Opportunity Zone Pitch Day - March 23rd
Investing In Farming And Agribusiness, With Chris Rawley
Farming and agribusiness offers a range of investment options capable of fulfilling numerous portfolio objectives that can be both recession-proof and high yielding. Income-producing agriculture often beats the returns from other asset classes and perform differently from them in response to market changes.
Chris Rawley is founder and CEO of Harvest Returns, a Fort Worth-based online marketplace that connects accredited investors with opportunities in all types of agriculture, orchards, and timber.
Click the play button above to listen to our conversation.
- Agribusiness is a growing asset class because the demographics of the planet are constantly expanding and offers the potential for outsized returns.
- Agricultural production is one of the oldest, most profitable investments available compared to gold, stocks, and bonds.
- The different types of agriculture verticals (and their risk-return profiles) such as indoor agriculture and grass-fed and sustainably-raised livestock.
- How investors access deals offered by Harvest Returns and how are these funds structured.
- The types of investors that agribusiness and agricultural technology appeal to.
- Why agribusinesses and farmers should consider the tax benefits provided through the Opportunity Zone program.
- Traditional bank loans aren’t the only option for farmers who need to raise money.
- Crowdfunding allows a business venture to raise capital rapidly by collecting monetary contributions from a large number of investors.
- Some of the challenges in using the QOF investment wrapper.
Featured On This Episode
- Chris Rawley on LinkedIn
- Harvest Group
- Publicly-traded REITs
- Controlled Environment Agriculture
- Agriculture Technology
- Qualified Opportunity Zones
- Chris Rawley on the Opportunity Zones Podcast
- Regulation D Exemption Offerings
Industry Spotlight: Harvest Returns
Headquartered in Fort Worth, Texas, Harvest Returns connects farmers in need of capital and investors looking to diversify and grow their portfolio via the crowdfunding process.
Learn More About Harvest Returns:
- Visit HarvestReturns.com
- Follow Harvest Returns on Facebook, Twitter, Instagram, and LinkedIn
About The Alternative Investment Podcast
The Alternative Investment Podcast covers new trends in the alternate investment landscape. Hosts Jimmy Atkinson and Andy Hagans discuss diversification opportunities in the alts universe, including direct investments, DSTs, opportunity zones, private equity and more.
Jimmy: Welcome to The Alternative Investment podcast. I’m your host, Jimmy Atkinson.
Andy: And I’m your cohost, Andy Hagans.
Jimmy: Great to be back here with another episode with you, Andy. Today we’re here to discuss passive investing in farmland, and agribusiness, and joining us today from my neck of the woods right here in Fort Worth, Texas is Chris Raleigh, founder, and CEO of Harvest Returns. Chris, thanks for joining us today.
Chris: Jimmy, Andy, it’s great to be on the program. Thanks for having me.
Jimmy: Absolutely. Chris, great to have you here. So why farming and agribusiness, I’m curious, what opportunity do you offer to high net worth investors?
Chris: So we started this company in 2016 because I saw the need in my own portfolio to start to find some alternative investments. I invested in real estate for quite some time, and I became very interested in agriculture around 2014, 2015, and looked at all the ways to invest in a C asset class, and the vehicle’s out there. They just weren’t very promising, you know, some publicly traded REITs, which were largely correlated with the rest of the stock market. So to me, that kind of defeats the purpose of investing in alternative assets. And the most direct way of course is to go out and purchase a farm and either operate it yourself or pay somebody to operate it. But that requires significant amounts of capital and know-how, and it’s anything but passive.
So around 2015, 2016, when we started this company, and have been building ever since, and what our investment thesis is, agriculture, agribusiness is a strong asset class because number one, the demographics are solid. When you look at agriculture and real estate, it’s, they’re the two most essential industries on earth. Everyone touches agriculture. Everyone has to eat, everyone benefits from the products that farmers and ranchers, and other ag companies produce, and the demographics continue to grow. So the population of the world continues to grow as populations around the world, become wealthier, as they all are, for the most part, they consume more calories, more protein, and so that requires more agricultural production.
So, the first part is just purely the demographics driving the market. The second reason we like agriculture is the potential for outsized returns. And if you look at, or just compare asset classes over the long term versus say the stock market bonds, gold, farmland, just one segment of farmland, in particular American farmland, it has outperformed them all over the long term.
