AreaOne Farms harvests growing institutional demand for farmland assets

AreaOne Farms is nearing the finish line with its third Canadian farmland private equity fund thanks to institutional investors eager to gain access to agricultural assets.

AreaOne Farms Fund III is expected to meet its C$100 million target in a close at the end of December, Joelle Faulkner, president and CEO of AreaOne Farms, told PE Hub Canada. If that happens, the fund will be 10x the size of its predecessor, which raised $10 million in 2014.

The Toronto firm updated Fund III’s target from a range of C$50 million to C$80 million due to enthusiasm from potential institutional LPs. At least two institutions are expected to join repeat LPs, mostly high-net-worth investors, in the close.

“Institutional investors we’ve been in contact with recently created farmland allocations and are looking for a spot that fits their criteria,” Faulkner said. “For some, Fund III will facilitate their entrance into the asset class.”

Partnering with family farms

Faulkner and her brother, Benji Faulkner, founded AreaOne in 2011. Born and raised on an Ontario dairy farm, the siblings designed a strategy to help owners of family farms scale operations and eventually transfer ownership to the next generation.

Drawing on a large network, the firm partners with a handful of experienced operators in a joint venture. Together they acquire new land, some of which is brought into productive use for the first time. AreaOne provides more than 60 percent of the equity.

Over a 10-year term, the joint venture “farms everything that is farmable,” Faulkner said, with operators earning a portion of the income and appreciation. AreaOne invests in equipment, land improvements and research to enhance profitability. In the 10^th year, operators are able to buy the expanded property.

The firm has so far partnered with eight family farms and invested about $50 million in equity. The portfolio holds about 70,000 acres of agricultural land in four provinces, including Alberta and Ontario.

The strategy has to date surpassed performance targets, Faulkner said. AreaOne’s debut fund is currently showing a net average per-annum return of 14 percent, while Fund II is showing a net return of 16 percent.

Faulkner attributes this to AreaOne’s “shared-value approach,” which relies on the efficiency and stability of the family-farm production unit. She also feels it pushes back against a trend of owners becoming renters, something that other PE investors often encourage.

“Most investments in row-crop production in developed nations use the sale-and-leaseback model,” she says. “That’s not what we’re doing. We’re not interested in accelerating a system where owners of family farms had to, or felt they had to, become renters.”

Growth in farmland investing

AreaOne is part of a new and fast-emerging asset class. Much of the impetus has come from increasing agricultural land values, fueled by global food-consumption patterns.

This has whetted the appetite of institutions looking for new sources of returns and diversification. Farmland PE holds particular appeal because of its promise of steady, long-term income and appreciation opportunities.

Canadian pension funds, including British Columbia Investment Management Corp, Caisse de dépôt et placement du Québec and Canada Pension Plan Investment Board, are among the most active investors in the space. Activity is undertaken directly or via funds.

In September, Preqin reported that more than 100 unlisted agriculture and farmland-focused funds collected $22 billion between 2006 and year-to-date 2016. The largest of these, TIAA-CREF’s second global agriculture fund, closed last year at $3 billion.

With growth, farmland PE has also attracted its share of opprobrium. Some of this has come from public policymakers concerned about foreign or corporate takeovers of locally held agricultural assets.

The issue has recently been debated in Canada. Last year, the Saskatchewan government introduced new rules to restrict institutional investors from acquiring farmland. The decision was prompted partly by CPPIB’s buy of 115,000 acres of Saskatchewan cropland in 2013 for $128 million.

Earlier this year, Canada’s Senate determined to study farmland acquisitions and their potential impacts on agricultural producers and food supply. A report will be issued in 2017.

Faulkner welcomes the scrutiny: “You don’t want to inhibit farmland investing. You do, however, want investment to be thoughtful enough to ensure farmers remain owners. The focus should be on helping them grow in ways that keep the Canadian family farm going for future generations.”

Another Canadian farmland PE firm, Bonnefield Financial, is also in fundraising mode. In July, Bonnefield announced the $60 million initial close of Bonnefield Canadian Farmland LP IV. The firm closed its third fund two years ago at $261 million.

Photo of Joelle Faulkner courtesy of AreaOne Farms