Acquiring Minds Podcast: Building a $350m Holdco of Farms with Jack McCarthy

Gold Leaf Farming Co-Founder Jack McCarthy joined the Acquiring Minds podcast to discuss our business model, why farmland is an attractive asset, and more. Listen to the episode below:

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Transcript

Will Smith:

Jack McCarthy, welcome to Acquiring Mines.

Jack McCarthy:

Thanks for having me.

Will Smith:

Jack. What you are doing is different than my typical guest in that you are focused on farms rather than businesses. Of course, farms really are businesses. So as we'll tease out over the next hour or so, there are tons of parallels between you and a typical searcher. But let's start at the end for context, Jack, and then we'll go back, get your story and work forward. Please tell us what is Gold Leaf Farming?

Jack McCarthy:

So we own and operate almond, pistachio and medjool date farms today on behalf of our partners who are all individuals and families that want exposure to ag, but don't have a good way to get it.

Will Smith:

Great. And give us a sense of age of the business and size by whatever metric you use.

Jack McCarthy:

Yeah, so we started six or seven years ago when I was in business school, and today we own about 12,000 acres of farms. Central Park is a little less than a thousand acres, so we're decent size, acreage. It's about $350 million of asset value and we've got a great team of 80 people that are mostly unlike me driving tractors every day and operating the farms.

Will Smith:

Excellent. Well, we're going to return to that $350 million to understand what it means. I suspect it means something a little different than if we were talking $350 million worth of HVAC businesses, we'll return to it. But on the physical size to give people a visual that was helpful. So Central Park's a thousand acres and you own 12,000. So 12 Central Parks, give or take.

Jack McCarthy:

Yeah.

Will Smith:

And for a modern business person in farming, is that a lot? Because Central Park is in the middle of Manhattan, so the scales are a little different here.

Jack McCarthy:

Exactly, yeah, it's a little different. We are a decently large grower today. We got about 6,000 acres of almonds and 6,000 at pistachios. Our medjool date business is tiny, so we're a decently large grower in those crops. Probably top 25 globally.

Will Smith:

Okay.

Jack McCarthy:

Most of our business is a mom-and-pop industry. I think the average almond grower has a hundred or 200 acres, so it's a pretty small mom-and-pop business. There's about 7,000 almond growers, for example. And while there are some large ones like us, mainly it's a small family business.

Will Smith:

Well, you've just hit on parallel number one between your industry and the industry of many of my guests.

Jack McCarthy:

Totally.

Will Smith:

All right, Jack, let's go back to business school or even earlier if you want, wherever relevant. Please give us the backstory.

Jack McCarthy:

Yeah, so I'm from the Midwest, originally grew up in Indiana and after going to Indiana University for undergrad, I worked at McKinsey. I did a stint in politics in Chicago. I worked for the mayor in Chicago and then I worked at a private equity firm, took me out to California called TPG. And through all that stuff, I think partially my dad ran a construction company growing up. I was from Indiana, I was working at places like TPG and I think they just sort of assumed this guy must know about farming, manufacturing, heavy industry. So I got always staffed on those types of things and really grew to those types of more overlooked businesses.

So I was in business school at Stanford and was really, hey, I really like TPG, I'm either going to work my way up that firm or I'm going to do something very, very different, much more entrepreneurial. And I had the good fortune to be able to spend business school mostly finding that breakaway opportunity. So I spent a fair amount of my first year looking at different tech ideas. I was at Stanford after all, and a lot of my classmates were looking at tech. I was looking at agriculture tech with a buddy whose dad was an almond farmer.

Will Smith:

Tell us a little bit about how you guys arrived on that potential opportunity and started pulling the thread.

Jack McCarthy:

My friend and I both wanted to do something more entrepreneurial after business school and we were spending our kind of free time, we had Wednesdays off, most of our classmates play golf, we would drive out to Chowchilla, California and see an almond processor. So his dad was a almond grower. He was getting ready to go to school and was sort of like, dad, how do you sell your crop? It must be on exchange or something, right? And his dad was like, no. Well I give it to this processor Steve. Steve calls this guy Bob, who sets up a contract, then he calls somebody in Dubai who's going to buy it. They put it on a boat. So it was very kind of opaque old school phone-based industry. And we thought that was intriguing. We thought there were other problems related to that that technology could solve.

And so we went down that path with the general concept of specialty agriculture is traded in an old school way and unfortunately we couldn't find anything that would really improve it. It kind of just works. And I'm sure your audience knows that in their businesses, no matter how much tech and stuff you add to it, stuff generally works pretty well how it's functioning today. So we didn't find anything that we were excited to build a business around, but we met dozens and dozens of people in California agriculture, which tends to be more specialty crops like what we grow today and realize there was this massive amount of land in the US there's like 3 trillion of land in the U.S. It's very limited institutional type of money that's in this space. It's really very mom-and-pop.

