Q&A: Getting to the Root of Agriculture Investments in Private Equity

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#1: What Should PE Firms Know About Controlled Environment Agriculture?

Agriculture is a growing industry with many ripe investment opportunities for private equity firms. Specifically, climate-controlled farms continue to gain traction for year-round yields, regardless of location or seasonality. These indoor structures allow farms to consistently sell products to various entities, including supermarkets. Recent growth and projected growth make the controlled environment agriculture attractive to prospective investors. 

Some firms and investors are drawn to the agriculture industry’s sustainable nature. There are several environmental, social and corporate governance (ESG) benefits to controlled environment agriculture, including: 

• Less water usage: CEA facilities make it easy to plant soil-free or re-use water. 

• Renewable power sources: Sources like solar or wind energy can lessen power consumption for CEA farms. 

• Less carbon dioxide emissions: Greenhouses and vertical farms require less land and water than outdoor farming. Renewable energy options further reduce emissions. 

Before investing, private equity firms should ensure they understand both the benefits and challenges of controlled environment agriculture. Connecting with knowledgeable advisors from Apex Leaders, such as Peter, can provide in-depth insights during the due diligence process. 

#2: What’s Better: A Vertical Farming Investment or Greenhouse Investment?

Two types of controlled environment agriculture currently dominate the market: CEA greenhouses and CEA vertical farming. Each option operates differently, offering varying risks and rewards for prospective investors. 

Benefits of a vertical farming investment: 

• Lighter operation that requires less ground area. 
• Greater precision control for crops. 
• Cost-effective LED lighting prices that continue to decrease. 
• Potential for reduced lighting needs in the future. 
• Most are not profitable today, but it is a ripe opportunity for venture capitalists. 

Benefits of a greenhouse investment: 

• Cheaper lighting costs with natural sunlight as opposed to artificial LED lighting. 
• Proven long-term success with large tomato, pepper and cucumber greenhouses. 
• Established industry that allows private equity firms to leverage the investments. 
• Most practical and profitable option in U.S., Canada and Mexico.

#3: How Do Controlled Environment Agriculture Investments Perform During a Recession?

The market’s inflationary conditions can cause business costs to increase, resulting in higher prices, less profits and possible losses. Firms can avoid many of these risks with controlled environment agriculture investments. With a high level of fixed costs, climate-controlled farms more easily withstand variable market conditions. 

Outdoor farms face heightened costs from labor fluctuations, water costs and weather disruptions, to name a few. Controlled environment agriculture farms, on the other hand, have one-time facility costs and consistent power costs with lesser labor needs.  

As prices to run outdoor farms increase, prices of their products will similarly increase—bringing traditional produce prices closer to climate-controlled produce prices. The smaller price difference will help CEA farms better compete with traditional outdoor farms. 

Controlled environment farms are also better equipped to handle changes in behavior during recessions. During tough economic times, people are less likely to eat out at restaurants, driving more consumers to supermarkets to purchase products. Produce from controlled environment agriculture farms can meet the demand. 

#4: Which Agriculture Produce Yields the Best Returns?

Before investing, it is integral to understand local demand for specific products. Investors should avoid equating the overall agriculture industry’s growth with guaranteed success. In order to be profitable, investors must make sure a prospective controlled environment farm is producing fruits or vegetables with proven sales in their particular geographic location. 

Specialty products—such as lettuce, leafy greens and strawberries—often come with a high price tag in supermarkets, making it harder to capture as many consumers. These products face a variety of competitors, including organic products, along with products from outdoor growers and other indoor growers. 

It is unlikely these prices will go down until more facilities and produce enter the market. Until then, private equity firms can explore tried-and-true produce for long-term returns. Greenhouses for tomatoes, cucumbers and peppers offer a safer route for investors.

#5: Are There Investment Red Flags in Controlled Environment Agriculture?

Adequately evaluating an investment opportunity is critical to achieving success. There are several factors to consider when assessing controlled environment agriculture facilities. 

Look for these red flags: 

• Dirty inside: CEA farms should be pristine. Harmful bacteria, such as Listeria, can quickly and easily spread inside facilities and contaminate produce. This can cause a myriad of risks to consumers and your investment. 

• Highly unique products: It is difficult to make profits if there is little demand for your products. 

• Small customer base: Farms that sell mainly to one customer pose an investment risk. Choose facilities with a variety of strong customers. 

• Inefficient practices: Seek facilities that institute cost-effective transportation and technology to reduce costs. 

• Not big enough: Make sure facilities are large enough to meet demand. If you intend to sell to a large supermarket chain, for example, your facility needs to be big enough and efficient enough to meet demand. 

Ready to Make Your Climate-controlled Agriculture Investment?

Apex Leaders is ready to help with due diligence and precise-fit advisors to accelerate your agriculture investment, whether interested in CEA greenhouse investments or CEA vertical farming options.