#1 Chris Rawley: Agriculture investing through Harvest Returns

Dive into the world of investing in farms, ranches and tech that help meet our growing food needs.

In today’s episode I have the privilege of speaking with Chris Rawley, CEO of Harvest Returns. Harvest Returns is a FinTech marketplace that allows you to invest in agriculture. The platform allows farmers to raise debt or equity funding from investors via crowdfunding.

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Harvest Returns Overview

• 4 investment verticals:
  1. Specialty agriculture (orchards, vineyards, etc.)
  2. Controlled environment agriculture (indoor farms, vertical farms, indoor aquaculture)
  3. Livestock
  4. AgTech
• ~12,000 investors on the platform
• Closed ~50 deals, 9 exited, 6 with above projected return
• Only 4% to 5% of deals make it to the platform after the due diligence process
• 80% of deals that make it to the platform get funded
• Typical capital lockup period:
  • Debt: 1-3 years
  • Equity: 5-7 years
• Mainly for accredited investors

What you can expect in today’s episode

1. How Chris found his way into farmland investing
2. Harvest Returns investment options
3. US farming regions
4. Due diligence process
5. Investor accreditation and barriers to wealth creation
6. Impact of inflation on farmland investing
7. Future outlook
8. Chris’ personal investing experience and tips

Hope you enjoy it!

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Transcript

Nikhil 0:00

Welcome to Value Add Your Edge in Building Wealth. I'm your host, Nikhil Pajankar. Today we're joined by Chris Rawley, CEO of Harvest Returns to talk about farmland investing. Stay through the end for Chris's top tips based on his 20 plus years of investing experience. hey Chris. Thanks for joining today.

Chris 0:23

Hey, glad to be here, Nikhil. Thanks for having me.

Nikhil 0:26

So Chris, we're here to learn a little bit more about Harvest Returns. You guys started, I believe in 2016. Before we jump into Harvest, it would be great if you could tell us a little bit about your background and how you got to starting Harvest Returns.

Chris 0:39

Sure, it's interesting because we run an agricultural company and I'm not really an agriculture guy. I grew up in a city in Dallas. Went to school at Texas A&M, which is an agriculture university. I did spend a lot of time around people who grew up on farms and ranches but that's not what I studied. ended up going into the Navy. So was a naval officer for a long time, and I spent some time in commercial real estate and technology, and working for defense contractors. All the while I was doing that, I was really interested in investing. So I, started investing in real estate, which is where a lot of people start. And of course, stocks and bonds, and invested in just about everything except for farming. I didn't even realize it was a possible investment until, Sometime after the financial crisis when I saw what had happened to a lot of real estate investments and started looking for a way to diversify further. One of the things that, started to be appealing to me was farming and farmland. I had traveled extensively in the military and been to a lot of places where, people are much more reliant and in touch with agriculture than we are. They're in a food system. They don't have all the, the many choices that we have in the average restaurant or grocery store. Started looking into that asset class and decided I wanted to invest in a farm. And at the time, this was back in the mid 2000s. There wasn't really a great way to do that. There were some agriculture REITs, some farmland funds, and of course you could, invest directly into a farm if you had enough capital and if you kinda had to know how and knew what you're doing and had a relationship with a broker and all those sorts of things. So I didn't really like all those options, so kind of took the long way around and decided to start harvest returns to allow people like me who were interested in farming, to invest in it in a much more simplified and streamlined manner.

Nikhil 2:34

So you started Harvest Returns, out of that curiosity, finding that gap in the market that you couldn't actually fulfill your own due diligence and investment options that you were looking for. Tell us a little bit about Harvest Returns. How you guys started, and where you are.