And there's a big problem in that. The folks that own the land, the farmers that own the land, if they were successful, a lot of times their kids went to college and they're a doctor in LA now and they don't have a good succession plan. There's also a lot of young talent that studied plant sciences. They know how to operate the farms, but they don't have $10 million to buy a scale farm. And so that was the genesis of what we do today is realizing there was this big asset class that was very attractive, but a big mismatch between the owners today and who needed to operate it tomorrow.

Will Smith:

Awesome. That was phenomenal. All right Jack, a lot of follow-up questions before we proceed. Personally, you said while you were at TPG, you grew to the overlooked businesses. What did you grow to like? Why did you grow to like them?

Jack McCarthy:

Yeah, at McKinsey and TPG, I worked on a variety of things from more like manufacturing businesses, construction, mining. I looked at businesses that did tire distribution and all that. One of my businesses at TPG was Chobani Yogurt, and I thought finally, I have a consumer facing company, they have an office in Manhattan, it's going to be fun. I get to go to a big city. And they're like, no, no, you're going to the plant in upstate New York in Twin Falls, Idaho. And so I was helping them with procurement and operational issues and just really liked that sort of hands-on aspect of the business and how the real world operates is so sometimes distant. I think from the end consumer and what we see as sort of consumers.

So yeah, I just grew to that business a lot and saw from my dad's experience in construction that the same sort of principles that apply in the tech world where you really want a bunch of smart people in one room, in one company rowing in the same direction. That stuff works in heavy industries too, but it's not as common. So something I've been really proud of and appreciative of is we've tried to really bring a lot of smart people into agriculture, all focused on things like organic conversions and saving water. And that's just really paying dividends is sort of concentrating a very high talent team in a space that doesn't have as many companies that have done that.

Will Smith:

And your friend that you were exploring possible venture ideas with-

Jack McCarthy:

Larson.

Will Smith:

His name was what?

Jack McCarthy:

Larson

Will Smith:

And Larson's dad was the almond grower. Was Larson's dad, what you described as kind the typical 100 to 200 acre farmer?

Jack McCarthy:

Maybe a little bit bigger than that, but Larson was a Olympian and a Navy SEAL and went to Stanford Business School. So his dad was a successful farmer, but he wasn't necessarily back in Wasco Shafter taking care of his dad's operation. So I think that was a great example and kind of showcases what we see every day in the acquisition side of the business.

Will Smith:

And we're going really get to that. And you're in Larson's exploration looking for tech ideas, applying tech to the supply chain at least that was the first thread you started pulling on. I assume the first idea you had was some sort of clearinghouse or marketplace for the supply chain. Why doesn't that exist and why did you also conclude that it wasn't a good opportunity?

Jack McCarthy:

Yeah, I think we did a lot of the classes that I think are common in entrepreneurial places like lean startup type methodology where we're interviewing people, trying to find where the pain is, who really feels the pain. I would say there's certainly problems to the way that the business works today, but it's not especially painful for any one participant or the grower, the processor, the trader or the end consumer. Nobody feels the pain. And so no one needs to do things differently, badly. And therefore it's very hard to get people to do things differently because it kind of just works. It works at least okay. And so I think one of the lessons from that, that I'm not in technology at all today really, but I think seeing that you got to be pretty different, 10 times better or 10 times cheaper to get somebody to do things really differently. And I think that was a really great lesson.

Will Smith:

And by the way, isn't that 10 times better? Right out of zero to one from Peter Thiel? I think that's where I first-

Jack McCarthy:

Yeah, exactly.

Will Smith:

And you keep referring to specialty crops. What do you mean by a specialty crop?

Jack McCarthy:

Yeah. So in ag we talk about row crops, which would be like corn and soybeans. Specialty crops would be stuff that is smaller markets maybe grown in only a few places. So we grow almonds. They're growing 80% in California globally. 7% in Australia, 5% in Spain. So they need very specific weather to grow and that doesn't exist for many places. Other types of specialty crops would be fruit. Like in California we grow berries on the coast and lettuce on the coast. We grow things like citrus in the Central Valley near where we farm. And those tend to be crops that can't grow everywhere and the markets are a little smaller, a little more niche, and that's create some good opportunities for growers.

Will Smith:

And so when you say specialty, really what we mean is basically just a smaller market?

Jack McCarthy:

Exactly.

Will Smith:

The end product is just a smaller market. And you also referred now to I think corn and soy. What are the giants? I know you call it a row agriculture, what are the giants of agriculture in the U.S.?

Jack McCarthy:

I think the big businesses tend not to be farmers themselves. They tend to be more seed businesses, chemical and fertilizer businesses that are selling to farmers. Some of the processing and more midstream businesses tend to be very large. The farmers themselves still are fairly mom-and-pop. And I think there's been more consolidation as the technology gets better, you do want to be investing in the latest and greatest ways of farming more sustainably. And some of that takes more capital, more concentration. And we're seeing the same types of consolidation happening in our market is happening in other parts of ag too.

