Entering a new investment can be exciting. But it is just as important to understand how and when that investment will successfully end. Investors in private equity and venture capitalist are especially concerned about how they will exit an investment and recognize their gains. Because they invest in private, untraded companies, departing an investment is not as simple as hitting the sell button on a publicly-traded stock on a discount brokerage. Private placements are generally illiquid investments, and agriculture is most suited for those with long term investment horizons. That said, investments in farming don’t have to be set up in perpetuity. Harvest Returns equity investments generally are structured with one of three exit strategies:
In some cases, the exit strategy involves the merger or acquisition of the invested company by another company. These types of exits are common in start up or development projects, such as a greenhouse operation that might be acquired at a later date by a private equity company. The goal for an investor is to realize an acquisition at a higher value multiple than the price they bought the original interests in the company. The benefit of an M&A is that the upside potential is unlimited. Drawbacks include an unknown time horizon.
Cash Out Refinance
If a project is producing stable cash flows and appreciating in value every year, at some point the company may decide to take a loan out on its assets. The goal is to produce enough cash in the transaction to pay investors back their principle as well as some amount of scheduled bonus returns. Refinances are dependent on unknown future factors such as land appreciation, interest rates, and credit standards.
In a project with sufficient free cash flows, partners can receive a return of their invested capital simply from the profits of the farming operation. Agriculture development projects often take time to produce profits, but when they do, those returns can be sufficient to pay investors back and allow the project sponsor to retain full ownership of their operation.
Optionality is Key
Ideally, any company will have identified multiple exit strategies for their investors. Market conditions change, resulting in better (or worse) performance than expected for a particular investment. For example, a sale of the portfolio company might be a primary exit strategy with a cash out from refinancing the farm’s land or infrastructure being a secondary option. Investors should know ahead of time approximately how long they expect to be involved in a farm or ranch operation and what their options are for exiting. The duration of a private placement and the nature of its exit are critical components to an investment’s overall returns. This information should be disclosed in offering materials such as the private placement memorandum.