Chris 2:49

Yeah, so at the time we started, I brought on a partner, Austin Manis, who I'd known for a long time. We've done some work together and he has more of a farming background. He grew up working on his family's farms in the southeast United States, and so he brought sort of that, farm angle and I brought the investment angle When we started there was a lot we didn't know about the industry. Over time we've learned significantly, not only about the investment side, but about the production side. So what we do, we have a pool of investors. Right now it's around 12,000 or so investors. They come in. We find deals in agriculture and essentially the farmer. The people who want to invest in a farm or a ranch or an agribusiness can, invest anywhere between$5,000 to whatever they want into these companies. And then we pull the investments together and essentially write a single check to the farmer or the rancher. Regulation D is the SEC exemption we use. Primarily accredited investors, although we do have some ways for non-accredited investors to invest. And, that's essentially how we started. We're close to$30 million in the amount of farms we've funded and we've done around 50 or so deals.

Nikhil 3:54

And what kind of farms, what kind of products are you guys focusing on?

Chris 3:59

So our niche is a little bit different. If you look out today at farmland investing platforms or farmland funds, you'll see that most of'em are focused on what are called row crops or annual agriculture, which is, soybean, wheat, cotton, things like that where it's pretty much focused on the farmland itself, which is great investment. Our niche that we like. There's several verticals. One of them is more specialty agriculture, so things like orchards, vineyards we've done quite a few of. We do controlled environment and agriculture. So this is indoor farms, both large scale greenhouses, vertical farms, smaller urban farms, and even indoor aquaculture. Our third vertical is Livestock, primarily grassfed livestock, holistically raised livestock. There's a lot of different way names for it, regenerative grazing, that sort of thing. But it's essentially raising livestock in an environmentally sustainable and friendly manner that helps rebuild the soil. And the final vertical we do is Ag tech or agriculture technology, and those are companies that are early stage companies generally what one might consider a seed round if you're talking in terms of venture capital. But these are companies that have a lot of growth potential that are using innovative ways to support the agriculture industry. And of course, any kind of early stage company there's a higher risk with that as well.

Nikhil 5:14

So for some of our investors or listeners who might not have as much of a background in agricultural investing, could you lay out what are the different regions that are good for agriculture investing and where you guys are currently present?

Chris 5:29

Yeah, so it all depends on what type of agriculture you want to invest in. If you're looking for something like row crops, you're gonna wanna go to the Midwest, the corn belt, those states where there's a lot of those produced. If you're looking for something like leafy greens or vegetables, that might be in California, although we do that now in all the country with our indoor agriculture farms. So obviously climate is a big factor on where you wanna invest and what type of prop. We do business all over the country. We've done business from New Hampshire to California and everywhere in between. And we've even done a couple of deals overseas. A few in West Africa. One in Belize. We'd like to eventually do more deals overseas, but, as you can imagine, the due diligence is a little bit more challenging with those offerings for us now.

Nikhil 6:15

That makes a lot of sense. We've touched a little bit on the types of deals that you're doing. Could you walk us through what your typical due diligence process is? Mm-hmm. obviously you're looking at a variety of different crops or even AgTech companies. Mm-hmm., right. So just curious to learn a little bit more about your due diligence team and due diligence process.

Chris 6:33

Yeah. First thing that happens generally is a farm or a ranch or business approaches us. They come in via several ways. We have a website that we're always taking submissions from, but sometimes they come in via referrals from other sponsors where we've raise capital successfully. They just look in their network and they're talking and word spreads about us. Sometimes they come in through land brokers. Sometimes other financing sources, consulting partners, you name it, we get deals that way. But the common way is people Google, how do I find money from my farm? So we get those deals. They come in a lot. The first scrub is just What are they doing? Who's doing it? How are they going to do it? What is the level of the documentation that they provide initially? Is there a professional looking pitch deck or business plan? And are they realistic in what they're trying to do? And once it makes it through that really high level screening, we'll usually have a phone call with them. We'll talk through our fundraising process and we'll come to an agreement to raise capital for them. Then we start our real due diligence process We're gonna look at all the typical incorporation documents. Proof of sales. Third party background checks on the sponsors. Dig into their financial models. Both if they're an operating company already, we're gonna look in and see how they've done today, what their debt ratio is, and then look at their proforma plans for the future. How are they gonna make money? Do they have a sales pipeline ready to go that can support their growth? And this is whether they're a farm, a ranch or an AgTech company. It's a similar process. And then, at some point we may go out and visit the farm, but not always. We'll definitely have multiple conversations with the producer. We'll look at the terms that they wanna raise, whether it's for debt or for equity. If it's for debt, we'll make sure that they have the kind of cash flow that they need with some reserve to service the debt. If it's for equity, we'll look at their valuation. Is it realistic? Is what they're asking for, possible, probable in the duration of the offering and then we'll put it all together, put it on a platform and put it in front of our investors, and then they kind of decide from there, what level it gets funded.

