Broadly, each of these is coming under increased pressure, as the rapid farmland expansion and crop technology gains of the twentieth century have begun to slow.

If these trends persist, per capita farmland under cultivation will continue to decline and yield growth gains will continue to flatten. This will create a greater need for investment in crop inputs and protein production, as well as processing, storage, and distribution assets that improve efficiency and limit food waste.

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2 TIAA Global Asset Management | Investing in the agriculture value chain

U.S. and CanadaTotal food and agriculture8 =

$2,500bn+ in revenue

Relevantagriculture

value chain:9

$550bn+ in revenue

Although demand growth is relatively low in developed nations, these countries are net exporters that enjoy large primary production footprints and advanced infrastructure and processing capabilities. They will play a key part in supplying the food needs of developing countries. The relevant privately owned agriculture value chain universe in the United States, Canada, Australia and New Zealand generates over $700 billion in annual revenue.

TIAA Global Asset Management and AGR Partners have prior agriculture value-add investing experience in these key developed markets, and believe they represent an attractive opportunity to realize strong risk-adjusted investment returns.

Businesses in the agriculture value chain have attractive qualitiesThis universe generally comprises operating companies with the following characteristics:

W Substantial tangible asset base

W Volume-driven revenues with limited exposure to commodity price fluctuations

W Solid, business-to-business relationships with end customers, with limited reliance on consumer brand recognition

W Ability to generate attractive levels of free cash flow which provides investors with current income via dividends and/or interest payments

Agricultural opportunities exist in key developed markets



Relevant agriculture value chain:9 $170bn+

in revenue

Australia and New ZealandTotal food and agriculture8 =

$250bn+ in revenue


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The agriculture value chain needs institutional capitalTIAA Global Asset Management and AGR Partners believe a mutually beneficial opportunity exists to provide minority equity to privately held agribusinesses. This form of investment supplements the two predominant liquidity sources—senior debt and control equity—with a third option that does not require companies to relinquish control or increase leverage.

Historically, minority equity investments into privately owned agribusinesses have been limited, largely due to the lack of institutional understanding of and focus on the sector. Furthermore, among the very limited institutional equity providers that have focused on the sector, the historical preference has been for control equity investments. In a sector with a high proportion of privately owned businesses, many of which are not for sale, this capital landscape has resulted in fewer ways to finance growth. As a result, many private agribusinesses have only two main options for capital: senior debt provided by traditional agriculture lenders or a majority sale to a larger competitor or financial buyer.

For privately held agribusinesses that seek capital for a range of reasons—to fund growth or acquisitions, to reduce

leverage, or to buy out minority shareholders or family members—this limited menu of options has been and continues to be problematic. This dynamic has limited capital availability and growth, and prolonged the fragmentation of many agribusiness subsectors.

A limited number of agribusiness-focused private equity funds have launched in recent years, but these typically pursue control equity deals and do not represent a fundamentally different option for companies seeking financing. In the experience of TIAA Global Asset Management and AGR Partners, many privately held agribusinesses are generally reluctant to sell to private equity firms or industry buyers due to their desire to continue to operate and grow the business. Indeed, the volume of private equity deals is light relative to the large size of the sector.

Private equity transaction volume10

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Minority equity capital is especially needed In addition to the normal challenges facing capital-constrained businesses that are seeking to grow organically or expand through acquisitions, agribusinesses often face challenging internal dynamics.

W Many businesses in the sector are privately owned, small- to medium-sized enterprises. Company ownership may be split among numerous family members or other minority shareholders who are not aligned in their vision for the business.

W Succession planning can be difficult. While family-owned businesses often prefer to stay independent, younger generations may not be interested in running the business.

TIAA Global Asset Management and AGR Partners believe a mutually beneficial opportunity exists to provide minority equity to privately held agribusinesses. This form of investment supplements the two predominant liquidity sources—senior debt and control equity—with a third option that does not require companies to relinquish control or increase leverage. In these cases, minority equity can be a valuable tool that serves many purposes.

W It can fund growth initiatives, acquisitions, or debt repayments.

W It can be used to buy out existing minority shareholders, freeing up the ownership and management team to pursue a clearer or more desirable strategic direction.

W It can professionalize the business through board-level guidance.

TIAA Global Asset Management and AGR Partners have found that their sector expertise, corporate finance experience, and agribusiness network are all attractive selling points to potential partners who recognize their own limitations.

