Adams and the Institutional Investors Patagonia Sur Case Study

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Patagonia Sur

Warren Adams had 60,000 acres of land in Patagonia, Chile, and had the plan of ensuring 15% internal rate of return on investment by conducting various revenue streams, from eco-tourism to carbon credits, water rights, sustainable land development, etc. He had raised $20 million in capital from high networth investors (HNWs) but was being blocked by institutional investors who were less willing to run the risk on investment that they saw with Adams' Patagonia Sur. Managing so many different revenue streams would be highly difficult and they viewed Adams' plan as unlikely to do more than break even yearly. HNWs were not as concerned with the risk because they were not on a deadline to have a return on investment and were willing to let the money sit in the property, which would increase in value over the coming decades; thus, for them the risk was mitigated. For institutional investors, the risk was not mitigated, especially as they would need their investment to be liquid, meaning they could quickly withdrawal their money via a sale if necessary in order to return it to clients or to exit the investment if necessary. There was nothing liquid about Adams' plan, as far as institutional investors were concerned. Thus, by denying their funds they were essentially blocking Adams' business plan from proceeding.

The main issue for Adams was to unite conservation with capitalism and he intended to do this by bringing in big-time institutional investors and develop a win-win strategy, meaning that they would benefit from investment and that Patagonia would benefit from conservation. This plan was represented by Patagonia Sur. As acres of land could be purchased for as cheap as $200 an acre, the plan appeared to be low-risk for Adams. The only problem was that his for-profit plan was open-ended, was not a fund, and established no clear date on when returns would come even if shares could be liquidated.

One aspect of the business plan was to develop plots "sold" to individuals -- titles were not given, rather "keys" to the land were sold, meaning the individuals owned shares in the corporation and could develop the land in accordance with rules laid out by the corporation (Segel et al., 2012, p. 5). Based on various credits given from the Chilean government as well as the carbon credit market heating up, Patagonia Sur had been profitable in its first year of business (p. 7). Eco-tourism and water resources were other revenue streams. Revenue streams were not the primary issue, however -- the primary issue was convincing institutional investors that they could exit their investment by selling their shares on the secondary market, which was still nascent (p. 11).

The best reason to invest in Chile for HNWs was the land -- it was cheap and would most likely rise in value as more people sought to buy. HNWs realized this and were willing to sit on the investment, viewing it as a trust that could be passed on to their children. Institutions did not want to wait 50 years for a return. They wanted the option of being able to sell at any time and make a profit. Adams' business plan, even if it did generate income, was illiquid. In order to win over institutions, Adams would have to show them a clearly defined exit strategy that would identify the secondary market, prove that buyers existed, and that their investment would not be illiquid. Adams had to show that there was demand for what he was offering. That was what institutions needed to see -- volume and breadth. So far, they did not see it and Adams could not supply it. He had raised $30 million, but he wanted $300 million -- ten times as much, and he felt that only institutional investors could deliver it.

With this in mind, there are a number of options available to Adams. First, he could develop an exit strategy that would appease the institutional investors and show them that the secondary market for shares in Patagonia Sur was not as illiquid as they considered.

Another alternative would be to forego institutional investment and take the company public by offering shares on the open market. This would allow Adams to raise the capital he required, though it would also draw attention to the project and perhaps lead to greater competition in the region and rising prices of land as a result -- which would not be what Adams wanted: the whole goal was to obtain land for cheap before prices shot up.

A third alternative would be to scale back the scope of the project, concentrate on just a few revenue streams and focus on conserving a portion of land more controllable with the capital he had already raised.

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This would allow the business to stabilize and develop over a number of years, during which time his brand could be built and established and marketed, bringing in more investors and allowing the business to grow organically over time. Instead of having $300 million to start, it would come over time, but in this way there would be less public scrutiny on what was happening in Chile and less worry about competition for land driving up prices.

These three alternatives each have their benefits and drawbacks which can be assessed in the following highlights: with the first alternative, Adams would require developing the secondary market in a manner that would be convincing for the institutional investors. This could be done, but it would require bringing buyers into the fold and creating a demand for a product that he did not want to necessarily sell (institutional investors would want to sell -- not he). Therefore, what he was asking from institutional investors was money that they would not require back immediately, which is not something they were willing to give; proving that a secondary market existed would help them feel more comfortable, but it would require Adams to spend more time on the capital side of the project than on the conservation side. His ambition was to couple both. This alternative would thus draw Adams out of his initial aim and force him to compromise by spending more energy on the capital side. For this reason it is not the best option.

The second alternative is feasible, but again taking the company public would bring exposure and no guarantee of interest. Competition could come, drive up prices and cause the whole plan to collapse under the weight of increased land prices. However, if it is assumed that prices will go up inevitably, taking the company public could be the best option: it would involve a serious ad campaign to drum up investors; it would most likely be traded on the OTC, where there are fewer regulations for start-ups but where values of shares can swing wildly to the upside (and to the downside). It could possibly allow Adams to raise the funds he requires in order to fulfill his dream; however, there is no guarantee it would work either.

The third alternative, which is to simply scale back the scope and size of his ambitious plan, is perhaps the most realistic and attractive. It may mean that Adams cannot do everything he planned to accomplish in Patagonia, but the reality of the situation is that institutional investors will not invest in a land scheme and want a return on investment that is guaranteed via a liquid market. Relying on throwbacks from the Chilean government and revenues from burgeoning streams (such as carbon credits and eco-tourism) were hardly reliable. The best option for Adams, therefore, is to scale back the size of Patagonia Sur and do something smaller with the capital he has already raised. With this capital, he could start the business and allow it to grow and develop naturally, letting the revenues speak for themselves over the years; and if they did not, there would be no pressure from investors as they were never really concerned about an annual return in the first place -- what they liked was the attraction of cheap land that could be worth far more in the decades to come.

Thus, the best answer to Adams' problem is to reconsider his objectives: the mixture of capitalism and conservation was not a well-worn tradition and had only lately been attempted in earnest by another corporation. The conditions for success were highly unique and dependent upon a number of factors coming together to work; and if some failed, the project could return little if at all -- ever. For HNWs the risk was not as great as it was for institutional investors. HNWs used their own money; institutional investors were responsible for investing the money of others and doing so wisely. Investing with Adams would be like investing in a start-up -- not something institutional investors typically did. Adams could thus turn to the VC capital of the world -- Silicon Valley and look for venture capitalists there. It could….....

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