And then finally, just for the pure diversification value, farming agriculture, it’s recession-proof. We saw this during COVID, it’s not correlated with the stock and the bond markets. And if you avoid some of the major, highly traded commodities, like wheat, soy, corn, those sorts of things, you can avoid volatility in the market by having a nice illiquid steadily growing asset.
Jimmy: Yeah. The liquid versions of this type of asset, the publicly-traded REITs, I suppose, as you mentioned, rightly Chris, a minute ago, they’re highly correlated with the stock market, or it could be more highly correlated with a stock market than something illiquid and more of a direct investment structure in a privately held fund. What types of agricultural verticals are you guys investing in? Can you tell us a little bit more about the types of deals that you’re investing in within your funds?
Chris: Yeah, so we invest directly with the producing farmers, or ranchers, or agribusinesses, in a few different verticals. And the first one of those is controlled environment agriculture, also known as indoor agriculture, and this is something that’s popping up all over the country, and there’s two main forms of it. So one is sort of the urban vertical farm you might see in an urban area, kind of small scale, might be in a warehouse, old building, industrial areas, those sorts of things, small scale, delivering directly to consumer, or local restaurants, local grocery stores. There’s also a larger version of controlled environment agriculture. These are greenhouses, that are large scale high-tech glass greenhouses, providing growing potentially acres of crop year-round in areas that wouldn’t normally grow those crops, whether it’s leafy greens, vegetables like tomatoes, in places across the country, including areas where you normally wouldn’t produce things like leafy greens. Most of the leafy greens we consume in the United States are produced in Salinas Valley, California, different parts of California and investing in indoor agriculture helps diversify that food chain by producing food closer to where it’s consumed the consumer, which reduces a lot of waste, produces a better product, fresher product, and also does things like consume less longer, doesn’t produce the runoff that typical agriculture does, year-round growing cycles, numerous benefits.
So that’s the first sector we like, another vertical that we’re in is grass-fed livestock and sustainably raised livestock. So we’ve done sheep and cattle. And in that respect, that’s a premium product. It takes longer to grow than grain-fed, and some people claim it’s a healthier, better-tasting product among those. I like it, but it’s also better for the environment as far as regenerating the soil. So that’s something that our investors have taken a liking to. And then we do what I’ll call cats and dogs, or specialty crops. We’ve done things like vineyards, hazelnut trees, other sort of non-row crop non-commodity types of products across the country.
And then the final sector that we like is ag tech. So this is something we’ve recently started doing, just because there’s this huge demand in agriculture technology, early-stage companies for capital, and they had these companies, they normally work with VCs. A lot of them come to either in conjunction with a VC or before they talk to a venture capitalist to raise that sort of initial seed round after they sense some traction, some sales, some revenue, we like to talk to them and we’ve done very well. And we’re helping a number of companies early stage.
Obviously, each of these verticals has a different sort of risk-return profile with the most riskiest is these early-stage ag tech companies, the ultimate highest payoff down to the controlled environment agriculture, as you’ll see IRs north of 20%. These are kind of like to think of it as a real estate development. So you’re either taking a brownfield place, and, or sort of greenfield developments where you’re either starting from scratch on a piece of land, or you’re starting with an old building and repurposing it to grow indoor. So we’d like all these spaces and some of our investors, it’s kind of narrowed in differentiated that’s because we’re one of the few places you can access some of these certain niches.
Jimmy: And how do your investors actually access these deals that you’re participating in? Are they coming in at the deal level, or do you have a larger fund that is diversified, or do you have different thematic funds? How do you have that structured for your investors?
Chris: Yeah, so the way our platform works is if we pool investors, we invest via a special purpose vehicle directly into the operating company, or the farmer, the rancher. And we will, our ticket size, our minimum ticket size ranges anywhere between $15,000 to $25,000. And so what it enables is people who have maybe allocated a portion of their portfolio to agriculture, but maybe haven’t done, so, and so it allows them to do say 25, 50k into multiple deals, which provides them with some geographic diversity, some, just some diversity within, inside the asset class. And that’s, we have investors that have been multiple repeat investments and they lacked the ability to kind of spread the, spread their wealth across our different offerings.
