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THIRD WORLD NETWORK INFORMATION SERVICE ON SUSTAINABLE AGRICULTURE Dear Friends and Colleagues A Dangerous Trend: Private Equity’s Growing Control Over Agriculture From seven agriculture-focused funds in 2004 to more than 300 today, the interest in capturing profits from farming and agribusiness on a global scale is growing. Most of these funds are “private equity” funds (that are not listed on stock exchanges) with a total aggregate capital raised of US$8.4 billion in 2019. A recent report by GRAIN examines the issue (see below), Private equity is only one class of investors taking control of assets in the food and agriculture sphere – from farmland to grain terminals to meat processing plants to food delivery – and transforming realities for farmers, fishers and workers. But it is a powerful class, becoming increasingly present in the global South, with much of the funds landing in Africa. Nearly half the money engaged in private equity as a whole (46%), and agriculture and farmland investing specifically (44%), comes from worker pension funds. This points to a potentially huge accountability gap, as there is a lack of transparency around these investments which are not necessarily being managed in the interests of workers or the local communities where capital is being deployed. The private equity industry is subject to very little regulation or oversight, which is a central part of its appeal to investors (and why it is often anchored offshore). Apart from lax requirements on reporting and disclosure, excessively aloof tax treatment is a huge issue. When it comes to political or societal accountability, there is next to none. This trend is part of broader process by which the world of finance – banks, funds, insurance companies and the like – is gaining control over the real economy, including forests, watersheds and rural people’s territories. This is called financialisation. Apart from uprooting communities and grabbing resources to entrench an industrial and export-oriented model of agriculture, it is shifting power to remote board rooms occupied by people with no connection to farming, much less local concerns, and who are merely in it to make money. It is disconcerting that the biggest players in the private equity industry are people’s pension funds, followed by governments’ development finance institutions. They are responsible, yet there is zero connection between them and the people whose money they are investing, much less between them and the communities impacted by these investments. With the world grappling with a Covid-triggered economic crisis and an escalating climate crisis, we have to put the question of how to better support people’s retirements, and how to dismantle, not entrench, the industrial food system, on the table. With best wishes, Third
World Network ———————————————————————————————————– BARBARIANS AT THE BARN: PRIVATE EQUITY SINKS ITS TEETH INTO AGRICULTURE GRAIN Financial flows going into agriculture are growing more and more institutionalised – and more and more private. To be sure, investing in agriculture has been going on since time immemorial. After all, farmers do it every day as they improve their soils, set up cooperatives, share knowledge with their children and develop local markets. But since the mid 2000s, institutional investment in agriculture has started growing. From seven agriculture-focused funds in 2004 to more than 300 today, the interest in capturing profits from farming and agribusiness on a global scale is real – and Covid-19 is not slowing things down. Who is involved? Where is the money going? How do these funds pay off for the financial players and for local communities? These are some of the questions we set out to get answers to, in order to better understand capital flows and who is influencing the direction of agriculture today. Before the global financial crisis erupted in 2008, there was just a handful of funds catering to investors wanting to get involved in farmland and food production. Valoral, an investment advisor in Argentina, counted seven such funds in 2004.1 GRAIN identified 55 a few years later.2 Today, according to Preqin, a London-based alternative investment intelligence group, there are more than 300.3 Most of these funds are “private equity” funds. That is, they are pools of money injected into private companies that are not listed on stock exchanges (and therefore not subject to public reporting requirements). Private equity funds are managed by small, specialised teams and tend to attract a very specific kind of clientele. As they normally require minimum investments in the millions of dollars, which then get locked up for five to 15 years, this kind of investing is only accessible to pension funds, sovereign wealth funds, endowment funds, family offices, governments, banks, insurance companies and high net worth individuals. This will be changing soon, as the US opens the door for private equity firms to tap into the retirement savings of individual workers, but for now it’s only these big institutions which are involved.4 Private equity investing bloomed in the 1980s when “leveraged buyouts” and “venture capital” became well known strategies to take over companies and buy into startups. Investment houses like KKR, Carlyle Group and Bain Capital grew legendary on Wall Street and notorious on Main Street for their hyperbolic projects, cut throat methods and fantastic profits. Today, the private equity industry has secured a solid spot on the investment landscape. In 2019, it ranked third among institutional investing spaces, with over US$4 trillion under management (see table 1). This is comparable to the US$4.5 trillion wielded by the world’s development banks, and far outstrips the US$1.5 trillion invested by US and European philanthropic foundations.5 Table 1: Institutional investing (assets under management, 2019)
Source: compiled by GRAIN, figures rounded But the reality of private equity investing is not as glossy as Wall Street spin would make it out to be. GRAIN took a look into how it’s operating in the field of food and agriculture today and came out with some important findings. The big picture Information about private equity is not easy to come by, as private equity firms are not required to publish data about their operations.6 But we were able to access some specialised data to get a look at the industry’s footprint in food and agriculture. The data is incomplete, but it does give some clear indicators (see box: A word on the data).