Nikhil 8:36

So how many deals have you gone through so far, or closed so far? And then how many have you exited so far?

Chris 8:44

Yeah, so we closed almost 50 If a deal makes it on our platform, there's about an 80% chance that it's actually gonna fund. And of all the deals, I should've probably said this earlier, but of all the deals that come to us, only around 4% or 5% actually make it onto the platform Okay. So it's quite a few deals. Don't make it through the due diligence process. We've had 9 exits. Of those nine exits, 6 of them came out at or above where they were projected to be, and 3 of'em did not. And those happened to be some overseas deals that got impacted by Covid and exchange rates and inflation and things like that, that really took a chunk out of what they were, trying to do. But, for the most part we've been successful, especially on these livestock deals where they've had shorter durations anywhere between 1 and 3 year, debt and then, obviously the equity deals are tend to be a little bit longer.

Nikhil 9:32

So is like about 10 deals a year or I guess you would've started off smaller and now it's kind of grown.

Chris 9:38

Yeah, we're doing 2 or 15 deals a year. This year we probably hope to close around 15 or more. And they tend to get larger every deal we do.

Nikhil 9:47

That's awesome. So, what are the biggest challenges that you see in terms of the business in general? Right. Like, you know, deal flow, deal identification, the due diligence, Or ongoing operational issues?

Chris 10:02

Yeah. Almost all of those things, honestly. But, to pinpoint one, the due diligence started to become very challenging until we recently expanded our due diligence team. So. Coming through the deals, finding the good deals, making sure we're doing a thorough job. I think we, we've solved that challenge. Another challenge in this business, because we do deal with securities and investments. We're constantly dealing with compliance. And, and that's pretty easy. What's not easy is the unpredictability of it. There's always somebody talking legislative changes that may or may not impact our business model, whether it's Regulation D or Regulation Crowdfunding or we were in opportunity zone business for a while and there's those unknowns that are always hard to deal with from a legislative standpoint. When you're a small business, they disproportionately impact you. And when you're a investment bank and you've got a room full of compliance folks and attorneys working for you.

Nikhil 11:00

Interesting, interesting. In terms of getting investors who are accredited versus non-accredited, how are you dealing with that? I know you cater to both, but I'm curious to know how you're dealing with providing these opportunities to even non-accredited investors.

Chris 11:16

So for the most part we do only deal with accredited. There is a part of Regulation D that's called 506(b). And you can take a certain number of sophisticated investors that you establish a relationship with. So we, so we do do some of those, but it's dual marketing. So we find the farmers and we don't spend a lot of money on marketing to the farmer's side because they tend to come to us when you're offering flexible source of capital and they see that you have success in raising funds. On the investor side you're competing for a lot more eyes, even amongst the, I don't know, 13 million or so accredited investors in the United States. I think this is a number somewhere around there. So you're competing with other private investments, whether it's real estate or other platforms or, you know, angel investors, those sorts of things. And then you're competing with people who are just kind of fire and forget who give all their money to their broker or their financial advisor and let them take care of it. Generally those are not the kind of people that we're trying to attract because they've already made up their mind. They're gonna outsource their money management to somebody else, which is fine. That's good for a lot of people. But a lot of people like to be more self-directed.

Nikhil 12:20

That's right. That's right. I'm curious to know your personal opinion on accreditation. You know, a lot of people are not accredited investors Recently, I think in 2020, now you're able to kind of take like a Series 65 exam and actually just get accredited. And the deal sizes that are on your platform and on somewhat other alternate investment platforms are actually relatively low. But some of them still require you to be accredited. So I'm just curious to know what your opinion about becoming an accredited investor is.

