In the world of investment, decay is inevitable. Buildings age, machinery wears down, and infrastructure crumbles. Typically, every physical asset an investor acquires begins its slow march toward obsolescence from the moment it enters the portfolio. Capital must be continuously reinvested merely to maintain value, let alone grow it.
Consequently, the investor finds themselves on a treadmill, allocating maintenance capital expenditure year after year to prevent the erosion of their asset base. Yet one category of productive asset defies this convention; when managed correctly regenerative agriculture assets naturally appreciate over time.
In this article we discuss why many traditional fund structures fail to align with regenerative agriculture’s biological time horizons and to benefit from its compounding returns before making the case for permanent capital vehicles as the optimal structure for capturing long-term value from regenerative agricultural assets.
The depreciation problem
Commercial real estate investors are intimately familiar with capital expenditure reserves. A Class A office building, no matter how prestigious, requires continuous reinvestment. The building does not improve with age; it merely survives through perpetual intervention.
The same dynamic characterises industrial assets. The average commercial property demands capital expenditure equivalent to 15-20% of net operating income simply to prevent functional obsolescence. Rising construction costs and inflationary pressure on materials have intensified this burden, squeezing returns as an ever-larger share of rental income is absorbed by maintenance.
This can create a capital expenditure trap in older portfolios, where buildings acquired decades earlier require significant modernisation. The conventional response has been to optimise holding periods. Many private equity real estate funds operate on five-to-seven-year cycles, acquiring assets, implementing a value-add strategy, and exiting before substantial deferred maintenance obligations come due.
The next buyer inherits both the asset and its accumulated depreciation. This approach works until someone is left holding an ageing portfolio with mounting capital requirements and ever-compressing profit margins. Under this model time is the enemy, and the investor’s task is to extract returns faster than decay erodes the asset base. Exiting before the accumulated depreciation becomes their problem.
Regenerative agriculture offers a different proposition: time as an ally rather than an adversary. While conventional agriculture often degrades land for the sake of maximising short-term yields, regenerative agriculture inverts this paradigm. Through practices such as minimal tillage, cover cropping, diverse rotations, and integrated livestock management, regenerative systems rebuild the soil microbiome and increase soil organic matter.
This improves water retention, enhances nutrient cycling and supports beneficial microbial communities, ultimately improving the productive asset itself, the soil. Under this system, every year brings the soil closer to its biological potential, increasing its productive capacity and reducing the required amount of agri-inputs. This enables investors who hold through the transition period and into biological maturity to capture and compound the underlying assets’ value.
Why traditional funding structures fail
But if regenerative agriculture offers such a compelling investment case, why has institutional capital not flooded into it? The answer lies in a structural mismatch between dominant investment vehicles and the realities of regenerative agriculture.
The closed-end private equity fund was designed for corporate restructuring and leveraged buyouts. A typical seven-year fund spends years one and two deploying capital, years three through five operating assets, and the remaining years preparing for liquidation. This timeline is governed by the expected internal rate of return, which is time-sensitive by design. A dollar returned in year three contributes far more to reported performance than a dollar in year nine.
This creates systematic pressure toward strategies that accelerate cash realisation, often at the expense of long-term asset quality. In agriculture, the easiest methods to maximise short-term cash generation are extractive, as owners seek to maximise short-term yields through the use of chemical inputs and intensive farming practices that mine soil fertility rather than build it. In fact, it could be argued that the private equity model rewards precisely the behaviours that regenerative agriculture seeks to reverse.
The timing mismatch is even more pronounced for regenerative transitions. When a conventional farm shifts to regenerative practices, the soil microbiome needs time to re-establish. Research indicates that yields may decline by 15-20% during the first two to three years, while at the same time costs for modifying machinery and establishing cover crops mount.
During this transition period, frequently termed the “J-curve”, net profitability can fall by up to 60%. For a fund measured on quarterly returns, this valley is essentially disqualifying. Any fund manager optimising for a high internal rate of return would rationally have to reject such a regenerative project, even if it promised exceptional returns over a longer time horizon.
But the transition dip obscures a more important dynamic: the compounding nature of regenerative practices over extended time horizons. As regenerative assets mature, the economics shift decisively.
In many cases, by years four through six of a regenerative project, the biological system begins delivering measurable benefits. Organic matter accumulates in the soil, improving moisture and nutrient retention, while mycorrhizal fungal networks re-establish, extending effective root systems and accessing minerals from deeper underground. Farmers in mature regenerative systems report reducing fertiliser applications by 50% or more while maintaining yield parity with conventional operations.
The profit implications are substantial. Analysis of wheat farmers in Kansas found that mature regenerative systems increased profitability by up to 120% compared to conventional benchmarks. This improvement flows almost entirely from reduced operating expenses as input costs fall and output remains stable.
Also, and perhaps more significantly given current climatic conditions, the variance in returns decreases. In drought years, soils with high organic matter capture more precipitation and retain it longer, while their biodiverse nature also provides greater resilience to pests. For investors, this reduced volatility justifies a lower discount rate and, consequently, a higher valuation multiple for the asset.
Why permanent capital vehicles hold an advantage
If regenerative agriculture’s primary benefit depends on extended holding periods that capture the compounding value that accumulates post J-curve, then the financing vehicle most suited to it must accommodate long, if not indefinite, tenure.
Permanent capital vehicles, including real estate investment trusts, open-ended funds, and perpetual holding companies, align perfectly with this investment horizon. They have no fixed dissolution date, eliminating the forced liquidation that truncates profits for private equity funds.
Permanent capital vehicles can execute portfolio-level strategies unavailable to short-duration holders, with cash flows from mature regenerative operations subsidising the transition costs on newly acquired land, smoothing the J-curve at the fund level while individual properties complete their regenerative transitions.
Several pioneering permanent capital vehicles have begun demonstrating this model in practice. While many of them remain modest in scale, they clearly illustrate the feasibility of the concept.
For fund managers, the analysis suggests a competitive positioning opportunity. Regenerative portfolios’ ability to hedge against inflation, provide a stable income, move independently of traditional equity markets, and insulate against climate risks enables allocators to build long-term, differentiated returns. As regulatory pressure on conventional agriculture intensifies, input costs rise, and the effects of climate change become more pronounced, the economics of regenerative systems will only strengthen.
Capturing and compound value
Ultimately, regenerative agricultural practices upend traditional investment theses. They offer an escape from the entropic certainty of the built environment, where capital fights a losing battle against depreciation, and provide a living system that grows richer, more resilient, and more productive the longer it is held.
By utilising permanent capital vehicles to marry patient capital to regenerative timelines, investors can secure an asset class that does not merely endure but improves with age, transforming the passage of time from a liability into the primary driver of wealth creation.
At Farrelly Mitchell, our natural capital and agronomic specialists provide strategic, technical, and commercial expertise to help investors and agribusiness operators navigate the transition to regenerative systems. Our technical due diligence capabilities encompass soil health assessment, transition planning, and the valuation of natural capital assets.
With a proven track record across agricultural value chains globally, we combine rigorous analytical frameworks with practical operational insight to help clients identify opportunities, structure appropriate investment vehicles, and capture the full value of natural assets. Contact our experts today to discuss how we can support your natural capital investment strategy.
