THE DAILYALTS PLAYBOOK

April 24, 2020

The DailyAlts Playbook: Long Agriculture, Short Peloton Rides, Crypto Sentiment, and the Slump in Hedge Fund AUM

PRIME OVERVIEW

Good morning,

“He told me to go into farming.”

That was the opening line of a column I wrote in 2011 about famed investor Jim Rogers.

When I was coming out of graduate school Round 1, I sat down and interviewed Rogers in a long conversation about gold, the stock market, and… farming for my first real writing gig for a financial publisher in Baltimore.

At the core of the article, Rogers had a thesis that one day that farmers would be driving expensive cars and Wall Street would lose its luster.

Days after I published that article, I ended up having a conversation with Purdue University’s agricultural economic program.

As I closed up my thesis at Hopkins, I was exploring my MBA finally.

The Boilermakers invited me to obtain an MS in Ag Econ and an MBA in Agribusiness (finance) from Indiana University.

The dual program was half the cost of Duke or Yale’s MBA program, and I wouldn’t need to take two years off and live on campus.

And that was history.

I’ve bounced back and forth between finance, editorial, and agribusiness – and the intersections of the three for nine years.

I’ve been waiting for the alternative space to see the value in agriculture.

A report from my friends at HighQuest Partners in Massachusetts made me smile.

HighQuest and Global AgInvesting reported that the total amount of capital in agricultural investment strategies hit $130 billion at the end of 2019.

“People in the industry were surprised by the $130 billion, and there are tens of billions more being invested in agriculture that we have yet to account for,” said Philippe de Lapérouse, consulting co-head at HighQuest, co-author of the report. “The takeaway is there is more capital coming into the market.”

I’ve done some work with HighQuest Partners and GAI in the past, and they’re both terrific organizations (linked at the hip), with their finger on the pulse of Agri-investment.  The asset class has grown by 2.5 to 3x over the last decade, according to Nuveen.

I’ve also worked with startups like FarmLead in Ontario that is working to improve the marketplace for more illiquid crops and now Alt-Fi specialist FundThrough in Toronto – which operates in invoice factoring and hopes to help capital flowing through the food and agribusiness supply chain and energy sectors during COVID-19.

It was just a few years ago, I was sitting in Chicago at a dinner with banks and venture firms at a major M&A advisory, who was getting ready to move into the space – despite a lack of many people there with an agriculture background.

There is a lot of interest here… and we’ve been waiting for a breakout.

COVID-19 appears to be a massive catalyst that could fuel that rotation back into farmland, food production, and the rest of the supply chain and all of the associated technologies.

Interest rates are at zero. Our supply chains need more revamping.

But more than anything – I think that COVID will leave scars psychologically in the masses that put food security back at the top of mind for Americans for the first time in decades. And not just the U.S. – this is widespread – with the UN warning about devastating food insecurity due to this crisis in 30 developed countries.

Yet the U.S. agricultural sector has taken so many punches over the last two years due to the trade war, it will be difficult to know what consolidation will look like in the year ahead.

That said, it’s a great time for real assets and Agtech.

Food could be the asset of the decade.

It just took a lot longer for Rogers’ thesis to play out. I doubt the farmers will be driving sports cars, but private equity managers who are moving into the space at a breakneck pace certainly will.

This is one of the busiest days I’ve seen in months for the alternative investment space, so let’s dive into the headlines.

Be sure to check out DailyAlts.com, and look for new research published next week in the PE and community banking space.

MORNING MOMENTUM

VIRUS: The coronavirus has now infected more than 2.6 million people around the world, according to Johns Hopkins University. The total number of U.S. cases topped 800,000, according to the same group. The ongoing decline in daily cases has been a major catalyst in the rise of the U.S. equity markets over the last month. Major indices have jumped more than 25% from March lows.

NO HAT, NO HAND: Blackstone reported earnings yesterday. As we noted, the company fell short of Wall Street expectations. The firm does anticipate robust opportunities ahead. We’ll dig deeper into their earnings call today. With that in mind, we know that the firm will direct portfolio-companies to not seek money from government programs designed to help small businesses. The proposition of PE firms seeking capital from PPP or the Main Street Lending Program has already prompted criticism and warnings from large investment groups like Alaska’s sovereign wealth fund.

PASSED: Meanwhile, the House of Representatives passes another bill that supplies $484 billion to small businesses and hospitals. The bill now goes to President Donald Trump’s desk, where he is expected to sign it quickly. The new law would bring the total U.S. commitment to addressing COVID-19 to more than $2.5 trillion across four different pieces of legislation in less than a month. The bill comes as the economy deals with news that the real unemployment rate sits around 23% across the country. Another 4.4 million people filed for unemployment benefits last week. The bill contains $310 billion for the Paycheck Protection Program, $60 billion for the Small Business Administration, $75 billion for hospitals, and another $25 billion for testing.

BOUNCE: U.S. crude prices continue to tick higher as markets anticipate a greater cut to U.S. production. The June oil futures contract increased by 19.7% to hit $16.50 per barrel. Markets have reacted positively as well to the news that the USO ETF, the world’s largest oil fund, has stopped trading. The ultra-speculative ETF purchases a large number of futures contracts but has no intention of taking physical delivery in Cushing, Oklahoma. Still, WTI crude is now off about 70% since the start of the year.

