Ag Sector Positioned To Withstand Market Volatility
Capital inflow into agtech is likely to remain strong in 2019, says Phil Erlanger of Pontifax AgTech.
The scope of agtech advances during the past three years is nothing short of astonishing. Today's growers now have at their disposal a full complement of science-based tools, among them disease-resistant seeds, biological crop inputs, increasingly precise nutrients, data-driven farm management and robotics to improve on-farm productivity and curtail food waste.
The companies that are delivering high-payoff ag solutions and attracting major investment dollars may be better positioned than other tech companies to weather the current volatility in the capital markets, according to Phil Erlanger, managing partner and cofounder at Pontifax AgTech, one of the industry's leading growth capital investors in the food and agtech space. (Full disclosure: Pontifax AgTech is an investor in Concentric Ag Corp., of which I am the CEO.)
Erlanger's earlier career started with a Ph.D. in economics and finance from the University of Pennsylvania, followed by a 24-year career as an investment banker on Wall Street focused on M&A and private equity. He has concentrated on food and agriculture specifically and exclusively for the past eight years.
Erlanger cofounded Pontifax with partner Ben Belldegrun five years ago, and the two began investing in agtech, first with their personal capital and then through a private equity fund they launched in 2016.
Why the enthusiasm for agtech? "In contrast to other sectors, including renewable energy and clean tech as well as ag, we feel food and agriculture really stands out because of its compelling long-term fundamentals, driven by population growth and dietary trends, along with increased general focus on resource constraints and sustainability. The sector also has very few focused private equity investors."
Erlanger views the ag sector as unique in a number of regards. By most traditional measures of global economic output, it's the fourth largest industrial category, the fastest growing and "clearly the least penetrated by innovation and technology."
Capital inflow into agtech is likely to remain strong, Erlanger says, because it's a sector that's disproportionately underrepresented in investor portfolios.
According to AgFunder, agtech companies attracted more than $4.2 billion in private equity investment in 2017, part of the $10.1 billion invested in agrifood tech companies across the supply chain. That figure has likely grown in 2018.
"Despite having grown, deal volumes are still very small on a relative basis," Erlanger told me. "Now, with more and more institutional capital starting to flow in, we see greater prospects for liquidity as investors start to recognize the sector’s potential for outsized returns that are generally uncorrelated with the capital markets."
Private-equity generalist investors are increasingly attracted to agtech, but Erlanger believes that only those who are deeply engaged in the industry will be successful. Ultimately, he said, "the successful investors will be the ones who understand market idiosyncrasies and who have expertise in agriculture and food."
As for CEOs of companies in agtech, their success will depend on looking beyond current financial market volatility and "focusing on longer-term objectives, ROI to customers, product commercialization, and being disciplined about working capital, spend and burn," said Erlanger.
CEOs need to understand the addressable market for their products or services and "what problems they're solving," Erlanger observed. They need strong partners who will help them maintain focus and steer toward financial success.
Erlanger noted that Pontifax has identified four areas of agtech innovation that it believes hold the most promise for success under the criteria of making more money for farmers, protecting the ag environment and contributing to the world's food security. They are:
Sophisticated Crop Inputs. Crop inputs are becoming more diverse and more precise, enabling "a much more sustainable and efficacious set of solutions, both for crop nutrition and crop protection," Erlanger noted. New biological inputs, when combined with micronutrients, are helping reduce chemical loads in crops, thus improving soil health while reducing runoff of traditional fertilizers into lakes, rivers and streams.
Gene Editing. In commercial and academic labs, biologists, geneticists and computer scientists are developing better tools and methods for editing living cells. "As agriculture migrates away from genetic modification, gene editing tools that aim to optimize the physiology of plants are growing in importance."
Automation and Robotics. Ag producers are experiencing "a growing need for organized data" as their production processes grow more complex. They are also increasingly constrained by labor shortages. Here's where both automation and robotics can boost productivity and profits. But development work in this area tends to be capital-intensive.
Health and Nutrition. "Ultimately, the efficacy of the agricultural supply chain depends on the quality of the nutrition it provides to people and to animals," said Erlanger. If the ag sector is to feed up to 10 billion people in coming decades, knowledge from biotech science and human nutritional needs will have to be adroitly applied to the ag sector.
Erlanger acknowledges that "big data" in the form of huge amounts of information produced by smart sensors and other devices has real applications for growers, but he cautions about potential pitfalls for investors in an environment where too many applications, on too many incompatible platforms, are struggling for commercial adoption.
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