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Private Equity Making Huge Investment in Indoor Ag

BY: Don Goodwin and Dean Cavey | DATE: November 29, 2017

In 2008 when the economy tanked, Private Equity companies turned to Agriculture for steady returns.  Most sectors of the market were struggling and the future was more unpredictable than in past years.  PE Companies saw Ag for its steady returns with plenty of growth potential. The influx of Ag technology also teased us with game changing potential. Experts were projecting a world population growth of 3-4 Billion people by 2050.  Consumers were trending toward eating fresher and more local.  It seemed like a perfect place to invest to assure stockholders a fair and consistent return and one that is essentially recession-proof.

As they scoured through deals, these companies soon realized the inherent risk with most Agriculture related products; Mother Nature.  The perils of weather can throw a forecast or projection out the window with one below freezing night. With the onset of global warming, weather patterns were disrupting regions that were previously more consistent. How could they invest and mitigate this risk?  One answer is controlled-environment agriculture or what is more commonly known as Indoor Agriculture. These are smaller market centric growing operations in warehouses, glass houses, shipping containers and more.   Various growing techniques are being applied including hydroponics and aquaponics

Today, we are seeing an unprecedented amount of interest from Private Equity Companies or strategic investors in the Indoor Ag space.  By our estimates, the current and potential investments exceed $1B.  In many ways, this is astonishing.  Just 15 years ago, PE companies shied away from Ag for a variety reasons mostly related to risk and price. Historically, most ag based M&A deals were done by strategic buyers who were willing to pay strategic multiples.  PE firms could not compete as they were used to paying "financial" multiples.  That is changing.  PE firms want to get into the space and they realize that they must compete with strategics for deals and, consequently, they must pay competitive prices.  So, what is compelling them to invest now?

"Private Equity looks to invest over $1B in Indoor Ag"

The answer comes in many ways. First, they looked at what products to grow. Many have quickly realized that the Hot House tomato space as well as peppers and mini cucumbers has matured. With large scale operations in Canada, the United States and Mexico that are generally well capitalized with strong branding programs backed with new varieties, it would be difficult to carve out a niche. However, this has not stopped some who have invested in operations adjacent to large metropolitan areas like Chicago and Minneapolis.  These companies are playing on local grown and fresher product.

As more research has been completed, companies are showing more enthusiasm for leafy products including cooking and salad greens. The competitive space is different here as most products come out of the west coast of the US or Mexico and the indoor market share is less than 1%. They will enjoy a strong freight and freshness advantage.  Indoor growers are reporting some challenges growing products like Romaine and Spinach to similar quality levels found in a field.  It is our belief that seed companies will invest here and growers will ultimately solve these issues. If they do, some experts are predicting that 50% of all leafy greens will be grown indoors by 2030. Companies are now exploring and investing into a wide range of products to be grown indoors including leafy greens, berries, herbs, ethnic greens and micro greens.

"Some experts are predicting that 50% of all leafy greens will be grown indoors by 2030"

Second, Private Equity companies see Indoor Ag as a way to invest in Agriculture while controlling significant risks.  We field many calls from these companies wanting to understand the space. Ultimately, the conversation comes down to growing operations and some notable crop failures.  Our response is fairly consistent. Invest in a good growing and entomology team. If you execute flawlessly on this side, you can mitigate the risk of full crop loss. We have no doubt that the PE companies welcome this insight as they assess their investment returns.

Finally, Private Equity companies appear to be more open to building an operation from the ground up.  The macro level trends support this concept including local, fresher and easier logistics. They are emboldened by the idea that they don't have to overcome the traditional grower paradigms.  In many ways, Indoor Ag is a completely new way of going to market.  Your assortment is narrow and you just need a handful of collaborative customers to make your model work. Aside from a few technical roles, you can staff these operations with bright people from inside or outside the industry.

Understanding the motivations of Private Equity Companies and private investors is critical when selling your company. Verdant Partners and Golden Sun Marketing work closely to bring our clients this insight.  This includes working with both strategic companies in your Agriculture sector and Private Equity.  By exposing your company to both groups, we can help you maximize the value of your company and find the best fit for future growth.

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