Will Smith:

A couple of things here are kind of counterintuitive to me as a lay person. First I have the sense that there's this big ag, big agriculture, and that agriculture now is run by the Monsantos of the world. Honestly, all I know is Monsanto's a boogieman. I don't even know what Monsanto does to be honest, so maybe you can educate me but-

Jack McCarthy:

They're like those seed and chemicals businesses, that's what you'd hear about as a consumer, is people that are selling the farmer or the seed or selling them the roundup. That's what you'd hear about more as the consumer.

Will Smith:

And so those guys are actually-

Jack McCarthy:

Not farmers.

Will Smith:

... the giants-

Jack McCarthy:

Yeah. Those are big companies.

Will Smith:

... and not farmers. And so the farmers themselves remain pretty fragmented even in non-specialty crops, even in say corn.

Jack McCarthy:

Yeah, although I think there's more consolidation in some of those bigger crops, especially in land ownership. There's more of a liquid market to buy a piece of ground and then lease it to a farmer. In our business, almond trees take six years to get mature. Pistachio trees take nine years to get mature. So you have a piece of ground, you're going to plant an orchard on. It's going to take half a decade or a decade to mature. And so a lot of the value is in the trees and the irrigation that you've installed to run the orchard. So it's more challenging for that market to have outside capital, you have to have that amount of patience. And a lot of the value is not just in the dirt, it's in the trees and other aspects of a built up orchard.

Will Smith:

But why is it that if farmers, even non-specialty crop farmers still are pretty fragmented? You said not as much as on the specialty side, but still pretty fragmented. It used to be that 50% of people were farmers or something. There's some statistic that now it's like less than 2% or less. So square that circle for me, very few people today are farmers, I think. You're in the world, so you probably meet tons of ton of farmers. So this is all kind of perspective, but we all have the sense that there are very few farmers, but it sounds like in fact, there are thousands and thousands of mom-and-pop farmers to this day.

Jack McCarthy:

Yep. And I think there's certainly a lot less than a long time ago, but it's still very fragmented and there doesn't need that much employment. The process of this is quite mechanized in the Midwest. You've got big machines that can cover lots and lots of ground out here. Our crops, we have maybe one person, one employee per 200 acres. So to my Central Park point, maybe four or five guys covering Central Park. And so they're pretty mechanized industries. Doesn't necessarily employ tons and tons of people. But that said, the ownership is still very fragmented and you got a lot of small business owners basically running acreage in their little part of the world.

Will Smith:

Okay. Fascinating.

Jack McCarthy:

Yeah.

Will Smith:

Okay. And so now let's return to where we were. So the opportunity that you guys ended up kind of spotting wasn't in some SaaS tool or marketplace to throw it at the supply chain, but was in the fact that if there's maybe a talent, there's an opportunity for very hungry, a talented new sets of eyes to come into this industry and maybe be more aggressive, better operators perhaps, and a very fragmented market. And so that was kind of the thesis?

Jack McCarthy:

Yeah. So basically we realized the average farmer is 60 or 70 everywhere in the U.S. but in California they don't necessarily have a great succession plan. And on the other hand, I ended up bringing in my co-founder Brandon, who's an agronomist, and guys like him studied plant sciences. They grew up in the industry, maybe even worked in a family operation. But to do this at scale, you might need 10 or 20 million to get into the business. And so a lot of our team today, and Brandon before we started this, were really talented agronomists and farmers, but they don't have the capital to get into the business the way it's structured today.

Will Smith:

And so there aren't kind of incubators or startup competitions at the schools where agronomy is taught to target the brandings of the world to raise a few million bucks of capital and go buy a farm.

Jack McCarthy:

No, it's very difficult. The main capital is kind of bank debt, mortgage debt, and that can only get you 50 or 60% of what you need to buy a property. So it's very difficult to enter into farming even if you have the talent. And I think that's something that we're addressing pretty head on.

Will Smith:

Okay. Addressing this head on. What shape did that take?

Jack McCarthy:

So the way we operate is we have a group of partners that want exposure to farmland. Our original partners were tech entrepreneurs that had actually bought several farms themselves directly because they couldn't find a way to get exposure to agriculture. They wanted exposure to agriculture and farming. They couldn't find a way to do it. So they bought farms directly and realized, man, this is actually a lot of work and every other asset class we have someone who manages that asset for us and that would work well here. So they helped us get started. I can get into this more, but it was basically like a search fund concept where they gave us some money to go see if we could make a business of it. For the first two years, we ended up doing five investments over that time, and that became the starting point to then continuing to grow.

But our investors look like those guys. They might be individuals, tech entrepreneurs, business owners, work in finance. In most cases, they don't work in agriculture, they don't have exposure to that and they want it. And so that's what we provide is a way to get access to that. And then on the other hand, we're hiring really talented young people or talented farm managers that know how to take care of the trees, drive really high yields, but they don't have the capital to do it. And trying to create an environment where they really feel like they're running their own farm, running their own business. And we're making that easier for them to do by giving them centralized procurement, hopefully access to other talented people, giving them the keys to run their own farm. And we want it to feel more and more like they're running their own operation and we're just helping them make that easier.

Will Smith:

Reminds me, Jack, something you said to me on the pre-call that it's hard to categorize what Gold Leaf is a little bit HoldCo, a little bit search, a little bit real estate, a little bit farming. Elaborate on that.

