Episode 05: Farmland Investing with Iroquois Valley Farmland REIT
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MENTIONED IN THIS EPISODE
Alex Mackay from Iroquois Valley
Justina Lai from Wetherby
TRANSCRIPT
Linda Rogers: [00:00:00] My name is Linda Rogers, and this is Investing Forward. Let's talk about farmland. This may seem off topic for an investment show, because you don't often hear people talk about investing in farmland. Well, many big companies, foundations and investors have been doing just that for a while now. Fresh water and land are increasingly valuable resources and farmland, which is considered a real asset, has shown to be uncorrelated to stocks and bonds and not affected by economic shocks. How can you obtain exposure to farmland without, of course, having to directly buy a farm? You can buy a farmland REIT, which stands for Real Estate Investment Trust. That is a company that holds a basket of real estate properties from residential properties, commercial, hotels or even farmland. While learning about farmland investments, I also learned how unsustainable conventional farming is. The two major farming areas in the U.S. are the Central Valley in California and the Corn Belt in the Midwest. California is depleting water at unsustainable levels and the Midwest has plenty of water, but their problem is an unsustainable rate of soil erosion. For this episode, we're going to focus on the Midwest region and the importance of soil health, which us non-farmers may not be educated on, but it's worth exploring if you decide to invest in farmland. In the Corn Belt, farmers are incentivized to grow the same one or two crops each year, typically corn and soybeans. That leaves the soil depleted of nutrients and requiring the heavy use of pesticides and fertilizers. These chemicals don't stay contained on the farm. Depleted soil is much more susceptible to flooding and runoff, and these chemicals end up in rivers, lakes, oceans and drinking water. The bright side is there are farms that are doing things differently and highlighting just how successful simple solutions can be. Steps such as practicing no-till farming, using cover crops, rather than letting the ground go bare in the winter, integrating animals on the farm versus just growing vegetables, or adding even just one additional crop to offer more diversification. All of these things improve the soil health, build a more productive and even more profitable farm. So why aren't all farms implementing these steps? It's a money issue. It takes new skills, new equipment, time and money to get through that transition period. Farming is a brutal business and most farmers don't have a cash cushion to transition from these conventional to organic methods. Farmers also lack land security. Many are renting the land they farm and it can be sold out from under them at any time so they don't really have the incentive to improve the long term health of soil on land they might not even be farming next year. It's also difficult for them to obtain a mortgage if they want to purchase the land. So this is where Iroquois Valley Farmland REIT comes into play. Alex Mackay from their team is joining me to discuss how the founders saw these roadblocks that were preventing change. Unlike a typical farmland REIT, Iroquois buys farmland mostly in the Midwest, where the soil has been depleted. They work with the experienced farmers to help them transition to organic, regenerative farming practices. We're going to talk about the logistics of this relationship, why it works, and answer your questions about adding farmland to your portfolio. After the interview with Alex, stay tuned for my conversation with Justina Lai. Justina is the Director of Impact for Wetherby Asset Management. She previously worked at the Rockefeller Foundation and has extensive knowledge on investing for a financial return in addition to an environmental and social impact. So you won't want to miss her perspective. First up, Alex Mackay from Iroquois Valley Farmland REIT.
Alex Mackay from Iroquois Valley Farmland REIT
Alex Mackay: [00:04:03] Hey, I'm Alex Mackay, I am the Vice President of Investor Relations for Iroquois Valley Farmland REIT. We're an organic farmland finance company and I can explain what that means. I'm coming to you from Portland, Oregon, where I live with my wife and two sons, Homer and Dewey. And I'm originally from New England, from New Hampshire, actually. But I've been out west. I've been back and forth between the coasts for a while, but been working out west the last three and a half years for Iroquois Valley. The company is based in Chicago, in Evanston, just north of Chicago where Northwestern University is. And I've been working remotely now for that whole time. So I'm a little bit used to the work from the home office routine. But yeah, I'm excited to be on the show. Thanks for having me.
Linda Rogers: [00:04:48] Great. We're excited to have you. So just tell us a little bit about Iroquois Valley.