Jimmy: Gotcha. So they get on your platform, which I believe they can access on your website, @harvestreturns.com and they’ll have access to a variety of different types of investments. They kind of spread their money around as they choose. They’re not just coming into like one large blended fund per se.
Chris: That’s correct. We’re doing regulation D exception offerings. So probably most of your listeners are familiar with those, primarily taking credit although some of them have a limited number of sophisticated or non-accredited investors that can access the deals. We don’t do regulation crowdfunding, which is sort of retail investing where, you know, a thousand dollars pop sort of thing. We’re not in that space. At some point we might be. But right now we’re helping with kind of those high net worth folks diversify a portion of their portfolio.
Jimmy: Yep. That’s great. That is our listener base, high net worth accredited investors by and large. What about the deal size? What’s the typical size of the deals that you’re investing in?
Chris: So that varies on some of their early stage let’s say AgTech deals, AgTech companies. we might be doing a seed round for them that totals 500 to a million dollars, 500k to a million dollars. In some of the, let’s say large-scale indoor agriculture deals, greenhouse deals, that might be a 40 or $50 million project and we are simply one portion of the equity stack that might be combined with the larger debt portion. So very similar to commercial real estate, how you might structure a commercial real estate or any other sort of private placement offering.
Jimmy: Gotcha. That makes sense. Well, Chris, you and I met probably about two or three years ago. I think we ran into each other at one or two different opportunity zone conferences that were being put on in 2018 and 2019. Because you had the first, or one of the first, at least opportunity zone funds that was focused in this sector. You had a QOZB that focused on farming, and in a OZ fund on top of that. Could you tell us a little bit about that fund, and maybe you share with us some of the challenges that you faced when using the qualified opportunity fund investment wrapper?
Chris: Yeah. So we wanted to start a sustainable agriculture opportunity zone fund, I believe it was the end of 2019. We deployed some of that capital that we’ve raised into a single asset, which is a, an indoor farm/restaurant in Omaha, Nebraska. I was just up there a couple of weeks ago, right after the grand opening. It’s an amazing restaurant called Gather Open Omaha and here, let’s sort of drop up there. We’re still taking investments. Although we will probably close the fund at the end of this year, we’re still deploying a little bit of capital into that farm/restaurant project. As far as the challenges go, farming investors as a QOZB fund. And we reviewed a lot of the agriculture OZ deals. I’m sure some of your listeners might be familiar with the statistic that approximately 40% of the designated opportunity zones are rural areas.
And it was originally our intention to kind of deploy some capital into those areas. And we found out that talking to our investors, most of them are interested in the real estate deals rather than the qualified opportunity zone businesses, which was a challenge. Some of the feedback we got from our investors was they just weren’t happy with the lockup period for the 10 years, or were a little bit worried about the uncertainty of regulations. And we’re still seeing that as far as the craziness going on in the tax side. Although I think everybody with opportunity zones is probably investments is probably safe, but it didn’t go quite as we planned. There are a lot of good deals. We probably reviewed 80 deals on opportunity zones ag related, and we still have some of those deals in our pipeline, although we may not be offering them in a QOZ wrapper. So it was a good program. I think it will likely continue to evolve slowly. And that’s probably a good thing, but for us, it’s a small portion of what we do.
Jimmy: Gotcha. I just had to ask about opportunity zones because I’m the opportunity zone guy, right? So thanks for indulging me for a moment there. I want to bring in my cohost now, Andy, I know Andy has some questions for you on some trends, and some macro economic trends and how they may relate to a sector that you’re investing in, Chris, Andy, take it away.
Andy: So Chris, you mentioned that some potential investors were uncomfortable with the 10-year life cycle of a QOZB investment, which makes sense. I mean 10 years is a very long lock up period, that’s very illiquid, but that being said typically direct investments in alts do have less liquidity, and have that longer life cycle, anyway, although not necessarily full out to 10 years. So I’m curious, what’s like the typical life cycle for one of your investment opportunities, or how soon could an investor receive liquidity without necessarily paying a penalty, or getting a discount on their redemption or anything like that? Like, what do you plan for in terms of that liquidity, or capital gain event?