Jack McCarthy:

Yeah, so I think we borrow from lots of different other concepts because it is a little bit of a new model. In some ways it's a new model where we're borrowing from search to get started. Like, hey, we had capital to go look for a couple of years and find the first set of farms to build a business around. In some sense, we're doing what searchers do, which is bring high talent people into a maybe overlooked industry or business. We also own farms, so there is a real estate component to what we do, but we need to operate them too. We can't just sort of lease them out. So I think we're borrowing from those businesses, but sometimes I start down that path and then I sort of realize, well, the big successful family farmers that we look up to, we look up to Driscoll's, the berry company, they only do blueberries, blackberries, strawberries, raspberries.

They do four berries, but they do them really well. They own the genetics, the farms, the processing, and then the marketing. You'd see them in the grocery store. And so we think about building towards that over the next many decades and really we don't look way different from them. We just have maybe outside capital, but otherwise we look pretty similar to those guys. And so I think we are borrowing from lots of different industries, but at the same time we're really emulating these great ag businesses that were built over certainly decades, but kind of family ag businesses that have built a dominant business over time.

Will Smith:

Well, without knowing anything about Driscoll's, perhaps, I mean, were they as acquisitive as you? I mean, your playbook here is starting by acquisition and then growing through acquisition and maybe in farming it has to be that way because there's no such thing as unowned land, so you got to start by buying somebody's land.

Jack McCarthy:

Yeah, I think that's right. We're in an interesting moment in our business where almond price has been low for about three and a half years. Interest rates are up, and so we think there's going to be quite a bit of sales activity the next couple of years where people are selling or having to sell, and we're going to see some really quality assets for sale. When we look at some of these family businesses, there's a great grower we know in the Sacramento area, they bought all of their farms in two downturns. So in the 1980s and in the early two thousands, we had similar moments to where we are in almonds today. And that's when they bought really all their acres. They didn't buy anything else in other periods. So it is a growth by acquisition business to buy and buy more land to grow. But I think that the smart folks are doing it in the right moments and building a quality footprint sort of patiently, but aggressively when the iron's hot.

Will Smith:

But in fact, to date you have been buying when the economics weren't as good as...

Will Smith:

To date, you have been buying when the economics weren't as good as you think they're going to get now?

Jack McCarthy:

Yeah, we've-

Will Smith:

Had to start, I guess.

Jack McCarthy:

... done.... Yeah, we started, but I think most of our acquisitions have been in the last few years when prices have been low. So I think we're seeing better and better deals. The first couple of years we invested 2 million the first year of equity. We invested 8 million, the second year. I think we invested around 20, the third year. And today we have about 250 million of equity and we're in year six. So we really started slow, figured out our sweet spot of what were the types of farms that we wanted to own really forever. And once we knew that, we started acting. And I think now we're ready to continue to grow because we have this great operating footprint, we know what we're looking for, and the market timing is feeling more and more right.

Will Smith:

And yet you're already at 350 million. So what exactly does that... Talk to me like I'm eight, what exactly does that mean, that 350 million number?

Jack McCarthy:

Yeah, so basically approximate value of the farms that we own today. And we use a little bit of debt and some equity, and equity to capitalize them. So we have about 350 million dollars of farms, about 250 million of that is equity value, and the rest is debt. So fortunate to have a lot of partners that have made that possible, people interested in getting this kind of farmland exposure. And that's what's enabled us to buy that size of portfolio.

Will Smith:

And let's tease this out a little bit. So 250 million of it is equity, and the rest debt. So 250 to a hundred debt. Usually I'm used to hearing terms that are kind of the reverse or more where they're heavily levered. So you're just the opposite. You've bought these things mostly in cash, right? Is that what you're saying?

Jack McCarthy:

Yeah. Yeah. I think we're either buying land and then developing it and drawing debt over time when we plant an orchard, or we're buying usually with 40%, 30% LTV debt. And I think over time we probably are moving in the direction of less debt. A, because interest rates have gone up, so the debt is more expensive. And then B, what we're finding is when you have a longer hold period, the debt doesn't help the returns as much. And so if you're doing private equity and you're going to buy something and sell it four years later, the debt can help your IRR quite a bit. But in our case, we're buying farms hopefully to hold for a long, long time. And the debt doesn't help as much and we're in a commodity business, so it does add to the risk to have more debt. So I'd say generally over time, I'm a reformed private equity guy from using more debt to using less and less is the further we get into building this business.

Will Smith:

But again, Jack, I understand that the dynamics are very different when you kind of have a permanent hold mentality, but at the same time, doesn't leverage always juice your IRRs no matter what your hold period is.

Jack McCarthy:

It does, but I think if you look at what going from 25 to 50% LTV does to your IRR in a four-year hold, versus a 25-year hold, it matters less on the IRR, and it adds the same amount of risk. So I think the further we get into this, particularly with our long hold deals, the less leverage we're trying to use. And I think as we grow, we think we'll use some debt, but less and less over time.