Alex Mackay: [00:04:53] Started as Iroquois Valley Farms in 2007 when the two co-founders, Dave Miller and Dr. Steven Rivard, came together. They were college roommates at Loyola in Chicago. They both went on their own ways, career-wise. One, into emergency medicine and then as a specialist and the other into corporate finance. And they came back together sort of at an inflection point, the 2007/2008 financial crisis, where they had both had huge roots in the rural communities south of Chicago that had were agricultural communities producing row crops that they had grown up around and in, and they were very dismayed by sort of the confluence of a bunch of negative impacts of that agricultural system. So one was just the the sheer chemical nature of commodity agriculture in the Midwest. So heavy use of pesticides and herbicides along with synthetic fertilizer and not only sort of the big picture impact themes that we now know a little bit more about, but rather just the direct impact on farmers who spent their lives spraying chemicals and incidents of cancer and Parkinson's and other significant problems for the farming communities that resulted in using those chemicals their whole lives. That was sort of the medical and human health reason that they decided to start Iroquois Valley. Another was just the finance reason. Organic farmers, and we can get into this, because of the way that you when you transition a farm from conventional to organic, you it takes you three years to get that USDA certification. The cash flow schedule of that business is not attractive to traditional banks and traditional ag lenders. So there's a complete lack of financing for farmers who want to operate and expand organic farms. And the most expensive thing for any farmer, organic or not, is the land. And so Iroquois Valley was really founded to to attack that problem, to figure out how they could offer land access to farmers who were trying to expand their organic operations. So that was the finance part. And then, of course, the environmental part as well, away from sort of the direct negative impacts of conventional farming on human health, which I missed in my original description, but also extend to the food that we're eating right there. And so I guess that's part of the larger impact theme as well, that the food being produced in these communities was so it was so negative to our overall human health. When it's basically soybean oil and a bunch of refined processed foods, corn syrup, a bunch of refined processed sugars that are coming out of those agricultural communities, it's not really adding any sort of nutritional value to the population and in fact, it's causing a health care crisis. So, Dr. Rivard, actually at our annual meeting, which happened a week ago online or a couple weeks ago online, talked about how the cost of health care now is. I think 2,000 times was what it was 50 years ago.
Linda Rogers: [00:08:07] And Alex had me fact check that. So what was said was we are less healthy than we were 30 years ago, despite a 2,000% increase in the cost of health care. You can find that at IroquoisValley.com/webinars. There's the annual meeting that just happened and about a minute 8, Dr. Rivard will speak to this topic.
Alex Mackay: [00:08:29] So and then, of course, the impact on the pollinators, the Mississippi watershed leading into the Gulf of Mexico. A lot of people, even kind of the most environmental neophytes know about the dead zone in the Gulf of Mexico, where the water is negatively impacted by all the nitrogen and phosphorus that goes right down the Mississippi from all those agricultural states to the Gulf of Mexico and kills off the fisheries there to the to the economic detriment of those communities and also clean air, clean water, more locally. So there's this big issue and such a wide array of negative impacts, that that's why the company started. So we really are steeped and sort of originated from making a positive impact. It's not just a company that has impacts goals internally. Our entire existence is around making a positive impact socially, environmentally and financially as well. So it's exciting company to be part of.
Linda Rogers: [00:09:35] Can you go through the 2 different types of investments that you offer?
Alex Mackay: [00:09:39] Sure. So we raise money through 2 securities. It's an equity security and a debt security. So in one, you are becoming a stockholder or an owner in the company and your returns are really tied to the profitability of the company on a year to year basis. But also the fundamental return is really the value of the land over time. And we can talk about farmland investment in general and sort of how that's been something that institutions and pension funds and large pools of capital have been doing for a really long time. You know, the Harvard endowment and CalPERS and TIAA-CREF, these are all institutions that people know about that own billions of dollars of farmland around the world, much of which is managed really poorly to the environmental detriment of the communities where it's being farmed, not to mention the labor standards and other things. And then the debt security is a promissory note. And for people who don't know what notes are, they're very similar to a bond. You're loaning the company an amount of money and then we're paying a fixed income, a fixed rate of return back to you in semi-annual payments. And then at the end of that 5 year term, right now, we've had 3 year notes and 7 year notes, but right now it's a 5 year note, we're returning the principal back to you. So I would say there's definitely a similar, there's a lot of shared reasons why people might choose either of those securities to invest in us. But there are some sort of defining factors why someone might ultimately go in one direction or another. One of them is that our equity security, our stock, is available to both accredited and non accredited investors. So versus the note, which is only available to accredited investors. So that's something that we've worked really hard to do the last 18 months, is make a more accessible stock offering. And that's exciting. People have heard about sort of crowdfunding and whether it's, you know, direct real estate deals on sites like Fundrise or CrowdStreet or even like some of those, not Kickstarter necessarily, but some of those sort of Kickstarter iterations that were about investing we fund is one that people might know. We're kind of a cousin of that. But it's the biggest, most broad offering you can do. It's a $50M dollar offering of our stock at a $10,000 minimum. So that's really our flagship product, the stock, and that's where we raise about 70% of our capital. And as we stand here today, we have about 425 equity investors and 130 debt investors. And the average investment across those securities is $100,000 dollars, but the investment amounts ranged from $10,000 dollars all the way up to $5M. So we have this really cool cross section of impact investors that have invested in us and we're now approaching around $60M of assets in our company and we don't have a lot of bank debt at all. It's really capitalized by investor equity. And then the second piece of the capital stack is really investor debt. So it's a lot of independent people, institutions, foundations, nonprofits that have chosen to put their money in Iroquois Valley to make us the company that we are today.
