Editors Note: AgFunderNews recently had the opportunity to speak with Mitchell Presser, a GAI Innovation Advisory Board Member and Head of U.S. Mergers and Acquisitions for Freshfields Bruckhaus Deringer, regarding his perspective on the relationship between private equity investment and the growth of agtech, a topic that he will be speaking on at the upcoming GAI Conference in San Francisco, running from Monday June 22 to Wednesday June 24.
If there is anyone who knows how the private equity world is currently thinking about the food and agribusiness investment space, it’s Mitchell Presser. With nearly three decades of experience in the investment world, Presser is slated to facilitate a panel, Interactive Think Tank: Achieving the Transition from Venture to Growth Capital, during the inaugural GAI AgTech Week, which will be held in San Francisco from June 22 to June 24. The think tank will discuss the factors that attract private equity investors to agtech and explore how venture capital and private equity can work together to help propel these companies toward success.
“You’re seeing a real influx of capital looking to put money to work in the food and agribusiness channel,” says Presser. “From a private equity perspective, this has been an underinvested area. Historically, you have seen less than 5% of total private equity investments going into these areas, so this is not really a space that private equity has been focusing on very much.”
According to Presser, however, private equity investors are starting to take a deeper look at opportunities in this space. “There are at least 10 investors, including a few large pension plans, on the GAI attendee list that I have never seen at ag conferences before.”
Presser has identified a few different reasons leading to the shift in focus, particularly when it comes to supply and demand issues. A now nearly infamous statistic from the United Nations on the agricultural supply and demand relationship estimates that the global population could exceed 9 billion by the year 2050. If that figure is correct, the current global agriculture production will need to increase by at least 70 percent. Factoring in the poverty and food shortages plaguing many nations, the growing scarcity of many natural resources, and climate change, agriculture is facing an uphill battle.
In addition to the supply and demand dynamics, Presser sees the business of farming shifting toward a model that lends itself to greater private equity investment interest. “We know now that companies are going to need to do things to really create value in the space, especially through yield enhancement, productivity, and increasing efficiency of resource.”
Fortunately, according to Presser, the private equity world is in tune with the changing tide of the food and agribusiness space and is starting to recognize the pivotal role it can play in helping farmers and agribusiness professionals access the tools they need to meet the growing demand more efficiently and intelligently. By his account, at least four major private equity funds now have a significant focus on the food and agribusiness sector and they’re bringing large checkbooks to the table. “Their investment size is much different than this space has been used to in the past. I would say that they are looking to put between $100M and $500M to work in a single investment.”
But for private equity players, moving into food and agribusiness is not without its impediments. “I think the challenge you are going to see with the private equity players, especially of this size, is really that there are a limited number of opportunities of this size in this space. I think it is going to take them some time to find the right opportunities and I think that they are probably going to need to look at things and think about investing in different ways, than when they invest in big industrial companies, healthcare, or other spaces,” says Presser.
Many of the existing opportunities for investment in food and agriculture fall outside the scope of private equity’s historical modus operandi. “Many of the existing opportunities are going to be a little smaller and more early stage than they are used to investing in,” says Presser. The answer to drawing private equity investors’ attention toward these atypical opportunities lies in finding ways to help them adjust and finding ways to create opportunities that appeal to investors’ interests.
What may attract a private equity investor to a smaller opportunity? “They’re going to need to put businesses together and find underlying businesses that have a clear ability to grow where there is a large market opportunity, and where the companies have a differentiated technology,” says Presser. “In the beginning, there will be a period of time where they are learning about these opportunities and understanding these businesses better so that they can figure out where on the value chain they want to invest and how they are going to find meaningful size opportunities within their target range.”
In his experience, a private equity investor considers between 100 to 200 opportunities in a single year. As Presser notes, not all of these opportunities have great potential or present real opportunities. What food and agribusiness companies will need to present in order to catch private equity investors’ attention is a compelling opportunity.
“Private equity investors are not looking for early-stage or pre-revenue/cash flow opportunities. They aren’t just looking for a technology. They are looking for businesses that are generating cash, that are market leaders, and that present a proven ability to grow with a need for capital to help execute that growth plan. It will be very important for them to see that the company generates meaningful value for the farmers, processors and/or consumers, and that the potential market opportunity is sizeable.”
A solid return doesn’t hurt either. According to Presser, private equity investors look for similar returns regardless of the space. “Private equity is looking for opportunities to at least double or triple their money over a reasonable time frame.”
Based on these factors, many early stage companies may fall out of the running, particularly when it comes to securing a private equity investment during the Series A, B, C, or D stages. “There are certainly funding gaps,” notes Presser. “When you’re talking about private equity, you are really talking about investors who are likely beyond all of these stages. They’re going to be dealing with companies that are generating real cash flow and are at least somewhat mature compared to what the venture investors are looking at.”
When it comes to the connection between venture capital and growth capital, however, Presser sees a burgeoning connection. Until recently, Presser has observed most food and agriculture businesses depended on large strategic deals with the handful of major players who dominate the industry, like Monsanto, Bayer, and Dow. Many factors made these deals harder to come by. “It depended on what was going on in the industry, whether these companies were buyers at the time, or whether they were watching their capital more closely. It also depended on whether the opportunity was a particularly good strategic fit for one company or the other.”
In Fall 2013, for example, Monsanto purchased Climate Corp. for $930M, a company that uses big data and machine learning to make real-time predictions about weather and other factors that are an essential part of agribusiness. Monsanto has faced a continual onslaught of negative PR regarding its use of genetic modification, corporatization of farming, and promotion of monocropping. Adding Climate Corp to the Monsanto family may have been motivated in part by a need to diversify the company’s image. Monsanto postured the acquisition as part of a long-term recovery plan, announcing the acquisition on the same day that Monsanto reported a larger-than-expected 4th quarter loss of $249M, or $0.47 per share.
“With private equity coming in, you’re really finding a new channel for exits and future capital for these businesses. All of a sudden you have another channel. Private equity is more interested in buying these companies and investing in them before strategic exits. I think the connection or synergy between venture capital and private equity funds in this space is going to be great.”
Currently, early-stage investment in food and agribusiness is dominated primarily by venture capitalists, but Presser sees plenty of room for growth for fledgling enterprises. “Companies have a tough time. Even when they have a great technology and a great business, it is tough to find investors to help them grow from the early stages.”
Particulars aside, a private equity investor’s hesitancy to engage with early stage companies may have more to do with educational deficiencies than the company’s youth. As Presser notes, “There are just fewer investors who have the experience here.” Opportunities like GAI, however, provide investors with a chance to pique their interest, or to explore their potential role in funding an early stage or growth capital stage company. “What you’re seeing at this conference is a lot more investors showing up. They’re looking. It is still in a transitional phase, but they’re looking.”
Presser is scheduled to moderate the Interactive Think Tank: Achieving the Transition from Venture to Growth Capital panel during the Monday, June 22 session of GAI’s upcoming conference in San Francisco. Participating members of the panel include Andrew Freeman, partner, Paine & Partners; Mark Kahn, Founding Partner, Omnivore Partners; and Brook Porter, partner, Kleiner Perkins. Check back with AgFunderNews for up-to-date coverage of the event.
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