Chris: Great question, we have multiple kind of deal structures. So ranging from short-term collateralized grass-fed cattle notes that are short as a year in duration, and so it’s just typical debt instrument, where you’re essentially pulling your investment. We make a loan to a company, they go out and buy some cows, they grow the cows, they sell the cows, they pay us with interest, basically split that interest with the operator, two longer-term deals. We like to structure our equity deals with multiple exit potential. So they might range anywhere between a three-year to a eight or 10-year offering length. And some of those potential exit opportunities are just like you might see in a commercial real estate, where a project is built up, developed, stabilized, and then either refinance, which cashes our investors out at sort of a pre-determined rate of return, or produces enough cashflow to cash out our investors.
And then on some of the AgTech deals and a few of the other deals, they’re the exit we’re ideally looking for is some sort of merger and acquisition or even an IPO. And those are within ag space itself, especially the indoor ag space. We’ve seen quite a bit of activity in the past year or two involving SPACs and IPO’s, and a few unicorns involved in the indoor ag space, AeroFarms, bright farms, there’s several others that are there doing indoor growing.
And they were about to see most of our investments are fairly immature. As far as the duration, our average investment, I think its duration right now is about 14, 15 months, because the platform is growing rather rapidly. So we’re, we’ll see some equity exits hopefully here. And that’s your, so one of our farms in Kentucky, a big greenhouse should be exiting in the spring, they’re doing some refinancing activities and things like that. So we’re hoping to exit out our investors pretty much right at the target IRR.
Andy: Great. I’m not surprised to hear that your platform is growing quickly. The market is so hot right now, just overall, like, macro, of course, we’re talking now in October of 2021, you know, there’s been a slight pullback in the market this month, but valuations with equity is that evaluations are about as high as they’ve ever been. And of course it’s not just the stock market. If you look at residential real estate, it’s like, wow, we thought going into maybe 2019, early 2020, that maybe we were at the end of a residential real estate cycle. And then COVID, and the lockdowns hit, and it was a reset button was pushed, right? And it’s almost like, wow, that was the beginning of another cycle with a lot of gas behind it. So looking across all these asset classes, valuations are starting to look pretty stretched, a little bit dicey, but that being said, cash has to go somewhere, right?
And we’ve seen in the opportunity zone space, a lot of people are locking in these capital gains, and then the cash has to go somewhere and, you know, they might be getting capital gains in the equities market, in residential real estate, and so on. So for me, it’s this kind of double-edged sword as an asset manager. It’s like the good news is there’s a lot of cash looking for investment opportunities. The bad news is it seems like valuations are high almost across the board. Is that true in terms of farming and agribusiness? Like have you seen multiples increased significantly in the past 12 months and how does that affect, I guess how you’re making investments in, let’s say the next 12 months.
Chris: Yes. It really depends on the sector of agriculture you’re looking at. So I will say some commodity markets are really hot, so when you talk about heavily traded agriculture commodities, everybody talks about that I just mentioned, the corn, soy, those markets were in a fairly long-term slump up until about a year or so ago, and now they’re on fire. And in turn they drive land prices, and not every deal we offer has a land component, but if you look at just basic US farmland, the valuations are very high. So I just saw today that there was a piece of farmland in Iowa who agrees that the Midwest very fertile land, very highly desired, went for $26,000 an acre, the same land was going for maybe $7,000, $8,000 an acre a few years ago. So that I would say that market’s getting a little overheated.
If you look at the spaces that we’re involved in, they’re very nascent. So indoor ag is a very new industry. We’re looking for the diamond in the rough, you know, we’re looking for the Ray Kroc of vertical farms, who can figure out kind of the secret sauce of running a small urban farm, and do it over and over again. It’s kind of the reverse of what you see happening in the publicly traded market where you’ve got some very significant institutional investment, a hundred million dollars and then some into some of these place like AeroFarms, the bright farms, and things like that, where big investor money’s coming in and now they’re trying to make a profit with that money. And like a lot of companies, that’s easier said than done. Sometimes it’s easier to start with less money than more money, and spend it more wisely and grow more strategically than to spread that peanut butter very thinly.
So we work with small to mid-market farmers all over the country, and even in emerging markets. And obviously they’re looking for undervalued assets, like in many cases, you’re gonna go overseas and we actually have done some overseas offerings, and we’re working on some more in emerging markets or even frontier markets where land is very cheap, labor’s very cheap and there’s a lot of room for growth and there’s a growing consumer base as well.