Linda Rogers: [00:12:59] Good. And why would an investor integrate farmland into their portfolio?
Alex Mackay: [00:13:03] Sure. So even though I'm not a financial advisor, this is something that even unsophisticated investors might know, which is there's this idea of modern portfolio theory where you a lot of people know you're balancing your stock and your bond portfolio where you might do, depending on your age and your risk profile, you're going to do a balance of like 60% stocks, 40% bonds. Well, if you kind of flesh that out even further and go to the next tier, you see that you want to diversify by asset class. So, you know, everyone knows that people invest in things like precious metals, gold and silver and mining, historically, coal and aluminum, steel, and then I guess iron ore. And then, you know, in that world of all these different asset classes, commercial real estate, residential real estate, there's all these different things. You also have farmland and farmland traditionally has been what's called a non-correlated real asset. So it's non correlated to the public equities market. A sort of traditional retail investor knows all about the stock market somehow continues to go up every day, even as we see the economy crashing. So the whole other podcast, but what the value of farmland is. So there's a few values, but one of its fundamental values is that if the stock market goes up 10% tomorrow or goes down 10% tomorrow, the value of an acre of farmland sort of broadly speaking, stays the same because the value of farmland is tied directly to the crops being grown on it and the crops being grown on it are food or animal feed that is ultimately turned into food. I mean, I guess there's also fiber, which is a whole other part of the industry for cotton and for clothing would be an example of that, and now, you know, flax seed for linen and hemp as well. But so what people do, asset allocators do is they say, well, if we invest in farmland, it's a safety mechanism. So we're taking $1B dollars in a portfolio or $100B dollars on a portfolio, and we want to make sure that all let's not bet in one single place. So farmland is the safety mechanism. But the other element of farmland, it's really important to know is that if you look at even just do a USFDA farmland values Google search, you can see USDA website graph where over 100 years farmland actually beats the S&P 500 because it's just tracking along with inflation and with the cost of food. And so you will you will not see double digit growth on farmland in any one given year. I mean, you might coming out of a bubble or something like that. But the reality is it's kind of this steady Eddie over time. And that's why when you have, like family office money, where there's generations of people who are preserving their wealth, farmland is always in a portfolio like that because they know that it's something that's going to be there 30, 40, 50 years from now. Even if those returns on a year by year basis aren't. So that's the asset class. It's something that kind of is a nice anchor. And, you know, with our $10,000 minimum on the equity side, I'm not I'm not I'm not an adviser. And I'm not going to make portfolio recommendations to anyone because I'm not I don't have the ability to or the expertise. But I would say that at some point, if you're managing money of some size and you want to start diversifying that for $10,000, that you might have a tiny percentage of your portfolio in farmland and then. As I mentioned in the beginning of our discussion, the impact of just general sort of farmland can be really, really negative to the environment and to the people who are ultimately doing the field work and to the nutritional health of human beings. So. It's not just let's throw some money at farmland, it's what is this farmland I own, how are they farming and what chemicals are they using? What water bodies are being impacted by it. What are the fair labor standards on that land? And so that's what we're trying to do. We're trying to be a retail farmland security that people know offers them very similar characteristics to traditional farmland from a portfolio management standpoint, but has all of the positive environmental impacts that they want when they're shopping at the farmer's market.
Linda Rogers: [00:17:32] Can you go into more detail just in terms of what happens when an investor writes you a check?