Will Smith:

Right. So I guess, yeah, the longer the hold is, the less the debt helps the IRR. Sorry, you just said exactly that, but I'm just making sure it's crystallized.

Jack McCarthy:

Yeah, that's exactly right. And I think that's why you see in these sort of older school businesses, in the SMB world, people not using as much debt, they built the business over 30 years or look at how Berkshire Hathaway's capitalized. They have the float, but they also have a little bit of debt, but really trying to use less and less debt over time. And sure they could have used more and gotten more return for it, but they were trying to build something over the long run, not get every last basis point of IRR.

Will Smith:

Well, we are going to dive into this long-term hold philosophy in just a minute, but before we do... So Jack, this 350 dollars million in assets, 250 million of which you've said is equity that you've raised from your LPs. So is that some mega fund that gave you a quarter billion dollars or is it a bunch of billion dollar checks? What does the makeup of that look like? What can you share?

Jack McCarthy:

Our investors are high net worth and family office, and I think it's generally regular people that want exposure to Ag and have enough capital to do alternatives. But people writing a 100K checks into getting a little bit of AG exposure, up to, we have family offices or multifamily offices have done one to 10 million dollars with us. But I think the bulk of our investors are sub million dollars and really just looking for a little bit of diversifier in their portfolio. So that's our capital today. That kind of long-term, taxpaying, smart money, we've really enjoyed partnering with, and I think that's kind of how we plan to keep growing the business. Although I'm sure as we get bigger, we'll have opportunities to take in other types of capital too.

Will Smith:

Your average LP is a million dollars or less. So we're talking 250 individual checks that you've raised?

Jack McCarthy:

Yeah. I don't know the exact average, but I'd say most of our LPs are less than a million dollars, in the couple hundred grand. We have friends and family that are in it. It sort of expanded from there. And today we have people that have done over millions of dollars with us that are more like a family office or ultra-high net worth investor. But a lot of our partners are business owners, entrepreneurs, folks that have the capital to do some alternatives, but they're not a multi-billionaire that's doing this. It's just regular individuals.

Will Smith:

So people listening have a few hundred grand laying around and they want some exposure to Ag, they should reach out?

Jack McCarthy:

Yeah. Give us a call. We have all accredited investors. There's various securities rules and stuff. But yeah, we have basically a set of friends and family that expanded from there, and that means that we personally know most of our investors and met them through someone that we know well. And that's been a great group of partners to have over the last six years, and I think we'll continue to target that kind of group.

Will Smith:

But just so I understand, if you've raised $250 million, is it common that you'd have so many investors, dozens and dozens and dozens? Is that often how something like this can accrue over time or are you guys unusual this way?

Jack McCarthy:

I think it's more common in real estate, but yeah, I mean if a private equity firm had $250 million fund, it would not be made up of this kind of investor. So I think it's something cool about our model is that it started kind of friends and family and expanded from there into their friends who did this kind of stuff. And I feel we've been really, really lucky with it. It is more common in real estate because there's tax and stuff to what we do and what exists in real estate that makes it more suitable for a taxpaying investor like an individual or a family. But I still think it was organic that we just started that way and then it grew over time.

Will Smith:

Now you've said multiple times that your investors want exposure to this, they want access to the asset class. You've said it in a number of different ways.

Jack McCarthy:

Yeah.

Will Smith:

Why has it been so hard for them to access before, I guess because it's so fragmented?

Jack McCarthy:

And I think there's a variety of reasons. So you mentioned earlier in the 1800s, 50% of people were farmers. Today it's very small. And so the overlap between where there's capital and where there's talent in agriculture is pretty limited. In Silicon Valley, the capital's on Sand Hill Road, the talent's at Stanford University down the block, it overlaps quite a bit. And so I think in this business, that's one challenge. I also think when people have tried to come into agriculture to build businesses with capital, often they're in New York or San Francisco, they don't have the operating experience to know what they're doing. And one of the things we've tried really hard to build is that combination of my co-founder is an agronomist. I'm a private equity guy. Really down the org chart, we have that mix of younger Stanford alums, but experienced farm manager in Fresno. And that's what we're trying to combine.

So capital and the talent lining up. There's also institutional investors have tried to come in our space. The average farm that we buy might be five, 10, 15 million dollars. So if you're a Canadian pension trying to put out $500 million, that's not easy to do. It takes a long time, and especially if you're going to have a very high bar for what you're buying. So I think the talent capital overlap, the lack of familiarity people have with agriculture as a business, and then just the sort of size of acquisition that's available, make it challenging for people to, whether it's individuals or institutions, to get exposure.

Will Smith:

And why do they want exposure? What is the understanding of this asset class by these folks that make it appealing and make them... I assume they think of it as a very long-term thing. So it's a place to not get IRR, but to park money for a very long time. So elaborate on that for us.