ACCRUED INTEREST

There is a lot to tackle today… so I’m going to shake this up just a little…

First, COVID has pounded hedge funds thanks to redemptions. eVestment says that AUM fell below $3 trillion for the first time since 2014. The same report says that outflows continued in March to the turn of $24.1 billion.

“Going through fund specific information to understand the severity of flows proved difficult in March. There were products with highly elevated redemptions, and some within the same categories which simply did not appear to experience similar influences at all,” said Peter Laurelli, eVestment Global Head of Research.

–

Despite COVID’s nasty impact on the market in March, we are seeing some new numbers that are positive for a handful of funds. One River is up 45.8% so far this year. The hedge fund operates a discretionary long volatility fund. Meanwhile, 36 South Capital over in London has returned more than 130% thanks to tail risk. The firm operates three different funds.

–

The downturn has been a boon for capital-raising alternative managers:

• Chris Rokos has reopened his fund and seeks another $1 billion to make bets across a wide range of strategies.
• Charlie Antrim – a Point 72 alum – launched a supply chain-focused fund with a total of $250 million. It couldn’t be a better time for this. They’re focusing on chemicals and agriculture, according to Business Insider.
• Slate Asset Management raised more than $250 million for another European real estate fund that is targeting grocery stores (are we noticing a theme here yet around food?)
• Blackstone wants to target the fried debt market with another $7 billion

QUOTES OF THE DAY

“Every Chinese investor is worried, any government approval could take months.”

That is Vaibhav Kakkar of Indian law firm L&L Partners. I noted this week that nations should be very concerned about China’s Belt and Road Initiative. The project sees China come into a nation, obtain lucrative and secret contracts for China-owned businesses, and then they build infrastructure. Turns out that in some cases, certain nations end up owing about half their GDP to China for the projects – which ends up with China taking over key infrastructure like airports or seaports as a result. Well, India has just raised eyebrows with a new rule that will add more scrutiny to foreign direct investments. Brookings says that current and planned investment from China into India currently stands at $26 billion. India is doing its best to stop “opportunistic” takeovers at the height of the COVID-19 crisis. China claims discrimination.

“I forgot about that part of my body…”

That’s me at around 6 a.m. after waking up a day after my first Peloton ride. Why does this part hurt? How does a bike work out that part of the stomach? And make sure you put the clips lower under your arch, because you’ll realize why Achilles died in all of those Greek Mythology books you read 30 years ago. Finally, why are these instructors on these videos so happy?

 

CARRIED INTEREST

Here are the other headlines getting our attention this morning.

• AP: EU agrees budget, recovery plan needed to beat virus impact
• DailyAlts: Morningstar Announces Deal to Buy Sustainalytics to Boost ESG Support
• Bloomberg: Private equity to get squeezed out of another stimulus program
• Crunchbase: North American venture report: Funding up slightly in Q1
• CNBC: Short sellers make nearly $300m betting against retail investors’ favorite oil fund

ACTIVISTS IN FOCUS

Finally, we note the departure of Frank Tuil from Elliott Management.

The French investor spent more two decades at the firm and helped Elliott position itself as a top activist shop across Europe from the firm’s London office.

Investors cheered him and investors feared him.

Some of his most notable activist campaigns included efforts at French spirits maker Pernod Richard and German chemical giant Bayer.

Tuil had established himself under the Gordon Singer, who ran the European office and is the son of founder Paul Singer. The hedge had pushed into Europe in recent decades thanks to less protectionism in the region.

Tuil succeded in activist campaigns across France and Germany, despite the historical opposition to the practice. He had worked on the deal that merged Bayer with agribusiness giant Monsanto and helped the hedge fund successfully takeover of AC Milan.

The departure comes the same week the Autorité des Marchés Financiers slapped  Elliott Management with a €20m fine for obstructing an investigation. The fine dates back to a tender offer in 2015 by XPO Logistics to take over French rival Norbert Dentressangle. The French regulator said that the company had “inaccurate and late reports,” failed to disclose its positions, and “obstructed the AMF’s investigation. The fine is one of the largest ever imposed by the agency.

Neither Tuil nor the company has spoken about his departure.

A few people that I’ve spoken to who know the activist hedge fund well have suggested that the company is “backing off” of campaigns at the moment. Of course, we’ll believe that when we see it.

Still, Tuil provided a road map for successful activist campaigns. In the post-COVID, world it will be interesting to see how regulators treat these campaigns moving forward. Many regulators are already concerned about buybacks and increased consolidation. We’ll look more into this story in the weeks ahead.

 

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ABOUT THE DAILYALTS PLAYBOOK

Garrett Baldwin is the author of the DailyAlts Playbook.

An economist and author based in Naples, Florida, Garrett has an extended history of financial analysis, business journalism, public relations and consulting experience in hedge funds, private equity, alternative investments, housing policy, commodities, and public equity coverage. He holds degrees from Northwestern University, Johns Hopkins University, Purdue University, and Indiana’s Kelley School of Business. He also has a Certificate in Global Business from Harvard Business School.

An avid Baltimore Orioles and Buffalo Bills fan, he would prefer to discuss other sports, please.