Alex Mackay: [00:17:38] Sure. Right. So let's go back to the 2 investment options. So let's say someone decides they want to invest in us and they're going to put $50,000 in our equity shares, which is our stock. Great. They write the check, they fill out a subscription agreement. What happens then? First of all, what are we doing with our money? So what we're doing is we are as efficiently as possible securing new farmland for farmers that have approached us with the need. So this is something very, very unique about Iroquois. Even if you strip away all the other sort of very boutique and unique things about us, we are not identifying land that we think will have an increased value five, 10 years, 30 years down the road and buying it on speculation. We are actually reacting to individual farmers who have approached us with financing needs. You know, oftentimes the traditional approach is an existing organic operator. I have a track record. I have a market. I am oftentimes the third or fourth or fifth generation farmer in my family. I grew up on the farm. I went got a four year degree that included agronomy and maybe some finance. I'm back now on the farm and I want to go out on my own, out of my grandfather and my father's land or my my parents, my grandmother, whoever it was. So they're looking to us to finance the land because the land is the most expensive. And so we're taking that money. We're buying the farm and we're leasing it to the farmer. And the farmer is paying us a yearly lease based on the purchase price. And then they're also paying us potentially variable rent if they have a good year. And we can get into the weeds there and I won't right now. So we're buying farmland with the money. And that's really what you own when you own our stock, you own a diversified portfolio of organic farmland. We also do mortgages as a quick aside. So it's not just only us buying and leasing land, they're also farmers who come to us and actually put 25% down for the land and then we're financing the rest of the leasing holder. We're acting sort of like a private bank. So a lot of times these farmers have identified the land themselves and they're saying that's the property I want and then we're negotiating with the seller, we're going to the auction and we're making it happen. So you as the shareholder are locked it up for five years. So it's not traditional public equity liquidity. You can't trade our stock on a daily basis, although we can be custodied with some traditional custodians and we should get into that. You can't buy and sell our stock on an exchange. It's a it's an agreement between us, the company and you, the shareholder. And you're going to own your stock for at least 5 years. And the way you can see your stock, appreciate or depreciate over time, is an annual valuation. So we get an appraisal of the entire portfolio on an annual basis from a third party, and they give us the net asset value of all of our assets and then we derive a share price from that. And that share price is what we're selling stock at for that calendar year. And we're also cashing investors out who've reached that 5 year window where cashing them out at the same price. So you're basically going to realize your returns, your losses on paper until you're eligible for redemption and you also are eligible for a dividend. So as a real estate investment trusts or REIT, which some people have certainly heard of, we are required to pay a dividend on any net income that we have to pay 90% of our annual net income as a dividend to our shareholders. And that's for tax reasons. That makes us very tax efficient. We don't pay corporate income tax. The the positive net income is passed on to the shareholders who pay tax on it. So in years where the company is profitable based on the lease and mortgage payments, we're getting less our operating costs. We're paying out to shareholders a dividend. So that's the lock up on the notes. It's a five year term and then your principal comes back. There are some emergency liquidity provisions on the notes where you can get out early for a small fee. But on the equity, the SEC requires us to treat every single shareholder the same. So there is no oh, actually, I need that money back 3 years from now. You're locked up for 5 years. And so we really try to encourage people to think about the chunk of money that they want to invest in us and align it to that long term strategy because one of our biggest impacts as a company is that we'll never sell the land out from under a farmer. We are a buy and hold asset manager who believes that the only way that these farmers will ever put their time and money and heart and soul into converting the land organic is if they have a long term partner that will allow them to make generational planning for soil science, for crop rotation, for capital equipment improvement, for management. There's no point in just having a 5 year lease with someone where they're going to get kicked off and then they certify organic. They would never do that work and make that environmental and financial investment. So we're cashing investors out using new fund raising and sometimes debt to get them out. But really the point is that we've raised a lot of money with individual retirement accounts, IRA money, 401k money, because if there's money in your portfolio that you're just going to sit there for decades and you don't really know what's going on with that, there are now ways where you can find a custodian that will allow you to invest in Iroquois Valley and you can see that non-correlated real asset over time appreciate and be a safety mechanism for your portfolio and you could be supporting farmers on the ground who are doing the sort of work you want for the food supply and for our natural environment. So that's pretty cool.
Linda Rogers: [00:23:14] Can you share what the return has been for your fund?
