Staking out a farmland business

He hails from an East Coast seafaring family, but Tom Eisenhauer is making his mark as a landlubber these days. The former investment banker and tech investor heads Bonnefield Financial Inc., a new Canadian entry into the rising investment market for agricultural land. Bonnefield expects to close its first fund at year-end, and has amassed a portfolio of 7,000 acres. While the global food-price surge helps his cause, Mr. Eisenhauer insists the payoff is long-term gains for investors and for farmers who lease back land from the fund.

Your family background in Nova Scotia doesn't suggest a future in farmland.

The Eisenhauer family came from Germany primarily as farmers in the 1700s. But they figured: "Farming in Lunenburg County? I think we'll go fishing." And my father was a habitual entrepreneur who was involved in shipbuilding and metal fabrication. So he made the processing equipment for fish plants and things like that. My brother now owns that company and has expanded it. I'm the black sheep because I'm the only male for generations who is not an engineer.

Originally, two Eisenhauer brothers and an uncle came to Nova Scotia in 1753, and arrived too late to set up shop that year. It's said they spent the winter on a ship in Halifax harbour. After that, I believe the uncle and one of the brothers said, "Forget it. I'm out of here," and went to Pennsylvania. There was already a German community there and the family of General Dwight Eisenhower came from those origins. It's spelled a little differently, but back then they probably couldn't spell. It's rumoured the one who stayed behind met a local girl and put down roots in Lunenburg - and that's the Canadian branch.

How did you end up in this business?

Back in 2008 I sold my [technology merchant banking]firm, and timing is everything in life - it was just pre-crash. The obvious thing was starting a new private equity fund, but no one was going to fund private equity in 2008-2009. So I was looking around at other assets.

So what was your eureka moment in farmland?

I do a lot of cycling, and my wife is from the Paris-Brantford area in Ontario. At that time, potash was going through the roof and everything, and I was riding around that area and seeing a bunch of farms for sale.

I thought: If I buy a farm and sit on it until I retire, it can't be a bad investment. That led to three months of research. I had no idea that farmland was such a huge institutional investment class around the world, but not in Canada. Over decades, it's had very steady-Eddie equity-like returns, extremely low volatility, and no correlation to public markets - at a time when markets were going crazy. I thought this is too good not to pursue.

But I realized I was this fishing-community guy from Lunenburg, who might get his head handed to him in farmland. I put the idea on the shelf but within days I had a call from a friend, Jan Kaminski, whose family has the Colonnade real estate group in Ottawa. They'd gone a long way down the road [thinking about land investment and lease-backs to farmers] So we put together Bonnefield Financial.

Is everybody calling you now because farmland prices are soaring?

If I could take money from non-Canadians, I'd be retired by now. But we adhere to farmland-ownership restrictions in Saskatchewan and Manitoba which means all our investors must be individual Canadian citizens.

Farmland leasing is a concept that's been around internationally for generations, but it's so new in Canada. We're getting certainly a lot more phone calls here, but I get four calls from non-Canadians for every one from Canada.

Why are Canadians behind the rest of the world?

We tend to think of agriculture more as social policy rather than agricultural policy. Through the rest of the world, it's the industry of the future because of climate change, water shortage, population growth, food security. But we still have this image of the farm business as being grandpa with a cow and getting by. That's certainly not the kind of Canadian farmers that we're dealing with.

Is there much interest from farmers?

Overwhelming response. But our approach is different: We're not going into these small communities, perusing the MLS listings and buying up farms. If you do that, you make yourself really unpopular in the local Tim Hortons because invariably there's some farmer who's had his eye on that property for years. Then some guy from Bay Street shows up to buy it.

Instead, we've got a whole bunch of metrics to identify farmland that's attractively priced relative to productive capacity. Once we've done that, one of our partners, a former farmer, works through financial advisers and the local Farm Credit Canada guys to find young progressive people who are growth-oriented and we get introduced. Invariably the conversation starts with, "Let's do a sale lease-back on some land that you already own" and doing that cleans up the farmer's balance sheet.

The next conversation is about how they are leasing land from some retired guy down the road. With the amount invested in operations and equipment, if they lose access to that land, they're screwed. They come to us and say, "I'm afraid the owner is going to retire and sell the land to someone else, so I'll get you involved, and you buy it from him." Then they'll lease it from us on a long-term basis. It's the farmer leading us to the land, and not vice versa.

A farmer in Iowa just sold his place for $11,000 (U.S.) an acre. Does that high price scare you?

We look at what the farm can earn. As former techies, we were frustrated that we couldn't find any third-party computer models to help us assess the market, so we made our own. We bought a GIS map of Canada and layered into it a land map that tells us what soil predominates where, as well as climatic data, production data, yield data. It allows us to compare regions and find out where land at similar productive capacity is trading at a discount.

We put together what we call the Bonnefield indexes, which go right down to the municipality level. Then we came up with what amounts to a price-earnings ratio for farmland. We layer that information onto our GIS map, and areas identified in green, for example, look pretty attractive.

And what's the outlook for ownership deregulation?

There are not many other businesses where your only financing options are sweat equity and bank debt. You can't take in public capital. You can't take in venture capital money. There are no securitized assets. So why can't you just say Canadian farmland should be farmed by Canadians, but does it have to be owned by Canadians? Does there have to be restricted capital?

Behind closed doors, policy-makers understand that. They have a wall of retiring farmers coming at them. We did back-of-the-envelope numbers - not accurate, but in the order of magnitude - estimating that about $53-billion worth of farmland will have to change hands from retiring farmers over the next decade to decade-and-a-half in this country. A lot of that will be intergenerational transfers but what if just 10 per cent has to be financed publicly?

Where do you fit in?

In the last six months I've been approached by two guys on Bay Street, both of whom grew up in the Prairies. Their dads farmed and, according to them, they would have liked to stay on the farm but there was no practical way to do it and earn the return that they wanted. They said, "Look, if I had your access to capital, I'd still be a farmer today." In one case, the guy loved our investment thesis so much, that he went back a few years ago and bought several sections that he now leases out to farmers.

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Tom Eisenhauer

Title: President, Bonnefield Financial Inc., Toronto

Born: Lunenburg, N.S., 49 years old

Education: Bachelor's in economics, Dalhousie University; master's in economics, Queen's University

Career highlights:

* First worked as a federal economist

* Early 1990s: managing director of Lancaster Financial, M&A advisory firm.

* 1995: Lancaster acquired by TD Securities, where he became investment banker.

* 1999: Formed Latitude Partners to invest in tech companies

* 2008: Sold Latitude; joined Bonnefield.