Heather Davis, Senior Managing Director, Global Private Markets
February 1, 2013
For investors accustomed to investing in stocks, bonds, and other well-known vehicles, investments via private markets in real assets — such as farmland and timberland — may be a new frontier. Unlike stocks and bonds, which are traded on exchanges with standardized contracts, transactions on the private market take place between two parties under terms that they determine, and are generally open to institutional and high-net-worth investors.
For TIAA-CREF, these direct investments in real assets are an attractive prospect for a number of reasons. They can provide competitive returns, capital appreciation, and underlying value rather than fluctuating market value. These investments can benefit from demographic trends such as population growth and urbanization, which have increased demand for the food and clothing that agricultural land produces as well as the timber that is needed for construction, furniture, paper products and fuel. Finally, there are often hidden gems in this space that TIAA-CREF’s research-driven approach and active market presence can uncover.
Heather Davis, senior managing director of global private markets at TIAA-CREF, oversees direct investments in real assets as well as natural resources, energy and infrastructure, private equity and high-yield investments and private placements. In this Q&A, she discusses how investments in real assets offer unique opportunities.
What makes direct investment in real assets so appealing?
Direct private market investments in timberland and agriculture are unique — and attractive — because they have historically been uncorrelated with almost everything else that we invest in as a company. While stock and fixed-income markets may fluctuate, timberland and farmland investments perform based on the value of the land and crops, and the underlying constant demand for food and wood products. People have to eat and they need the products that timber creates, and the fact that these end products are a necessity can make real assets a more stable investment.
Real assets also have an underlying value that tends to increase as finite supplies dwindle. With the world’s population expanding by 25 million people per year1, agricultural production will have to double by 20502 in order to keep up with demand. In addition, protein consumption in developing countries is increasing 2.6% per year3 as global incomes are rising. These huge increases in demand will likely drive agricultural products and farmland prices higher at a time when arable land is shrinking dramatically on a global scale, with the exception of Brazil.
Finally, real assets also tend to preserve their values in inflationary environments.
In my opinion, these factors bode well for investments in real assets, and our research-driven approach to these investments helps us find the hidden gems that may not be apparent to other investors. Our dedicated investment teams continually develop new and innovative strategies to invest in real assets. Making these investments via private markets allows us to pick and choose the right investments for our portfolio.
Let’s talk about agriculture as one subset of our investments in real assets. Can you discuss TIAA-CREF’s approach to agricultural investment?
We take TIAA-CREF’s significant capabilities in commercial real estate and put them to work across the agricultural portfolio, using proven strategies as well as the expertise of the organization’s real estate appraisers, engineers and attorneys. Our approach relies on seeking out farmland in both domestic and international markets that can offer strong yield as well as capital appreciation, diversified across permanent crops and row crops.
Based on these criteria, TIAA-CREF has purchased more than 400 farms in the U.S., Australia, Brazil and Eastern Europe. TIAA manages the domestic and international farms in the permanent crop portfolio through a land-lease structure with local farmers. In this structure, experienced commercial farmers, who lease the land from us, work with TIAA-CREF investment professionals on the ground at the farm sites. TIAA-CREF’s acquisition of a controlling interest in Westchester Group, Inc., one of the nation’s premier agricultural asset managers, has brought a further dimension to the organization’s in-house expertise and our proprietary deal flow.
The crops on these farms break down into two categories, which we manage differently.
With “row crops” such as grains, for instance, much of the value of the property is in the land itself. Therefore, we own the land and lease the farming rights to local farmers, who own the crops outright. However, with permanent crops — those that grow in orchards and vineyards — up to 80% of the value of the asset is on the tree or the vine, which makes them depreciating assets. Because of the greater risk in managing these properties we maintain control and farm these ourselves.
When it comes to processing our permanent crops, we use a value-added strategy that takes into account the needs of different markets around the globe. Take almonds, for example. We own a majority interest in a California almond processor, Treehouse, Inc., that can offer different levels of processing — such as removing the nuts from the shells, then sorting, then slicing. That lets us customize the product for our customers. In Japan, for instance, most buyers want to buy almonds that have been sorted and graded so that they get only small, perfect nuts. In India, by contrast, we sell almonds in the shell so that participants in the country’s employment program can add value by processing them by hand.
How did TIAA-CREF establish a footprint in agricultural investing?
Early on, we purchased a $300 million portfolio of properties from the State Teachers of Illinois. That got us going in scale. After acquiring properties domestically, TIAA-CREF expanded internationally — investing in properties in Brazil, purchasing multiple large tracts of farmland in Australia, and acquiring some smaller farms in Eastern Europe.
In 2011, TIAA-CREF’s farms produced:
Can you discuss some of the hidden gems in agriculture that TIAA-CREF has found through its research-driven investment approach?
