PGIM: Historical farmland lender with modern ambitions

A little more than five years ago, PGIM Real Estate, the real estate investment arm of PGIM, launched its first evergreen agriculture fund, signalling its expansion into equity investment in farmlands.

Prudential, PGIM’s parent company, has been active in the American agriculture sector as a lender for more than a century and PGIM has also been a lender on its parent’s balance sheet, as well as sourcing third-party capital.

Jamie Shen, PGIM Real Estate’s head of agriculture, says: “We have been more focused on growing our equity in the last five to six years. I would say we have had a lot of capital appetite based on our good experience in lending to and investing in the sector.

Shen was CIO and head of PGIM Real Estate’s agriculture equity business until October last year and has been credited with growing PGIM’s agriculture business. Since 2017, under her leadership, PGIM Real Estate’s agriculture investment platform has approximately tripled its assets under management over the past 10 years to reach €10.3bn today. The company is now one of the largest investors in agriculture in the world, with only Nuveen managing a greater volume of assets.

At the time of Shen’s appointment, Bryan McDonnell, PGIM’s head of US debt and agriculture and chair of global debt, said PGIM had ambitious plans to grow its agriculture platform and described Shen’s appointment as “central to them”. 

In her new role, Shen plans to leverage PGIM Real Estate’s expertise across agriculture debt and equity to drive client growth and expand a combined debt and equity agriculture platform. There is growing appetite for farmland, she says, adding that the investors include the US$1.3trn behemoth, Prudential Financial. 

The PGIM US agriculture strategy was initially launched in 2018 as a joint venture, but over the subsequent two years, PGIM opened its doors to other institutional investors. Launching the vehicle was a natural progression from PGIM’s traditional role of investing for institutional investors – including large US pension plans – on separate accounts since the 1980s. “We want to cater to smaller investors who do not have enough capital to build their own large, diversified portfolios,” Shen says.

“Agriculture is a tangible and easily identifiable asset. Investors understand the long-term demand for food and that the availability of productive land is finite. So, they understand the demand drivers and the supply constraints – that it makes sense to hold agriculture as a long-term investment.”

Aside from capital preservation, she says farming and the production of food offer a natural hedge against inflation. Overlaying the fundamentals of the sector is the consistent return that can be generated from agriculture, despite the buffeting the sector has endured because of a series of external events in recent years, including the global pandemic and resultant global supply-chain issues.

“To date, we haven’t seen negative total returns because we do have farm income to provide some offset,” she says. “So far, performance has proved to be strong over the long term.” 

But this is not to say the sector does not have its challenges. Shen points out that these have included trade wars, COVID-19, supply-chain issues and, more recently, inflation and higher input costs.

“We have been through a chain of events, but we are starting to see some of those challenges dissipate a little,” Shen says. “Some tariffs against US produce have been removed. We have seen supply issues improve and the outlook for some permanent plantings like nut crops is a little better going forward.

“At the same time – more recently – some commodities like corn and soya bean and some row crops have picked up. It really points to that need for a diversified portfolio where you can smooth out the various commodity cycles across overall farmland experience.”

The most comprehensive US benchmark of farmland returns is the NCREIF Farmland Index, which since 1991 shows US farmland returning 10.7% annualised, including both income and appreciation. The index is capitalised at US$16bn and the bulk of the investors are US pension funds.

Shen says: “There are many reasons why agricultural land appreciates, including improving productivity and scarcity. Sometimes, when the land is coming out of farming and going into higher and better-alternative use, it attracts higher capital appreciation.”

Currently, PGIM Real Estate manages more than 150,000 acres of farmland across the US, producing row crops (maize, wheat and soybean) and plantation crops (from nuts to citrus). It does not invest outside the US.

Loans, however, remain the larger part of PGIM’s agriculture investment. Of its total agricultural assets under management, debt accounts for more than three quarters.

Prudential Financial’s experience with lending to the agriculture sector has been positive, Shen says, with a low loss rate since the 1880s. “That is why we continue to expand and continue to grow our lending business,” says Shen, adding that Prudential is looking to expand its lending to new markets, like Australia.

“If you are looking to grow, it is probably easier to grow by lending than through equity investment,” she says. “Right now, there is a lot of capital requirement in agriculture – I would say agribusiness is the fastest-growing segment. Demand is driven by new technologies and capital improvement is needed to keep up with new technologies and the automation of processes in the food supply chain.”

Shen says debt is also easier to deal with than equity investment when entering new markets because it is a safer position in the capital stack.