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Will African Farmland Yield the Elusive Alpha for Portfolios

July 8, 2011

Looking for a 270% return on investment over the next five years? Emergent Asset Management, a London hedge and private equity fund, says it has the perfect investment vehicle for you. Farmland in sub-Saharan Africa. (You’ll need €5 million to throw in if you’re an institution and €500,000 if  you’re a retail investor.)

Right now, Emergent is in the process of fundraising for a new €60 million fund to increase its existing 55,000 hectares of farmland in five countries in sub-Saharan Africa. According to marketing materials for the Emergent African AgriLand Fund, the fund says it plans to give investors back 30% per year and offer coupons of 8-10% on invested capital.

Emergent’s targets are “very ambitious,” says Steven Kaplan, a professor of finance at the University of Chicago.  Private equity firms target returns between 15% and 30%, he adds. “There numbers are aspirational, and the investment is risky.”

The risks for Emergent abound. Chief among them recently: the public relations disaster that they and their investors have already experienced from these Africa-focused funds. A recent report by the Oakland Institute, an environmental think tank, says that Emergent’s funds are forcing small farmers off ancestral land in Africa. Read the report here.

Although Harvard and Vanderbilt have been cited as among the university endowments invested with Emergent Asset Management’s Africa farmland fund, Harvard’s endowment is not currently an investor, confirmed a spokesperson for Emergent. Neither Harvard nor Vanderbilt would comment for this article.

Emergent initially agreed to discuss its practices and funding but eventually refused to talk for this article. It did send along a lengthy rebuttal to all questions about its “land grabbing” tactics in Africa and explained how its firm has legally and transparently obtained rights to the land in question. (Will include a link to the rebuttal when it becomes available).

From thousands of miles away, it’s difficult to ascertain which of these institutions has the accurate information on the legalities of the so-called land grab, and such legal uncertainties are certainly among the risks for investors.  An even bigger question is whether such 30% returns per year are even possible. Can investments in Africa yield outsize returns for investors? Is African farmland the next big investment opportunity?

According to Emergent, land in Africa is 7 times cheaper than the equivalent land in Latin America. Still, Julian Sinclair the chief investment officer at the €1.6 billion London hedge fund Talisman Global Asset Management  says his firm has spent several years seeking farmland to buy assuming that commodities prices would continue to rise. Talisman, he says, has never pulled the trigger.  “Whether it’s Ohio or the Ukraine, it’s difficult to be an effective operator through crop cycles, and prices going up and down. We’ve seen very little evidence of exceptional operators of farmland,” says Sinclair.

Relatively illiquid assets like farmland and timber are often the domain of universities with billion dollar plus endowments, says Ken Redd, the director of research and policy analysis at the National Association of College and Business Officers that tracks endowment returns.

Private equity and hedge fund investments in Africa are called frontier investments and  are described as distinct from emerging market investments. “Frontier markets, including allocations in Africa, are a newer allocation for our clients, but they’re starting to dip their toes in there,” according to Marjorie Asfour of Cambridge Associates. “It’s no more than two to three percent of any endowment’s allocation.” NACUBO says endowments invest approximately 15-20% of their funds internationally, but the organization does not break out how much its endowments invest in Africa.

In its marketing materials, Emergent says its investments in African farmland have been “profitable” so far, but the fund does not specify whether such profitability is anywhere near 30% so far.