Scale and scope of ag investing Today, at least 300 private equity funds are specifically oriented towards food and agriculture.7 A subset of these, run by 200 fund managers, are focused on farmland per se (acquiring or operating farms). Other private equity funds, with diversified portfolios, also buy into food and agriculture, but usually on the downstream side (processing, distribution and service). Preqin’s assessment of farmland funds shows a rising number of closings over the years, peaking in 2013 and again in 2019 (see table 2), with a total aggregate capital raised of US$8.4 billion in 2019. Table 2: Annual unlisted agriculture/farmland fundraising, 2008-2019
Source: Preqin Ltd8 The dataset we studied, mixing funds and fund managers active in both farmland and agriculture, accounted for nearly US$300 billion (not exclusively dedicated to agriculture). In terms of geographical focus, most the of the agricultural investments targetted Africa (56 funds accounting for US$105 billion) followed by North America (130 funds, US$104 billion), Asia (111 funds, US$41 billion), Europe (30 funds, US$24 billion), Latin America (59 funds, US$16 billion) and West Asia / North Africa (18 funds, US$3 billion). What this tells us is that agricultural investing through private equity is quite active across the global South, with much of the funds landing in Africa. Who is involved and who benefits? As mentioned earlier, these funds draw capital from institutional investors (see box: How does private equity work?). Workers may despise private equity firms for their brutal buyout practices, but nearly half the money engaged in private equity as a whole (46%), and agriculture and farmland investing specifically (44%), comes from worker pension funds. Most pension funds tied up in agriculture have their headquarters in North America and Europe, with the remainder spread across an assortment of countries in Asia, Africa and Latin America.9 Many of the pension funds investing in agriculture or farmland are not yet at their target allocation level for this asset class, which tends to be around 4-5%, which means they still aim to invest further. Whether these funds serve public or private sector retirees, the fact is that nearly half the money going into agricultural investing through private equity is workers’ retirement savings – whether they are aware of it or not and whether their interests are well represented through these investments or not. This points to a potentially huge accountability gap, as there is a lack of transparency around these investments. But it also underscores the frightening fact that pension savings are the biggest pot of money “out there” and they are not necessarily being managed in the interest of workers or the local communities where capital is being deployed. Another major player are the development finance institutions (DFIs) run by governments.10 DFIs are quasi public bodies that operate on a for-profit basis, often alongside development cooperation offices. DFIs invest, rather than dish out grants. And they are quite active in agriculture, a long standing target area of foreign aid. It is often said that when DFIs subscribe to a private equity fund this is taken as a “stamp of approval” that enables other sources of capital to join in. In Africa, DFIs are particularly critical to private equity funds, even more so than pension funds. This means that DFIs carry a serious amount of responsibility for how private equity investing in agriculture pans out, at least in Africa.