Andy: Interesting. Okay. So you’re still seeing value. I mean, that’s a good answer for someone raising money to do deals, but it is interesting that valuations are up across every asset, but some asset classes are up 50%, and others are up 200%. So to some extent, as an investor, speaking as an investor, the mission is to seek out that relative value, right? Which, that brings me to my next question. I’m wondering if you could tell me a little bit about who is your typical investor and I’m looking through your platform now, and I see that minimum investment size, depending on the opportunity is $10,000, or $20,000, or $25,000, which I think is pretty cool, really, because that means if an investor had, let’s say a hundred thousand dollars that they wanted to invest with you, they could even diversify that across different projects.
But I’m wondering is your typical investor like a self-directed investor, or do they tend to be more RIA’s, or family offices working on behalf of a very high net worth investor? What’s your typical investment amount, and also, do you have any sense if a high net worth investor is making an allocation to agriculture and farming, what portion of their total portfolio that they’re allocating to that?
Chris: Investor base is variable. We have, I think about 8,000 investors right now that have actually registered on the platform. A smaller number of those have actually invested. Many of them like to kind of watch and learn, and we’re big on that and want you to be comfortable with the platform, comfortable with our offerings and the process before you invest. The average investment size we see is more than $20,000. In some cases it’s six figures. Our investors are yes, primarily self-directed investors who are looking to diversify out of the typical equity markets. But we do have some family offices that, you know, people I’ve talked to directly on here, only the principals that are, you know, investing small portions of their portfolio. I don’t know if I could pin down a number, I’d say somewhere between five and 15, they’re looking to diversify and to kind of natural resources, and agriculture. That’s probably pretty similar to what you’ll see on the institutional side where university endowment, hedge funds, things like that are investing in farmland. But we see, people reading the headlines this past year have seen Bill Gates buying up major swaths of US farmland, of course, Warren Buffet, Ted Turner, and others are part of that trend as well.
Andy: Chris, I’m gonna hop back in here, wanting to get back to some of your investment offerings. Are there any more examples that you can provide for our audience in any of those four sectors that you cited earlier? Indoor ag, grass-fed livestock, AgTech, and then I think you had that grab bag category where you were investing in non-row crop, non-commodity type products. What are some of your favorite examples of some offerings that you have available right now, or that you’ve invested in in the past? I’m just curious.
Chris: So right now our opportunity zone fund is live. We will be launching a 506(c) offering within indoor recirculating aquaculture system. So it’s called RAS. This is basically growing fish indoors, an indoor fish farm. This one’s in Florida and that offering should be going live probably by the time people start listening to this. So those are, you know, some of our current offerings, or recent offerings. We closed just a while back a vineyard in West Texas. And people think West Texas, if you’re from Texas, West Texas is primarily dry, but there’s parts that are not that are on very fertile aquifers our vineyards just happen to be on there. But the thing Texas wine is pretty popular, but what most people don’t know about Texas wine is that a big chunk of it’s made out of California grapes. So this particular vineyard operator is working to change that and grow grapes more affordably in Texas, so that Texas vineyards or Texas wineries can use the Texas-grown grapes rather than having to import them from California and sticking a Texas label on it.
Andy: That’s interesting, Texas wine, what are they gonna think of next? Well, Chris, thanks for joining us today. It’s been a pleasure. We’re gonna wrap up here, for our listeners out there today, we will have show notes as always on the AltsDb website. You can find links to all of the resources that we discussed today with our guest, Chris Raleigh at altsdb.com/podcast. Chris, before we go, where can our listeners go to learn more about you and Harvest Returns?
Chris: Yep. That’s the place to start, it’s harvestreturns.com our website. We found a blog, a lot of educational materials, references to several podcasts like this, where we talk about different types of assets, and you can learn more about us. You can also follow us on social media to typical channels, Twitter, LinkedIn, Facebook, Instagram.
Andy: Fantastic. And I’ll be sure to link to all of those in the show notes for today’s episode. So, yeah, please do go check out Chris and Harvest Returns at harvestreturns.com. Chris, thanks for joining us today.