Alex Mackay: [00:23:17] Sure, so since inception our total return, well, our our average annual return on the equity is above 8%. It's right around 8%. What's interesting there, though, is a huge amount of the appreciation in the stock was in the first few years coming out of the sort of trough of the financial crisis and then land had a boom. And then we've been kind of incrementally growing and then flat. We actually have been down the last few years. So we have plenty of shareholders who on paper have lost money in the last two years. So I want to be transparent about that. We do see that land prices are tightening this year and the market is pretty competitive. So we could see whether that's there's a lot of things going on, including people from the cities moving to the country and making agricultural land more valuable. And also, I think just food supply issue is growing population. I mean, everything that's there. But we do feel that on sort of a total return standpoint that our benchmark is around 5% per year, that maybe 5-7 on the plus side, but that if you could look at this at a at a 10 year clip and say, what is my expected return over the next 10 years, you know, it's going to hopefully be between 5 and 7% per year, which is tracking what the USDA estimates farmland values appreciate over time, around 5, 6% per year. So there might be years where our stock went up over 20% per year based on land values. But again, last year it went down just just less than a percent. So, yeah, that's the return profile situation.
Linda Rogers: [00:24:58] And can you tell us about the location of the farms and the diversification of the fund?
Alex Mackay: [00:25:03] When the company started in Chicago, like you talked about at the beginning, we're really working locally. So there's a huge amount of risk buying one farm and the risk is mitigated as you grow because you have every farm is going to go through weather challenges, crop price challenges, pest challenges, operator challenges. Farms are just full of risk. Farming is a very risky business. And so as you grow, you mitigate your risk. But in the beginning, one way that the founders of the original shareholders decided to mitigate risk was really to reinvest in people that they knew. So we had a really large concentration in Iroquois County, Illinois, which is in north central Illinois. And that's where the name of the company originally came from. There isn't a big valley there, we like to say, but there is a dip. So so then we started diversifying by county. And I know that before I was ever with a company that used to advertise how many different counties in Illinois and Indiana we were in. So we have now diversified to 15 states as far west as Washington and as far east as Maine. But if you look at our map, the heavy concentration of the asset value is still in the Midwest. So Illinois, Indiana, Minnesota, Wisconsin, Iowa, Ohio and then upstate New York, Montana has a fair amount. So we're diversifying. And as we grow, that's really what we plan on doing. And we continue to make investments with operators that we know and understand and in deals that we've done a lot of, because that's just the most cost effective way of allocating money. If we were to get an interest from an organic avocado farmer in California, we certainly have those phone calls and we start to put them through our underwriting process, but we don't understand the water rights situation. We don't understand the weather. We don't understand the crop markets. We don't know the community there. We don't know what happens if the farmer decides they don't want to farm any more. So trying to make bets where you're mitigating your risk to diversify to different regions while also making sure that you're not basically putting investor capital in places that it's too risky is just a tightrope that we walk. So we're excited to have now about 14,000 acres in 15 different states. We will continue to diversify across region, across crop, across the type of people that are farming. Diversity and inclusion is certainly something that our company is accelerating our efforts in for the last six months. And we're proud of that. But we will continue to do a lot of traditional organic crop rotation in the Midwest because that's really what our bread and butter is, and because that's where a lot of the negative environmental impact of American agriculture is happening. A story for you, and this is one we tell a lot, but I think it's for good reason. Our first tenant farmer ever, a gentleman named Harold Wilkin in Iroquois County. He was an organic farmer who owns his own land and was also leasing land and decided we asked him to farm the first property that the founders ever purchased with friends and family. And he has grown with his son and other family members and cousins in north central Illinois into one of the largest diversified organic farmers in the state and he's actually vertically integrated and built himself a flour mill with a bunch of incredible technology from Scandinavia, a lot of it, and I'm sure if he ever heard this, I'd screw up some of the details, although I have been in the mill and his flours are delicious. So he's now growing rotational grains, including incredible heirloom varieties. He has experimental farms with University of Illinois and I think University of Wisconsin, where he's trying seed breeding and doing all this incredible work. And then there are also milling all those grains into flours and whole grains and selling direct to the consumer, selling in originally co-ops and small grocery stores. Now they're on Whole Foods from St. Louis to Chicago and in between and has an amazing mail order business. So Iroquois Valley is the land access partner there. And I think it's really important to kind of give context to the story. We haven't financed everything that Harold's done, and we're not the farmers growing the food or even his business. He is an entrepreneur who is, would have succeeded, I mean, I guess I shouldn't say this, but would have made maybe would have succeeded without Iroquois Valley