Climate Circle Q&A With Founder Joseph Williams (HBS '99)
-
The specific moment that motivated me to start AgDev was not directly related to climate change. Instead, it was a large and very successful opportunistic real estate investment. Our firm partnered with a superstar local project sponsor (real estate asset manager) and a highly sophisticated internationally recognized large-scale global investor. Together, we purchased a high-quality distressed asset in the private markets, cleaned up several legal and operational issues (it was effectively in a pre-bankruptcy situation), and then within less than a year sold the same asset in the public markets at a 46% IRR off of a US $130M investment.
I had always heard about this public-private arbitrage, but the opportunity to execute a transaction at scale and see the results at this level was transformational for our firm. Even with this success, our Sandbox of Large Scale Brazil Opportunistic Real Asset Investing was not always in favor of global investors. In particular, COVID changed the global investor's perspective towards EM currencies. Hence, our firm sought another method to use our expertise with global investors and at the same time find a way to leverage the private-public arbitrage that can often exist in the emerging markets.
Through a three-year global search that included data centers in China, recycling centers in Southeast Asia, and Solar Energy in Brazil, we determined that agriculture in Brazil was the best way to execute a similar strategy. When our firm met the Carroll family, a globally renowned farming family with extensive operations in both Brazil and the USA, we immediately recognized the opportunity we sought for four reasons:
1. Soybeans, the primary product of the Carroll family in Brazil and many farmers in the Cerrado region, rank among Brazil's top exports. This generates dollar-indexed revenue and substantially mitigates the risks associated with emerging market currencies for investors.
2. We identified a substantial arbitrage opportunity. The cost of capital for soy farmers in Iowa contrasts sharply with that of their Brazilian counterparts, primarily due to the robustness of American capital markets and different sovereign risks in each country. Despite these cost of capital differences, the product – Brazilian soybeans, slightly adapted for tropical conditions – is nearly identical, similarly priced, and destined for the same major trading houses, including Bunge, Cargill, and ADM.
3. My relocation to Europe during COVID-19 opened a new perspective. I was able to envision the creation of a primary debt market in Brazil to support farmers in their effort to expand without the need to clear native vegetation via the acquisition and restoration of degraded pasture. This market would be driven by climate-focused capital, particularly aimed at preventing deforestation. Subsequently, we will establish a secondary market to trade green bonds and stabilize and securitize the primary market loans. Although this approach might not yield the 500+ basis point spread seen in larger, more opportunistic transactions, it promises an attractive spread (150 to 300 basis points) with a significantly positive impact on liquidity which will attract further capital.
4. Finally, this strategy offered the prospect of consistent recurring revenue. As a father with four young kids, I no longer have the stomach for feast or famine nature of opportunistic real asset merchant banking in emerging markets.
-
Our company is dedicated to promoting sustainable agriculture in Brazil and providing a fair cost of capital to forward-thinking soybean farmers to acquire and restore degraded pasture and to commit to non-deforestation. We support these farmers in expanding sustainably through the creation of a secondary market for those loans, which builds liquidity and rewards the right behaviors. Through partnerships with catalytic and climate-motivated investors in Europe, we aim to foster a transformation in Brazilian agriculture that not only boosts productivity but also combats deforestation and reduces the impact of climate change.
This unique approach mirrors the financial innovation of the 1980s when high-yield debt, often referred to as 'Junk Bonds,' played a pivotal role in the formation of important companies like MCI Communications. Just as MCI challenged AT&T's monopoly, we aim to provide a financial alternative to traditional banks in Brazil. These banks do not offer middle-market farmers in Brazil long-term credit for land acquisition. We plan to take advantage of new laws that allow for the securitization of Brazil-based cash streams in US dollars.
Our mission is to build a global debt capital market for climate initiatives in Brazil, with a particular focus on export-oriented agricultural products. While our initial focus is on soybeans, our vision extends beyond this initial product, as we seek to offer financial alternatives for other crops for export that can generate a positive climate impact. What sets us apart is our commitment to delivering measurable environmental impact results and ensure that our financial products drive real change in sustainability and regenerative agricultural practices. Our business model has the potential to revolutionize climate finance in Brazil, unlocking capital for sustainable and regenerative agricultural practices while providing profitability for all stakeholders. As we bridge the gap between primary market loans and secondary market green bonds, we not only address the world's growing protein demand but also create a sustainable, profitable, and environmentally responsible path for Brazil to remain the world's largest agricultural net exporter.
-
The hardest part is keeping the big picture and the long-term goal moving forward while simultaneously creating enough momentum and cash flow to support the team, the company, and my family. For example, last year I effectively was forced to stop working on the core business vision (large-scale climate-oriented capital to finance degraded pasture acquisition) to raise capital for a local currency vehicle (infrastructure and irrigation) finance opportunity. This was needed for cash flow and to keep momentum to support the big vision.
-
I visit farms quite often. On these farms, one often walks through fields. I was told that there are snakes in some of these fields. My thought was that these snakes were almost harmless and of the garden snake variety.
On one occasion, I was at lunch with a successful American farmer who moved to Brazil. Like many successful farmers, this gentleman is very hands-on. I noticed that his left hand was blue and about the size of my head. He had recently been bitten by a snake. He showed me a picture of a snake that he found on his farm. I immediately went and bought the pair of boots that I was told to purchase when visiting farms.
-
During the pandemic, business class upgrades were very affordable. Many African countries have their main diplomatic headquarters in Brasilia. I got a value-priced upgrade on a flight from Lisbon to Brasilia. In business class with me were several ambassadors and dignitaries from Africa. I felt quite important when I arrived at my seat and found myself sitting next to the president of a country! OK, Cape Verde — with its population of about 500,000 — is not China, the USA, or Brazil. But still, I can now say I sat next to a nation’s president on a flight! Not many people can say that!
-
The moral or scientific argument about climate change may have validity in certain environments. However, it is not necessarily the best way to impact change on the ground when talking to a farmer. Change on the ground is most impacted by financial incentives. This is why our mission is to create mechanisms that financially reward sustainable behavior. Farmers, like most entrepreneurs or family businesses, are usually economically motivated.
