Is CEA investable today?
Added on 08 February 2024
Despite recent negative publicity surrounding controlled environment agriculture (CEA), opportunities for investors remain in the North American sector today.
In 2023, CEA’s investable assets fall into two categories. The first is businesses with free cashflow and management teams experienced in CEA. Then there are the valuable pieces of startups that can become part of a new generation of viable businesses.
Within either category, the price of the asset today will be substantially less than in the heyday of 2021, when interest rates were abnormally low and the desire to invest in agricultural assets was at a peak.
However, the environment today is much more realistic and therefore investments in the sector have a much better chance for long-term sustained success compared to during 2021.
Conditions for investment today
Valuation analysis for new investments should be focused on the following three areas:
Conservative revenue forecasts: Investors should based forecasts on the reasonable likelihood of there being 1) production quantities of a quality product and 2) sell-through numbers in line with actual results.
A management team experienced in CEA: The majority of successful operations have management teams highly seasoned in CEA.
Valuations that account for interest rate increases: Treasury rates have increased 300 to 400 basis points from 2021 to today; this increase should be reflected in required rates of return.
The CEA investing environment: 2021 to 2023
The investing environment has changed dramatically from 2021 to today.