or not, he would have found a way. Harold's an incredible person, an incredible business person. With that said, the most important piece of this financial structure that allows what was formerly just commodity, extractive food production to grow into a local food shed that is not only growing grains for flours that people are eating at high end bakeries and restaurants in Chicago and at Whole Foods and giving grains to distillers and breweries in the area. The most expensive piece in that entire puzzle is the land. The land to farm these grains is a $1M plus for the normal parcel, and farmers don't have $300K in cash to put down to get a traditional bank to give them a mortgage. Nor will that bank even give them a mortgage. So I think when I have conversations with people about why we exist, it's out of need. It's not because we want it to force a fuzzy wuzzy impact investment on farmers in the Midwest. It's because nobody is financing these people and that's what we set out to do. So that story is incredible. Harold was featured in the BBC in the beginning of the pandemic. His sales went up 20% at the beginning of the pandemic because no one could find flour. And they were calling him saying, wait, you have flour? And he's like, yeah, of course we have flour. We grow all the grains and mill it, so we've got flour. So I think it's a story of food security in this ever changing climate pressured world. And just a story about how people think that all the change happens in farmers markets in Berkeley and Brooklyn. And the reality is some of the biggest change we need is in the heartland and in communities where there are incredible entrepreneurs who are growing food at scale and who can make positive impact at scale with financing. These are the people that can really fundamentally change what a large scale agriculture is doing to our environment and to our communities.
Linda Rogers: [00:31:28] Excellent. The website is IroquoisValley.com. So check it out. And Alex, thank you so much for joining us.
Alex Mackay: [00:31:36] Thank you so much for having me. It was really great.
Linda Rogers: [00:31:39] Next up, Justina Lai from Wetherby Asset Management. Hey, Justina, can you just go ahead and introduce yourself?
Justina Lai: [00:31:48] Sure, my name is Justina Lai and I'm the Chief Impact Officer at Wetherby Asset Management. I grew up mainly on the East Coast. My parents, both of them worked for IBM. And so if you've heard the joke, the joke is "I've been moved". And that was certainly my experience growing up as a child. I lived in different places every 2 to 4 years. And and frankly, I would say I've probably taken that mindset into adulthood with me. So as an adult, I've also lived in a lot of different places around the country as well as around the world.
Linda Rogers: [00:32:22] I love it. Well, can you tell us a little bit about Wetherby?
Justina Lai: [00:32:25] We have a little over $6B in assets under management currently, and we work primarily with high net worth individuals and families. We also have a handful of institutional clients as well, and we build custom portfolios for our clients. And that's customized in terms of all of their goals, including impact.
Linda Rogers: [00:32:44] Can you tell us about your role specifically?
Justina Lai from Wetherby
Justina Lai: [00:32:48] Yeah, my role is pretty multifaceted as the Chief Impact Ifficer. I have a primary responsibility for overseeing our impact investment strategy. So that means ensuring that we're providing a comprehensive impact investment offering to our clients, but also thinking more holistically about how impact integrates across all of our stakeholder groups. So who we are as a firm, how we operate internally, what our functions look like, how we work with our clients, how we treat our employees, how we steward our overall environmental impact and how we operate within the larger community.
Linda Rogers: [00:33:28] How did you get into the industry? Can you just tell us about your background?
Justina Lai: [00:33:32] Yeah, I started my career pretty traditionally, so I started my career in investment banking before moving over to the buy side. So I was doing growth, equity and leveraged buyout investments in the US and Europe. And it was one of those things where I really loved what I was doing in terms of a skill set and a mindset but didn't find it to be personally meaningful or personally aligned with my overarching vision. I've always operated with this idea of wanting to put more back in the world than I was taking from it, or what I was extracting from it. And it didn't feel as though I was really doing that, at least not in my role as an employee. And so I wanted to understand how I could take that as a profession and do something that would put more back in the world. And so I went back to business school to try and figure out what that might look like. And I was really fortunate to find my way to investing in agricultural enterprises in Rwanda between my first and second year business school. And that was my light bulb moment. My goodness, you could do private equity investing in a totally different challenge, totally different context, but really have meaningful impact on people's lives. And that I was hooked and I was really fortunate that the Rockefeller Foundation at that point had just coined the term impact investing, had just kicked off a body of work around that. And so I joined them to manage a portfolio, program related investments, which were Rockefeller's impact investments, and also to make grants to help build the field of impact investing. And so that really kicked off my journey in impact investing. I've been doing that ever since. It's been about 12 years. And after Rockefeller, I wanted to do something a little bit more on the commercial side. What Rockefeller was doing was incredibly innovative, but I didn't feel as though it was particularly scalable and where the vast majority of investment assets were. And so I joined a firm called Sonen Capital, which is a dedicated, impact asset management firm before joining Wetherby in 2015.