Returns for whom? Private equity funds invested in food and agriculture normally pay out annual “management fees” of 2% on the total capital invested to fund managers, whether the investment succeeds or not. The fund managers also typically take 20% of the profits generated by the fund, either deal by deal or at the end of the fund’s lifespan. Given that the fund’s managers, or general partners, normally only put in 1-5% of an investment, the payoff for them, in terms of risk, is very high. Added to this are quite a number of hidden fees that may be charged to funds or to individual deals, whether legally or not, as well as tax loopholes.11 The general partners may, for instance, receive fees for sitting on the boards of the various companies the fund has taken shares in or charge these companies service fees.12 Since a notable share of the world’s wealthiest are connected to private equity, it’s reasonable to deduce that the managers, or general partners, do quite well.13 But for those who invest, the limited partners, it’s another story. From the data we saw on farmland and agricultural investing, funds differ on returns for investors. Some lose money, many hover around 8-12% per year, some go as high as 40%. By our calculations, the average net internal rate of return (i.e. the annualised return on investment minus fees) for funds investing in agriculture in 2019, by region where the investment goes and just for those cases where data is reported, was 14% in Africa, 12% in Asia, 11.6% in Latin America and 9.9% in North America. (For Europe and West Asia / North Africa there is not enough data.) By comparison, median annualised net returns for private equity as a whole for the last three years is said to be 17%.14 But these industry-reported figures are contested. Right now, there is a big debate about whether or to what extent investors like pension funds have been “enticed” to go in private equity based on inflated promises, as the returns are not much higher than had they invested in public equity markets. Independent research looking at the period 2006-2019 finds the returns are more like 11%.15 Calpers, one of the US’ biggest public pension funds, openly states now that their returns, net of fees, have been 10.7% per year. This could be considered comparable to having invested in the stock market through an index fund except it leaves out the fees that Calpers and all other private equity investors paid to the fund managers over the same period, which adds up to a whopping US$230 billion. This is a huge transfer of capital straight into the pockets of a small group of funder managers.16 Contrast this with how these investments pan out for communities on the ground. For many, just the term “private equity” strikes fear because so many deals have led to workers in the target firms being laid off, management teams replaced, the companies stripped of equity and filled with debt, and eventually crippled and shut down. Many examples of this abound in the US, a recent example being the destruction of Toys ‘R Us and its 33,000 jobs.17 But they also occur in other places like India, as we see with Omnivore Partners in the annex to this report. Ethics, transparency and regulation The private equity industry is subject to very little regulation or oversight, which is a central part of its appeal to investors (and why it is often anchored offshore). In 2010, the US passed legislation requiring private equity firms managing more than US$150 million to register with the Securities and Exchange Commission, but the SEC has done little to exercise oversight on these companies.18 In Europe, the EU has also tried to move toward more disclosure and oversight, without rocking the boat, while the UK has promised that Brexit would deliver less regulation.19 Kenya has no overarching regulation of private equity, while Brazil, India and other countries do not have strong controls either.20 Apart from lax requirements on reporting and disclosure, excessively aloof tax treatment is a huge issue. Fees tapped by investment managers are taxed as income, but profits are taxed at a much lower rate as capital gains. This creates an incentive for managers to forego “fees” and take them as profit payouts. In addition, many payments reportedly go unrecorded and untaxed, and the structure of most funds, which run through multiple subsidiaries in offshore tax havens, can facilitate transfer pricing or tax evasion, as is alleged in the case of NCH Capital’s activities in the Ukraine discussed in the annex to this report. Even when authorities catch up with the companies, they tend to settle the matter for an agreed amount without changing rules or practices.21 When it comes to political or societal accountability, there is next to none. The industry likes to present its slow adoption of “environment, social and governance” (ESG) credentials and signature of texts like the Principles for Responsible Investing as proof of good conduct. But, as can be clearly seen with their investments in farmland, this is superficial and self-serving.22