Operating businesses are an attractive supplement to farmland holdingsAs global food demand grows and supply factors remain constrained, the agriculture value chain will continue to serve as a critical link between primary production assets (farmland) and end customers. For investors with existing farmland holdings (for example, via the TIAA Global Agriculture vehicles), investing in these intermediate assets provides supplemental exposure to the global food production and distribution systems. As these businesses tend to be volume driven with limited commodity price exposure, equity investments in this portion of the value chain can serve as a natural hedge against short-term commodity price weakness.

Other

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Food & agriculture

Telecoms &media

Energy & utiliti

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Consumer & retail

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Number of transactions, in billions


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Taking a focused approach to the agriculture value chain

Agriculture value chain (focus areas in orange)

Inputs

W Seeds

W Fertilizer

W Crop protection

W Equipment

W Land

W Irrigation

W Greenhouses

Primary production

W Row crops

W Permanent crops

W Fruits and vegetables

Protein production

W Pork

W Beef

W Poultry

W Eggs

W Dairy

W Seafood



The broader agriculture sector produces, processes, distributes, and sells food. It includes primary production (agricultural commodities), protein production (animal husbandry), processing, storage and distribution, and retail sales.

TIAA Global Asset Management and AGR Partners focus on the subsectors most attractive for private equity investments into companies with substantial real assets.

Storage & distribution

W Transportation

W Gold chain

W Storage

W Distribution

Retail

W Grocery

W Farmer’s market

W Delivery

Processing

W Protein

W Sugar/Ethanol

W Grains

W Oilseeds

W Beverages

W Fruits and vegetables

W Animal feed


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Farmed salmon production11

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Diverse opportunities exist with subsectorsThe agriculture value chain universe covers hundreds of subsectors serving myriad crops, livestock, processing activities, and customer needs. These subsectors are exposed to broadly similar macro trends. Each, however, has unique supply, demand, and competitive situations. This can create attractive investment opportunities within the agriculture value chain where growth outpaces that of aggregated food demand.

Farmed salmon production, for example, has expanded exponentially the last two decades as demand for healthier proteins, especially fish, has grown and wild catch volumes have plateaued. Similarly, egg consumption in the United States is growing, driven by consumer demand for low-cost, healthy sources of protein. Within this segment, demand for cage-free hens is also remaking the landscape of egg producers.



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About TIAA and AGR PartnersThe combination of TIAA’s and AGR Partners’ experience and scale provides investors with a well-defined strategy for capitalizing on the growing need for food production, processing, and distributing assets. TIAA made its first investment into farmland in 2007 and has since become one of the largest investors in farmland globally by deploying $5 billion into the asset class and successfully closing on an additional $3 billion for a second farmland fund in August of 2015. Through this experience, TIAA has seen firsthand that substantial capital investment is needed throughout the agriculture value chain to support primary crop production, to meet increasing demands for food safety and traceability, and to process and distribute growing volumes of agricultural goods.

To this end, TIAA made its first investment in the agriculture value chain in 2009, formed a dedicated investment team in 2010, and has since invested $569 million into the agriculture value chain, including $150 million through AGR Partners.

TIAA believes there is an attractive and largely untapped opportunity to provide minority equity to private companies in the agriculture value chain, and that AGR Partners has the experience and relationships to identify and execute attractive transactions.

Find out more about investing in the agriculture value chain.To learn more about TIAA and AGR Partners’ investment approach, please contact us.

tiaa.org/assetmanagement


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1 FAO, 2009 2 United Nations, 20153 United Nations, 20154 United Nations, 20155 OECD-FAO 2013-2022 Agriculture Outlook6 FAOSTAT and the World Bank7 FAOSTAT. Reflects 5-year rolling average yield improvements8 Revenue from all food and agriculture-related industries, including inputs, primary production,

processing, manufacturing, retail, and restaurants. Excludes transportation and warehousing. Sources: US Bureau of Economic Analysis, CANSIM, Australian Bureau of Statistics, Statistics New Zealand, S&P CapIQ

9 Excludes revenue from primary production, retail food sales, and from publicly-traded companies

10 Preqin, 201411 Kontali Analyse. Includes farmed salmon production from Norway, Chile, UK, Faroe Islands, US, and Canada.12 USDA

TIAA Global Asset Management provides investment advice and portfolio management services through TIAA and over a dozen affiliated registered investment advisers. Nuveen Investments is an operating division of TIAA Global Asset Management.

©2016 Teachers Insurance and Annuity Association of America-College Retirement Equities Fund, 730 Third Avenue, New York, NY 10017


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