Linda Rogers: [00:35:40] And at Wetherby, how do you integrate impact investing into the investment process?
Justina Lai: [00:35:46] Yeah, so we have integrated impact considerations throughout our entire investment process. So environmental, social, governance considerations are part of our core due diligence. The nuance though that I will point out is that we don't qualify all investments as impact. And so, again, it is part of our due diligence process because we believe that every single manager should be aware of the impact related risks and opportunities. We think they're incredibly critical. We believe they are financially material and we think every manager should be thinking about these issues. But it doesn't necessarily disqualify a manager or strategy for investment just because they aren't necessarily pursuing an explicit impact mandate. It's just that they're not qualified as an impact investment. And we have a framework by which we classify the impact that an investment is having. What is the impact approach? So what is the way in which an investment is creating impact? What is the impact objective? Meaning, what is the impact goal of this investment? What is the impact sector and what industry is impacting created and geography? And we use that classification framework really to create a matching process by which we can build client portfolios and integrate impact investment opportunities into client portfolios based on the individual theories of change that we've developed with them and that we've integrated into their investment policy statements.
Linda Rogers: [00:37:20] So Wetherby started as a traditional financial firm, like many firms out there today. They're doing so much more now in impact investing to have this framework that you just mentioned. Were you there during the transition? I'm just curious kind of what led the firm to start looking at and considering impact investing.
Justina Lai: [00:37:41] So yes and no. I would say that, you know, Wetherby, similar to me, actually, Wetherby has been making impact investments for about 12 years or so now. And it really started more in response to client demand. So clients started asking about it. And I think unlike a lot of other firms, Wetherby said, OK, well, this is really interesting. We don't know much about this. There was a fair amount of humility in that and recognizing that it would be a learning process and a journey over time. And so Wetherby started learning about it, eventually hired a firm called Imprint Capital to sub advise on impact investment opportunities. And that relationship worked really well up until the point that Imprint was acquired by Goldman Sachs in 2015, which I think was a real sea change in the impact investing space. That was a real, that along with a number of other shifts in the marketplace, like BlackRock establishing an Impact Investment Group, for example, really showed that the industry was shifting to the mainstream. And that gave Wetherby an opportunity to take a step back and think about what it wanted to do within the space. And it was at that point that the firm decided that they were ready to bring the capacity in-house and really think about developing a proactive effort around impact investments. And that's what brought me to the firm. To me, I had known Deb Wetherby, who was our founder and CEO. I had known her for a number of years. She had a passion and interest in the space as well, was a real leader in the forefront of pushing Wetherby in this direction as well. And she had reached out to me and said, hey, thinking about bringing this in-house, thinking about building this out much more proactively. And for me, it was a no brainer to be able to be able to be at the forefront of building out a proactive, positive effort, bringing it to clients proactively and really, you know, developing a service offering that was incredibly aligned with Wetherby's values that were already in place, but could also really support clients in integrating investment opportunities that not only aligned with their values, but we fundamentally believe serve to reduce risk and enhance returns.
Linda Rogers: [00:40:00] Great. OK, well, we're talking this episode about farmland, which is a type of real asset. Do you at Wetherby have an allocation to farmland in your portfolios?
Justina Lai: [00:40:12] At the moment, not explicitly, no. It is not part of our sort of strategic asset allocation. We certainly follow asset classes like farmland, like timber, but we have not we are not currently we do not currently have a strategic allocation of farmland. I think there are benefits to various forms of real assets. As Alex mentioned, there's the inflation protection that's built in. There is the current yield that's generated. In the case of farmland, it's obviously from the sale of farmland products or farm products. You know, there is downside protection in the form of investments and hard assets. It tends to be non-correlated with other major asset classes and other financial assets. So absolutely, we believe there is a role for real assets to play in a portfolio and we do have a strategic allocation to real assets. It just so happens that farmland does not currently deliver the level of absolute returns that we're looking for because the majority of our clients are taxable investors and long-term investors. We don't necessarily we don't value necessarily the current income component as much as other types of investors, perhaps institutional investors or nontaxable investors.
