February 21, 2022
Lisbon, 15 February 2021
Dear Investors and Friends,
I am writing to update you on recent developments at TLG Management Partners, the investment and operating platform Joaquín Labella and I co-founded in 2016 to turn around and manage underperforming South American farmland properties, as well as our plans for 2022.
When life gives you lemons, make lemonade
We were unable to travel and meet prospective clients in the early stages of the COVID-19 pandemic. We thus had plenty of time to reflect and find new ways to continue improving our management of farmland assets.
We spent many months on the ground consolidating our portfolio of properties and leases, optimising management structure and processes, growing and developing our local team, building cattle operations from scratch in farms previously leased to third parties, and rebalancing our geographical exposure away from increasingly difficult markets such as Argentina.
We did not grow our business as we would have liked to. But thanks to this interlude, we were able to substantially improve our farmland properties, which translated into superior cash flow generation and capital appreciation across the entire portfolio.
All things considered, we came out of this pandemic with a significantly better performing and more resilient organisation in place.
Winter is coming
Economic uncertainty. Financial markets volatility. Major supply chain disruptions. High commodity prices. Rising inflation… All these factors are driving renewed interest in farmland, a defensive asset class that offers compelling risk-adjusted returns and provides stable income, strong diversification benefits, and a hedge against increasing prices.
We welcome this change in investor sentiment and increased awareness about the role farmland can play in de-risking investment portfolios - not just at times of economic stress.
But it was not always so… we still bear the scars from launching our business in 2016 when depressed commodity prices weighed heavily on investors’ minds. We appreciate being now able to talk to a receptive audience that, looking past pre-conceived ideas, understands that Uruguay is a haven in a complicated neighbourhood that offers a very attractive backdrop for institutional investment in South American farmland.
The Switzerland of Latin America
Uruguay is a small country wedged between Argentina and Brazil with - as the tired cliché above implies - an unassailable reputation for reliability, transparency, and quality.
The country combines abundant farmland, rich soils, plentiful water resources, a temperate climate with a transparent market, the world’s first national livestock traceability system, and a dollarized economy that welcomes foreign direct investment.
An unassuming agriculture powerhouse with plenty of unexploited potential, Uruguay should continue producing a growing share of the grains and high quality, sustainable animal protein that the world demands in ever increasing quantities.
We manage 20,000 hectares of Uruguayan farmland to produce beef, soybean, rice, and timber and plan to continue growing our local operations to consolidate our position as the country’s single largest institutional manager of third-party owned agricultural land.
In this respect, we are working separately with two private investors to acquire 20,000 hectares of good quality cattle and crop land. We are also launching this week a capital raise to buyout and expand our existing portfolio.
Experience is what you get when you don’t get what you want
In the second half of 2021, we worked on an improbable transaction to acquire the distressed Uruguayan operation of a listed international food and agribusiness group present in more than 60 countries and with close to $20 billion dollars in assets.
We had learned previously that this group had discreetly earmarked for sale its 20,000 hectares dairy farms portfolio after accumulating more than $60 million in losses over a decade. Spotting an opportunity, we developed a comprehensive business plan detailing how we would acquire this loss-making dairy business and convert it into a profitable conventional cattle operation, following the blueprint we developed at Villa Lucero and El Tauro & Cabatir.
We then partnered with a European investor and submitted an indicative non-binding offer to acquire the group’s Uruguayan subsidiary at a price that valued the underlying farmland below 70% of current market prices. Following months of discussions, we agreed on general commercial terms and carried out a detailed technical due diligence to confirm our assumptions and the viability of our business case.
But once we were ready to enter the final stages of the transaction, the vendor unceremoniously pulled the rug from under our feet, deciding instead to sell the portfolio piecemeal to achieve higher prices in a rising market.
We were disappointed we could not close this acquisition. But looking back, we are pleased we managed to source such a compelling investment opportunity on a proprietary basis by combining local intelligence with credibility as a counterparty to a major international group. We were also impressed by the enthusiasm, diligence, and creativity of our team of agronomists, who built at very short notice a sound plan to convert a loss-making dairy business into a profitable beef operation.
Importantly, this aborted transaction allowed us to showcase our work to our financial partner. Far from being discouraged, they remain more than ever committed to backing us to acquire, develop, and operate farmland in Uruguay.
Opportunity to recapitalise and grow our Uruguayan portfolio
The eight farms we operate in Uruguay are owned by three different European investor groups composed of institutional investors (a pension fund and an insurance company), family offices, and high net worth individuals.
All three groups invested in Uruguayan farmland more than ten years ago and saw their assets gradually lose value under poor management.
When they hired us to turn around their assets, we agreed a scope of work that was as simple as it was restrictive: take over management; address fundamental issues (e.g., soils, infrastructure, tenants); oversee a stabilised land leasing operation; if required, reinvest part of the cash flows generated without asking for new money; and sell the farms once market conditions became favourable.
We have completed our turn-arounds at all eight farms and built a profitable cash flow positive operation. In certain cases we went beyond our mandate, for example convincing our clients to let us build two separate grass-fed beef cattle operations from scratch without investing any new capital.
Yet, many opportunities to add value across this portfolio remain untapped due to the restrictions under which we currently operate. For example, we could convert an additional 6,500 hectares of leased land into cattle operations; consolidate and integrate our cattle business (e.g., managing the herd dynamically across farms, integrating vertically through the entire production cycle); and improving and expanding existing infrastructure (e.g., cattle management facilities, water storage/distribution).
With our clients’ blessing, we developed a detailed business plan to raise capital to acquire this portfolio of eight farms; invest additional capital into expanding, integrating, and optimising our existing operations; and acquire additional properties.
We hired Jones Lang LaSalle (JLL) as financial advisors to support this capital raising which we will formally launch next week. We enclose a short executive summary of this investment proposition.
New website, new video, same old Instagram account
This capital raising exercise encouraged us to build a new, more comprehensive, and more informative website which you can visit here.
We also edited a short film that you can view on the landing page of our website as well as here.
Finally, we will continue regularly uploading pictures of our operation to our Instagram account at @tlg_m.
It is always a pleasure updating you on our activities; please do not hesitate to contact us if you have any question.
With best wishes,
Francisco Roque de Pinho
TLG Management Partners