Jack McCarthy:

Yeah. So US farmland, since World War II, has done about the same returns as the S&P 500, but maybe half the volatility. So it's done low double-digit return, some driven by cashflow, some driven by appreciation. The only down period in farmland and aggregate was in the 1980s. So there's been one down period, the S&P's had probably 15 or 20 in that time period. And so I think people think of it as a safe asset class that can get decent returns. When you look at the types of specialty crops that we do, the returns have been a little higher, some were like 15 to 20% depending on when you entered and exited, and compounding over 10, 15, 20 years, that is very attractive.

I think Berkshire Hathaway's compounded at 20% since the sixties. So pretty interesting long-term compounding in this asset class, really achieved by mom and pop farmers who are great farmers, but not necessarily that sophisticated in terms of using technology or having access to lots of money. They've just been in an attractive industry and done a good job with their farm. So I think it's a fundamentally attractive asset class that's performed well over a long time. But it's just unfortunately hard to access and that's what we try to do.

Will Smith:

Yeah. Wow, Jack. Where do I sign up? You're really... This is a compelling... This is really a compelling opportunity you're presenting here.

Jack McCarthy:

There you go. There you go.

Will Smith:

Actually, I meant that half jokingly, because we are going to also talk about if there's opportunity here for the audience, but let's put a pin in that. So let's get back to the plot a little bit. So you said in year one you deployed 2 million, year two 8 million, year three 20, and now 350. Take us back to the very beginning where you said you had kind of a quasi search fund model. Just give us a couple minutes on how this thing really got rolling and these first investors, and you said it was kind of a search fund, kind of not. So if you would.

Jack McCarthy:

Yeah, yeah, yeah. So I had spent the first year of business school doing this various tech ideas. The first investors, who I mentioned, we had met through that process of trying different tech ideas, meeting potential users. And he called me at the end of the summer between my first and second year and said, "Hey, how's your Ag tech thing going?" I was like, "Terrible, we're going to shut it down." And he was like, "I really feel, as you know, we own some farms, I feel that there's a business to be made around giving people that exposure, but you guys running the operation and doing what we do now." So that was the original concept. The original guys helped us get started, and basically said they'll give us money to pay salaries, pay for legal, things like that, for the first couple of years. And beyond that, we'd have to sink or swim, and that's what ended up happening.

So we got seed capital from these two investors. They also became investors in the farms themselves, and ended up, over the course of my second year of business school, setting that up, starting to look at farms to acquire. And I really met my co-founder, Brandon, during that period too. He was an agronomist who'd helped one of the institutional investors in our space build a big portfolio and sell it to a Canadian pension, and was looking for more of a true farming company situation. He was thinking about doing farm management for outside investors. I was thinking about becoming an outside investor, and we said, "Why don't we do this all under one roof?" And so Brandon and I got that seed capital from our first investors, Brian and Scott, and then got started.

Will Smith:

And the first year, maybe give us a picture of what these first $2 million of capital deployed look like. Just story time. What were these family farms like? Where were they?

Jack McCarthy:

Yeah. So it was just one farm. We looked at many, many, many farms. Were pretty picky on, for sure knew right out the gate that having good access to water was important. So in our business, the water rights are attached to the farm. So the old savvy growers have positioned themselves in good areas with good water rights. And that was something that was important. We also knew we wanted a quality orchard, quality growing conditions. So we looked a lot, ultimately found a first deal that was $2 million of equity. The second deal is maybe more interesting to talk about because we knew it wasn't a 10 out of 10 buy window like it's kind of emerging to be today. Now that prices has been low for a little while and interest rates are up, we're starting to see some, more frequently see very attractive situations. So far we've looked at 11 or 12 hundred farms and bought 20 something. So our hit rate's two or 3%. We're seeing that attractiveness level go up.

But back when we started, we knew we were in that kind of moment, so we were looking for more off the beaten path opportunity too. We found an opportunity in Arizona, which is not traditionally a growing region for these high value crops. It had the right weather, some advantages over California, like it had much colder winters, and then it had good access to water, and we thought, "Hey, let's see if we can't turn that into a pistachio region." So that was our second deal, which was mostly just buying land, and then over the next five years, proving it out by planting some trees, a small portion of it, proving out the water by drilling wells. And then as we got into it, doubling down, doubling down again to sort of once we knew it was working, then really add more capital. So I think philosophically that's how we try to operate is start small, do more once we know it's working. And that's embodied in the first couple of deals we did, particularly our second deal, which was in Kingman, Arizona.

Will Smith:

But the second one, you're basically starting from scratch, as you said, buying land and planting a crop there for the first time or an orchard there for the first time, and you have to wait five years. So why did the proof come earlier than five years that you deployed capital much faster thereafter?

Jack McCarthy:

Well, the proof is different things. It can be just showing that there's water. So we knew from the geology that there was water, from the diligence, but being able to access it for the first time adds a lot of value. Seeing how the trees mature and age as they get older, and seeing that it's on pace with California or better, is helpful. So we're seeing different things as we prove out this region. And you don't necessarily need to wait till year nine to have full proof. We're measuring the trunk circumference and looking at when they're coming out of dormancy and things like that to understand how they're growing and maturing. But a lot of it's water, a lot of it's growing conditions, and showing that slowly and steadily over time.