Linda Rogers: [00:41:33] Can you share what the other real assets are that you will invest in?
Justina Lai: [00:41:38] Yeah, you know, we've done a fair amount of renewable energy infrastructure, so utility scale solar and wind, as an example.
Linda Rogers: [00:41:48] What did you think about the interview with Alex? Had you heard of Iroquois before?
Justina Lai: [00:41:53] Yeah, I am familiar with the Iroquois Valley. I've known them for a number of years. I've known them from my prior roles as well, so I followed their progress over time. We have dug in a bit on their strategy, but because we don't have a strategic allocation to farmland, it didn't make a lot of sense for us to do full due diligence on them. With that said, we think they can play a certain role in certain client portfolios that have explicit mandates around sustainable agriculture.
Linda Rogers: [00:42:28] Ok, so you have an allocation to real assets in your core portfolio, not farmland. But if someone expresses an interest in a farmland, you might consider it?
Justina Lai: [00:42:38] To reiterate, we believe that integrating impact considerations and impact opportunities into client portfolios can serve to reduce risk and enhance returns. However, we also recognize that some clients may have very direct targeted impact objective for which it wouldn't be necessarily financially prudent, whether it's too concentrated in a single sector or a single geography, perhaps it's too illiquid where we would not necessarily feel comfortable integrating that into a client's core investment portfolio. In those cases, we have established what I'd call carve-outs that are sized appropriately given the client's overall situation and their larger asset allocation and their larger portfolios where we can have, you know, where it's still not necessarily concessionary. We're not necessarily looking to trade off returns for the sake of trading off returns, but where we can take additional risks, where we can be much more geographically or geographically concentrated or concentrated in a single sector, or take more risks with emerging managers by mandate for that particular portion of a client's portfolio and again, sized in a way in which we don't believe we would be compromising in any way, shape or form our client's other objectives. In that case, we have actually invested for one client in Iroquois Valley's soil restoration note. So we have not invested in the sort of equity in the REIT portion, but we have invested in one of their notes.
Linda Rogers: [00:44:25] Ok, great. Thank you so much for sharing and I just really appreciate having you on. It's so helpful to hear what other advisory firms are doing, especially ones like Wetherby that are really at the forefront of integrating impact investing. So just to wrap it up, can you go ahead and share your website and the best way for people to stay in touch with you?
Justina Lai: [00:44:45] Our website is www.wetherby.com. That's a great way to stay in touch with us. You can certainly sign up for our newsletter there. And LinkedIn is always a great way to find us as well.
Linda Rogers: [00:45:02] Real assets, or physical assets such as precious metals, energy infrastructure, real estate, or land like farmland. For an impact investor, real assets could be sustainable timber, solar and wind projects like Justina mentioned, or an organic farmland REITs, like Iroquois. What I like about Iroquois is that it expects a similar return to a traditional counterpart, but it is different in that it's contributing to solutions - from reduced pollution, water safety, and land security for farmers. Check with your advisor to see if you should be incorporating a slice of real assets into your portfolio and if so, which type? Each real asset has its own profile in terms of its liquidity, projected income, risk and return. So you want to keep that in mind given your financial and tax situation. There's a lot to learn about this topic. So check out InvestingForwardPodcast.com to view the contact information for Alex and Justina and for the links mentioned in today's episode. And for a family movie, check out The Biggest Little Farm on Netflix. It goes with the theme of this episode and kids, as well as adults, will love it. See you next time.
My name is Linda Rogers. You were listening to Investing Forward. If you liked what you heard, leave us a rating, subscribe, and stay tuned for next time.
Linda Rogers is the owner of Planning Within Reach, a registered investment advisor. Planning Within Reach produces the podcast and makes it available on its website and through other distribution channels. Linda Rogers and any guest on the podcast are providing their own views and opinions and are not necessarily the views and opinions of Planning Within Reach. Nothing on the podcast should be construed as a solicitation or offer or recommendation to buy or sell any security investment. Advisory services are only provided to investors who become Planning Within Reach clients pursuant to a written Investment Management Agreement. Clients of Planning Within Reach may hold positions in securities discussed in this podcast. Past performance is no guarantee of future results. All investments involve risk and may lose money. The Investing Forward Podcast is for informational purposes only and should not be relied on for any investment decisions. Consult with a financial advisor, accountant, attorney, or conduct your own due diligence.