Private equity, public problem Private equity is only one class of investors taking control of assets in the food and agriculture sphere – from farmland to grain terminals to meat processing plants to food delivery – and transforming realities for farmers, fishers and workers. But it is a powerful class. Though its operations are opaque and barely accounted for, private equity as a sector has grown enormously since the 2008 financial crisis and is becoming more concentrated. It is also becoming increasingly present in the global South.31 This trend is part of broader process by which the world of finance – banks, funds, insurance companies and the like – is gaining control over the real economy, including forests, watersheds and rural people’s territories. This is called financialisation. Apart from uprooting communities and grabbing resources to entrench an industrial and export-oriented model of agriculture, it is shifting power to remote board rooms occupied by people with no connection to farming, much less local concerns, and who are merely in it to make money. It is disconcerting that the biggest players in the private equity industry are people’s pension funds, followed by governments’ development finance institutions. They are responsible, yet there is zero connection between them and the people whose money they are investing, much less between them and the communities impacted by these investments. As the examples in the next section show, this has to change, for they have too much power and too little accountability. With the world grappling with a Covid-triggered economic crisis and an escalating climate crisis, we have to put the question of how to better support people’s retirements, and how to dismantle not entrench the industrial food system, on the table. In the process, we might manage to eliminate private equity altogether. For the Annex with case studies of private equity in agribusiness from around the world, please see the full article online. References 2GRAIN, “Corporate investors lead the rush for control over overseas farmland”, 2009, https://bit.ly/2BWvggq. Includes 33 farmland funds, 11 private equity funds and six hedge funds. 3Preqin Pro, https://pro.preqin.com/discover/funds 4On 6 June 2020, the US government clarified that institutions offering individual retirement savings accounts known as 401(k)s may include private equity holdings in those accounts: The Wall Street Journal, “Private equity could be coming to your 401(k) program”, Your Money Briefing, 25 June 2020, https://traffic.megaphone.fm/WSJ1161297107.mp3. The International Union of Food Workers have produced a scathing critique of this move: IUF, “Trump’s Labor Department clears the way for private equity funds to tap directly into workers’ retirement money”, 17 July 2020, http://www.iuf.org/w/?q=node/7861 . 5Data
sources: Foundation Mark for US foundations (https://foundationmark.com/#/grants);
European Foundation Centre for European foundations (https://www.efc.be/knowledge-hub/data-on-the-sector/);
Sovereign Wealth Fund Institute for development banks (https://www.swfinstitute.org/fund-rankings/development-bank)
and sovereign wealth funds 6To
add insult to injury, the US government has now proposed to undo the
modest reforms the Obama administration made to increase transparency
in the financial industry by allowing all but the biggest hedge funds
to avoid reporting their holdings. See Ortenca Aliaj, “Most hedge
funds to be allowed to keep equity holdings secret”, Financial Times,
11 July 2020, https://www.ft.com/content/c68c 7Preqin,