And then in the meantime, to your question on what it looked and felt like, I worked out of my closet. My co-founder worked out of his truck. Eventually we had our first kid. So I got kicked out of the closet and worked in my friend's startup. And we'd basically spend a few days a week getting stuff done, a couple days a week out looking at farms and meeting farmers to look at opportunities. So it was kind of a mix between a working out of your closet or a sort of startup feel. And then working out of the bed of my friend's, my co-founder's truck when we'd meet up at a farm that we were looking at.

Will Smith:

Man, that sounds like a lot of fun. Seriously, meeting in the field, not being in the closet.

Jack McCarthy:

Yeah. Yeah. There's a Dollar General by our first property that we still talk about. That was our office for the first couple of years, because we'd always meet up at that Dollar General. And I don't really feel any negativity around this, but I drive a Subaru, I live in the Bay Area. I'm very overt about, I'm not a farmer, but my co-founder is. And so in the early days, we would jokingly, not jokingly, park my Subaru at the Dollar General, hop in his F150 and drive over to drive over to meet people. So we look the part more than I would by myself.

Will Smith:

Totally, Jack, they should have just left you in the closet, hide you in the back room.

Jack McCarthy:

I know, right?

Will Smith:

Hurting all the credibility.

Jack McCarthy:

Exactly.

Will Smith:

So how many of your farms are start from scratch farms versus operating farms?

Jack McCarthy:

It's about half-and-half or a third that we developed, and two thirds that we bought. Even the ones that we bought where they were already planted, the trees might've been only three or four years old, or we were going to take them from conventional and convert them to organic. So still today we have quite a bit of capital and development farms. And then of our mature portfolio, 43% is mature, and at its steady state production, 57% of the acreage is either not yet mature or not yet certified organic.

Will Smith:

Well, that leaves me feeling like this is more of a land play than anything, because from across your whole portfolio, I missed the math there, but maybe 25% from the entire portfolio is actually operating mature farms that you're just continuing on in the way that they were. And the rest is you redeveloping or starting from scratch orchards.

Jack McCarthy:

Yeah. And to your point on where we are in the cycle, it's going to change depending... I think our belief is we want to be really expert at operating these crops, really good almond farmer, really good pistachio farmer, and then be flexible on what makes the most sense. Most of our pistachios are in a new region where we've developed, because the valuations are really high in California. And so if we can sell our Arizona stuff someday for California valuation, great. But we're certainly building it at a much cheaper cost.

Will Smith:

I see.

Jack McCarthy:

Where we are in almonds today, I think buying mature farms is becoming more attractive than building, planting an orchard from scratch just because of the price being so low. So I think we're flexible on where we are. Most of our firm's existence has been in a coming out of a boom period into a lower period. And so we've done a lot more value add and development, if you will, in real estate lingo, and less buying existing orchards.

Will Smith:

And when you're doing value add, is it still the case that you're buying from a family and it's a small mom and pop? What is on this land before that you then redevelop? A farm, just sort of an inferior one?

Jack McCarthy:

Yeah, that's still mostly the story. So yeah, it could be they were growing cotton or alfalfa, like a lower value crop, and they didn't have the know-how or the capital to plant an orchard. It does take a fair amount of capital to get an orchard up and running. In some cases, we've had orchards that were, I think cotton, alfalfa, rice, cattle, sort of lower value crops that long-term more and more of the places with good water and good growing conditions in California go to that highest and best use, which is higher value permanent crops in California. And there's still a fair amount out there that's not yet made that transition.

Will Smith:

And so how are these farms valued? That was something I spoke with your colleague, Sawyer, about and what a mess it is or how just kind of unpredictable it is. So talk us through that.

Jack McCarthy:

Yeah, I think that's one of the interesting things about, and I'm sure folks more in the search world or the SMB world.

Jack McCarthy:

... or in the search world, or the SMB world, are familiar with this, but things are not necessarily priced on a multiple or cap rate type of basis, like a cashflow type valuation. I'd say, many farmers have in their head, that an almond farm is worth $30,000 or $35,000 an acre. What we know is, some farms produce $2,000 of cashflow, or $1,000 of cashflow, some might produce $4,000 or $5,000. We're really sifting through for great water, and then valuing the orchards more on what they're going to produce from a cashflow and returns perspective, than caring about the comps. Yeah, that's something unique about our market.

It is less institutional, and so the valuation framework is just pretty old school. Whereas at TPG, every business was... 50 different private equity firms were looking at it, and they were all bidding to the decimal point of EBITDA multiple. And that's just not, at all, how our business is. There's no competition. Usually, the competition is the guy keeping it for another year, he decides not to sell it. The valuation is done based on what did my neighbor get, or what did I hear almond farms are worth.

Will Smith:

It also seems like another contrast between your valuation and... And how searchers will value an HVAC business is, you're basically pro formaing what you guys will do with this land.

Jack McCarthy:

Yep.