One example that comes to mind is our alfalfa exports to China. China currently feeds 20% of the world’s population with only 7% of the world’s arable land — and the supply of arable land is shrinking as urbanization continues. As China’s population becomes larger and more urban, we can expect the world’s largest nation to become increasingly dependent on agricultural imports. Our research team identified an opportunity in China’s fast-growing dairy industry: China can’t grow enough alfalfa to feed their dairy cows, so TIAA-CREF invested in an alfalfa-growing operation on the West Coast of the U.S. We now have a profitable business exporting alfalfa to dairy farmers in China.
Turning to another real asset class, can you address TIAA-CREF’s direct investments in timberland?
TIAA-CREF began investing in timberland in 1998. It was a forward-looking investment at the time, and our foresight has been borne out — the importance of sustainable production is now widely recognized. We currently manage a forestry portfolio of over $1.3 billion, covering 840,000 acres in 23 states in the U.S. as well as seven other countries. Our aim is to achieve attractive returns, while building a global portfolio of high-quality, sustainably managed timberlands that can be held over the long term. In addition to providing a broad range of revenue opportunities for us, timberland also helps society advance to a more sustainable economy by reducing CO2 emissions and providing alternative sources of renewable energy. The sustainability of our timberland investments is important to us, and we work only with managers or partners who are in alignment with our emphasis on environmental stewardship.
We believe in the long-term fundamentals of timber and want to grow our exposure to the asset class. To the end, in 2012, we acquired a controlling interest in GreenWood Resources, an independent timber asset manager. The GreenWood acquisition will allow us to ramp up our presence in timber, with a specific emphasis on timber as a renewable energy source.
What economic factors are relevant in managing our timberland investments?
Timberland is interesting because it has historically had a low correlation with asset classes such as equities and fixed-income investments. For instance, the NCREIF Timberland index has a correlation of -0.06 with the S&P 500 and 0.04 with the Barclays Capital U.S. Aggregate Bond Index. However, parts of the timber sector are correlated with the broader economy. For example, when the housing market and homebuilding sector are on the decline, it has a negative effect on pine timber in the southeast, which is used for construction, but a less significant effect on hardwood timber in the Pacific Northwest, which is used for furniture. These effects are not limited to the U.S. economy: For instance, as the Chinese economy was slowing down, timber exports to the country declined.
Are there any risks to investing in real assets via private markets?
In terms of farmland specifically, there are the risks one might expect, such as weather and pests. For our row crops, the farmers leasing the land from us take on these risks. For our permanent crops where we manage the properties, there are steps we can take, such as using windmills or misters to protect trees from cold weather.
As investments, real assets overall are subject to various risks, including fluctuations in property values, higher expenses or lower income than expected, and potential environmental problems and liability. They sometimes do not have sufficient property-derived cash flow and consequently may need additional capital. Our long-term investment horizon helps us to mitigate these risks.
Additionally, the markets lack transparency and require due diligence and expertise, which is why our research-based approach is so important; TIAA-CREF advocates the creation and distribution of relevant information about these assets. There is also a lack of liquidity relative to, for instance, the bond market, with 95% of farmland transactions carried out farmer-to-farmer at auction, or through private negotiation. This is rarely an issue for us because, first, we carefully investigate properties before purchasing to ensure that we will want to hold them for the long term; and second, because we do maintain strong relationships in the agricultural community so that we have access to a ready pool of potential buyers.
Finally, emerging market investments in real assets can carry higher political and financial risks than they do in developed markets. In entering emerging markets, we make sure that countries have the criteria we would require for any investment, such as a stable government and strong laws and regulations. We then find reputable, local partners with significant market knowledge and contacts so that we can build the investment together.
Can individual investors invest in real assets with TIAA-CREF?
Not currently, unless they are “qualified investors” as defined by the Securities and Exchange Commission. Investments in agriculture and timberland are among the many investments of TIAA's General Account, which is solely owned by TIAA and not available to individual investors. The General Account’s strength and stability back the claims-paying ability of the TIAA Traditional Annuity. The General Account invests in a broad range of diversified investments. Innovative investments in real assets diversify and strengthen the TIAA General Account, while enabling TIAA to pursue superior long-term returns.
1 Based on UN data
2 Global Harvest Initiative 2010 GAP Report estimates
3 UN Food and Agricultural Organization
The material is for informational purposes only and should not be regarded as a recommendation or an offer to buy or sell any product or service to which this information may relate. Certain products and services may not be available to all entities or persons. Past performance does not guarantee future results.
TIAA-CREF Asset Management provides investment advice and portfolio management services to the TIAA-CREF group of companies through the following entities: Teachers Advisors, Inc., TIAA-CREF Investment Management, LLC, TIAA-CREF Alternatives Advisors, LLC and Teachers Insurance and Annuity Association® (TIAA®). Teachers Advisors, Inc. and TIAA-CREF Alternatives Advisors, LLC are each a registered investment advisor and wholly owned subsidiary of Teachers Insurance and Annuity Association (TIAA).