“202 Preqin global natural resources report”, 4 February 2020, https://www. 8Preqin, personal communication with GRAIN, 5 June 2020. 9Some of the countries outside of North America and Europe with pension funds invested in agriculture and farmland include Argentina, Australia, Brazil, Israel, New Zealand, South Africa and South Korea. See Preqin Ltd database and GRAIN, “The global farmland grab by pension funds needs to stop,” 13 November 2018, https://grain.org/e/6059. 10In an exceptional move, in January 2020, the US banking giant JPMorgan set up its own DFI. 11See Eileen Appelbaum and Rosemary Batt, “Fees, fees and more fees: How private equity abuses its limited partners and US taxpayers”, CEPR, 11 May 2016, https://www.cepr.net/report/private-equity-fees-2016-05/ and Victor Fleischer, “The top 10 private equity loopholes”, New York Times, 15 April 2013, https://dealbook.nytimes.com/2013/04/15/the-top-10-private-equity-loopholes/. 12A study from 2016 found that such fees charged by general partners to the companies they’ve invested in amount to over 6% of the total equity invested by general partners on behalf of their investors. See Ludovic Phalippou et al, “Private equity portfolio company fees,” Saïd Business School WP 2015-22, April 2016, https://ssrn.com/abstract=2703354. 13Nathan
Vardi and Antoine Gara, “How clever new deals and an unknown tax dodge
are creating buyout billionaires by the dozen”, Forbes, 22 October
2019, https://www.forbes.com/sites/nathanvardi/2019/10/22/how-clever- 14Preqin,
“2020 Preqin global private equity and venture capital report”, June
2020, 15Jonathan
Ford, “The real ‘Money Heist’ is taking place in private equity”,
16Ludovic Phalippou, “An inconvenient fact: Private equity returns & the billionaire factory,” SSRN, 15 June 2020, https://papers.ssrn.com/sol3/papers.cfm?abstract_id=3623820. 17Sarah
Anderson, “Toys ‘R Us worker: Wall Street billionaires should not
be making money by putting people out of work”, Inequality.org, 9
December 2019, https://www.commondreams.org/views/2019/12/09/toys-r-us-worker- 18Appelbaum and Batt, op cit. 19See
Carmela Mendoza, “Key themes for Europe PE legislation in 2020”, Private
Equity International, 14 January 2020, https://www.privateequityinternational.com/key-themes-for-europe- 20See
Shanti Divakaran, “Survey of the Kenyan private equity and venture
capital landscape”, World Bank, 1 October 2018, http://documents1.worldbank.org/curated/en/820451538402840587/pdf/WPS8598.pdf;
Alexei Bonamin et al, “Private equity in Brazil: market and regulatory
overview”, Thomson Reuters, 1 February 2020, https://uk.practicallaw.thomsonreuters.com/0-504-1335.
It is worth noting that China has just allowed insurance companies
to invest in private equity. See China Economic Review, “China scraps
equity investment restrictions for insurance funds”, 16 July 2020, https://chinaeconomicreview.com/china-scraps 21Appelbaum and Batt, op cit. 22See GRAIN, “Responsible farmland investing? Current efforts to regulate land grabs will make things worse”, 22 August 2012, https://grain.org/e/4564 and “Socially responsible farmland investment: a growing trap”, 14 October 2015, https://www.grain.org/e/5294 for a deeper discussion of this. 23GRAIN, “Pension funds: key players in the global farmland grab”, 20 June 2011, https://grain.org/e/4287 and GRAIN, “The global farmland grab by pension funds needs to stop,” 13 November 2018, https://grain.org/e/6059. 24Rede Social de Justiça e Direitos Humanos, GRAIN, Inter Pares and Solidarity Sweden-Latin America, “Foreign pension funds and land grabbing in Brazil”, 16 November 2015, https://www.grain.org/e/5336, followed by further reports available on www.grain.org. 25UAW Retiree Medical Benefits Trust, 990 Form for 2017, https://projects.propublica.org/nonprofits/organizations/900424876/201833199349302778/full. The US$400 million may seem like a drop in the bucket of UAW’s US$57 billion medical care trust fund. But it is almost one-third (29%) of their allocation to natural resources, which represents 2.5% of their portfolio – a standard allocation level for pension funds. 26Black River Asset Management was originally Cargill’s own private equity firm. It was then spun off as Proterra. Proterra is an independent firm, but Cargill remains invested in it. 27As of September 2019, according to Preqin Ltd. 28Ben
Butler, “Macquarie pursues US firm Amerra Capital over $40m ‘fraud’”,
The Australian, 25 April 2019, https://www.theaustralian.com.au/business/financial-services 29Marcelo
Teixeira, “Bid by US fund Amerra for Brazil sugar mill fails to win
creditor approval”, Reuters, 19 November 2019, https://www.reuters.com/article/us-brazil-sugar-m-a/bid-by-u-s- 30The trust’s annual reporting to the UN Principles for Responsible Investment is erratic about its farmland holdings. In 2017 and 2018, it reported holding farmland in its portfolio. In 2019, it reported it had none. In 2020, it reporting holding farmland again. 31See the slides for Chapter 8 made available as a companion to Ludovic Phalippou’s book, “Private equity laid bare”, at http://pelaidbare.com/ppt/.
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