Chris 12:52

I wanna say it's been like since 1980 something that that million dollar level of investible assets has been the accreditation. Yeah. Which on one hand that seems like, wow, that's way overdue as they should update that. On the other hand, if you do update that and make it say 5 million you're gonna eliminate a lot of people from accreditation. I'm personally in favor of reducing barriers to investing. People, when they decide to invest in something, most of them, and this is in our experience, most of them have their eyes pretty wide open and yeah, they can lose their money. But you can lose your money on a stock market as a retail investor. There's certainly no guarantees in any kind of investing. If you're looking for a sure thing, put your money in Certificates of Deposit or keep it in cash. But people that want to grow their wealth and do it in a way that they can direct some of their investments themselves. These regulations that's kinda what they're designed for these, these private fund regulations, regulation D. I hope the SEC doesn't change the, I know there, there's, there's been back and forth on, on talking about it. I don't think that'll be good for entrepreneurs, small businesses like the ones we work with. And I also don't think it's gonna be good for the investors, cuz you're gonna limit access to a lot of, attractive invest.

Nikhil 14:00

Yeah, I definitely agree with that. Also curious to know your thoughts on, so, you know, the S&P on average, if you look at a 30 to 50 year historical time horizon returns on average about like 8%, 8.5%. Mm-hmm. Curious to know what you've seen in farmland, and how you kind of think of farmland investing in terms of the riskiness of farmland investing.

Chris 14:22

Yeah, I think from a risk adjusted standpoint, it's pretty safe. I think if you look at the long-term returns of farmland, they're very competitive if not more competitive than say the S&P 500. It's a little bit harder with farmland cuz there's not just the body of data that you have with say, stocks. There's something called the NCREIF Farmland and Index, which is growing and pretty well established and has been around for a while. This is the benchmark. And I wanna say it was roughly 10% for farmland. And that's not necessarily all the deals we do. Many of'em are land-based, but we do a lot of different types of deals. But for farmland, roughly 10% and that's very competitive with the market over the long term.

Nikhil 14:59

Yeah, I definitely agree. I was doing research on this and that's kind of what caught my eye cuz I was like, wow, okay, like farmland investing. Not a lot of people have talked about it. There has been a little bit of buzz lately with, some really prominent figures kind of buying farmland. And that kind of sparked my interest. And so I was diving in and I was pretty impressed by the, you know, historical returns. So, that, that's awesome. I'm curious also to know the typical capital lockup period for your deals.

Chris 15:28

So on our debt deals, it can be anywhere between one to three years. The average is about two. For our equity deals, it's tend to be longer maybe five to seven years. And of course, An exit on the equity side can occur in several different ways. It could be simple. The company grows and has enough cash to cash this out. It's some sort of targeted return. It could be the underlying assets grow, and then they're refinanced with debt. Hopefully the lower interest rate and they can cash us out at a positive return. Or it could be some sort of, liquidity. Like a merger and acquisition, especially on agriculture technology companies. They're more sort of a traditional angel investing where you're expecting a company to grow and grow and grow and then have some sort of liquidity event that pays back the early investors.

Nikhil 16:14

Gotcha. So recently we've been in a pretty high interest rate environment. Inflation has been skyrocketing all of last year. It's settling down a little bit this year. But curious to know what you've seen in the farmland investing space during these two years specifically. Especially after the pandemic going into 2021, mid 2021, we started seeing upticks in inflation all the way through September, I think we were at, 9.1%, inflation rates were peaked, and then we started, seeing it fall. As interest rates have been increased. So curious to know what you've seen on the ground from deal perspective, investment perspective, and what your long-term, outlook is.

Chris 16:59

Mm-hmm. So for agriculture, inflation has been sort of a double-edged sword. On one hand, you have input prices specifically like diesel fuel. If you run tractors and fertilizer have skyrocketed. So the input cost have been a real burden on agriculture the past 18 months or so. On the other hand, commodity prices have come up and so have land prices if you happen to hold land. So, if you are a farmer or a landowner that has land, you're probably pretty happy right now or if you're just invested in the farmland. But as you know, markets revert to their means. So, I think that parts of the farmland market last year got a little frothy. There was some record high prices per acreage that were probably just not sustainable. So those will probably correct to the mean here and next year. So, I would anticipate just kind of being an observer of markets. And in the farming side, we generally don't deal with commodity products, so that's more the row crop thing. We're dealing with more specialty goods, so like grass fed beef. It's a premium product, so it goes for a little bit higher. It's not dependent on the price of grain or corn because you're finishing a cow on grass or its entire life, the entire lifespan. So, not so worried about input costs there. On the other hand, things like drought and water availability can impact farming. And, and those are, some of the many risks involved with just like any other investment.

Nikhil 18:24

Gotcha. Obviously we can't predict the future, but what do you think farmland has in store for the 2020s? 2010s were a little stagnant for six or seven years, right?

Chris 18:35

Yeah, I mean, there was a long term commodity slump that didn't really end until I guess 2020, late 20 20, 20 21. And then they came up. I'm always bullish on agriculture. At some point growth will slow. Supposedly the world population growth will slow, but we're not there yet. We've got 20 or so years that many models predict that the population could be up to 10 billion. And the other thing that's demographic truism is that as populations increase in wealth, and in most world populations are even in impoverished nations, they tend to consume more calories and more proteins. So, agriculture as a industry will continue to see growth in high demand. So we remain bullish on it.

Nikhil 19:17

Awesome. This has been a lot of great information. I wanted to ask you a few questions about your personal experience with investing. So you've been investing for, you said, 20 plus years. What are some of the biggest lessons you've learned in your investing career?

Chris 19:33

Yeah. You know, I could talk about, You know, make sure you understand risk and understand exactly the asset you're investing in. Most of the lessons I learned as a younger investor was because I experienced the pain. So, I would say if you're taking advice from somebody who purports to be some kind of financial guru. I don't care if they are somebody with all their licenses, unless they've been doing it for a while and have lived through a market cycle or two, they really don't know what they're talking about because they haven't lost any money. So find somebody that's lost money and talk to them if you're gonna take advice. Yeah, that's probably the biggest thing.

Nikhil 20:09

Yeah. I think living through the pain yourself is very different from like listening to it, right? Mm-hmm. And a lot of people don't understand that, especially, you know, younger investors. It just changes your perspective completely.

Chris 20:21

Yeah. So for me, 20 years ago I didn't lose it much in the dot coms, but I lost some money in Enron, and you know, in hindsight I should have known because not only were they doing financially obtuce things. They were crooks, you know and it was hard to find out that they were crooks until after the fact. Unfortunately that happens. But, you know, I think there's probably a lot of younger people who have had a sort of sobering experience in the past 24 months or so with whether it's in crypto or meme stocks or whatever. A lot of people have lost some money.

Nikhil 20:50

Yeah, it always seems obvious after, right. Whether it's Enron, whether it's FTX, it's always like, oh, I should have known, but everyone should have known, right?

Chris 20:59

Yeah. And FTX really, I mean, that one, not only were they doing things that were just ridiculous, you could yeah, just take a, take a and, and they fooled some really smart people in including a lot of VCs that, yeah, gave them a lot of money in investment banks. But the guy was a crook. At least. he's an unindicted crook. But yeah, see what happens.

Nikhil 21:18

Yeah. Interested to see how that plays out. Feel sorry for all the people who lost a lot of money on that. And, to that point on making sure you understand the risks that are on your investments, which is very, very, very important. Last question for you. So if there was one thing, you could tell your younger self, right, about investing. Maybe something to focus on, maybe, just a lesson that you've learned. What would it be?

Chris 21:42

I suppose besides like, go back in time and buy Amazon or something like that, It's a lifelong learning process, so don't just roll the dice and hope you come out good. Educate yourself. Educate yourself on the companies. Educate yourself on the vehicle, whether you're investing in stocks or farmland or, or private placements or whatever you're investing in. Educate yourself.

Nikhil 22:04

That's great advice for anyone. Chris, thank you so much for your time. This has been a pleasure, Harvest Returns, Chris Rawley. Thanks a lot!

Chris 22:14

Thanks, Nikhil.

22:15

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