Will Smith:

And it's almost completely decoupled from what it has historically produced, or the economics of the historical production. Whereas in search, you're encouraged strongly to look only at that HVAC business, whatever it produced for the last three or five years. Don't think that you're going to come in there and transform it and grow it, assume that you're just going to steady state it. If you grow it, we all want to grow it, that's the goal, great, but don't pro forma that. I mean, do, have a good case, or whatever, have your cases, but you're really leaning on it on the recent historic financials. It sounds like you guys are not.

Jack McCarthy:

It depends. I'd say, in California, where there's good production history, we're typically looking at, what does this area produce in terms of almond yield? We know where the high yielding areas are, that have the right weather and soils, and the right water. And so we know what a high quality farm in a given area is going to produce. Or even often, we know the actual production history of a farm, so we try to mainly focus on that hard facts, and not be focused on, can we do better than that? Can we save money on this or that? Really, the only case where we think we're building in some upside is if we know we're going to take it organic.

That is something that we bake in, if you will, that we know we're going to do. Typically, we're saying, "Okay, this guy's been averaging 3,000 pounds an acre of almond yield. This is what it would cost to farm in this area." Because we farm up the street. That means we can pay X. We might not have financials from the buyer. We'd have USDA production history. But these are small businesses, so they usually would have a tax return, but not necessarily a detailed financial package. And we're really focused on what a week spend to farm, what's his production history been, or what's the USDA average production history in this area, so that we can be pretty certain of how we're going to do.

Will Smith:

Tell us more about this USDA production history-centralized database thing. So this a benchmark that exists, that you can reference.

Jack McCarthy:

We gather yield data from all different places, like there's county averages that the USDA publishes. We look at other types of data that's out there. We get advice from agronomists and farmers, and say, where have they seen high yields? And we have, basically, a tool we've built, like a GIS tool, that has water districts, what Opportunity Zone tax system it's in, what have the yields been historically, what do we think the cost of production is, in this area, based on the water and the yield? And we aggregate all that into... Basically, we know the areas where we'd want to buy, and where we wouldn't. We've gotten to the point now, where I think... When we see a new opportunity for sale, in five minutes, we know if it's probably going to be a fit for us or not. I think that the level of focus we have on the same types of assets has allowed us to, really, know what our strike zone is, and what it isn't, over the last five or six years.

Will Smith:

This tool sounds mighty powerful. Is this emerging, is some secret sauce for you guys? Do other players in the space, to the extent, you even have competition, have data tools like this?

Jack McCarthy:

There's a few more institutional investors in farmland. I'm sure some of them have it. But typically, they're doing lots and lots of different crops. We only do two crops, which are grown in the Central Valley in California, so we know the water really well. We know the growing conditions really well. And I think that's allowed us to be pretty focused on what we want. I think it is, probably, a secret sauce, that's a mix of this tool and just what's in our head, from having done this for quite a while now.

Will Smith:

And sorry, how long has it been? What year are we in.

Jack McCarthy:

2017, we started, so it's been six years, six and a half years.

Will Smith:

You just mentioned upside. What about downside? Of course, on the search, and again... Bringing this home for the searchers listening. One of the names of the game for searchers is really focusing on downside, as much, if not more than the upside. And because diligencing is so hard, there's so many unknowns, the businesses are so small, and messy, and fragile, et cetera, et cetera. Really, thinking it through is the name of the game. How do you guys think about downside protection when you're buying land and farms?

Jack McCarthy:

Yeah. I think the further we've gotten into this, the more we're really looking for very high quality farms, almost like a barbell approach, where most of our acquisitions are going to be high yields, senior water rights, good climate position. And that's going to be a farm we want to own for a long, long time. So we got to do our water diligence, make sure that the quality of the property is high. We do tissue samples, water samples, all sorts of agronomic look at the farms. And then, we look at, how is the weather likely to change over the next 20 or 30 years in this area?

Are we going to get so warm in the winter, that the trees don't properly go dormant, and then they don't set a good crop? That's something we think about. A lot of it is just doing really good diligence and making sure we're buying the 1% or 2% of farms that are highest quality. Generally, that means they're going to have very low cost of production, because they have high yields and inexpensive operating cost. And that's really what we're solving for, is that one end of the barbell, very high quality, quality farms.

Will Smith:

We've talked about now, a number of times, the play here, or the playbook, or the thesis, is bringing this talent, who's studying at university, agronomy, and so on, and pairing them with their own farms to run. We also just talked about your fancy data tool. Going back again, and trying to intersect this with how searchers think, what about operational efficiencies, being more tech-forward, out with the fax machine, in with Gmail? Does any of that stuff play a role here, operational efficiencies and/or tech-forwardness?

Jack McCarthy:

For sure. Yeah. I think it all does start with the team, so we have to have a really great team. Because we're going to give them a lot of authority. To borrow another concept from another business, we want it to feel like a franchise business, where our asset managers and farm managers are really running their own property, and we're just helping them. We need really good people that can do that. We have a mix of farm managers that are that young guy out of college, that studied plant sciences, and knows how to do it, but doesn't have the dough, and then also some really experienced farm managers, who've been managing for a family, or a larger operation, but were never given the full reins to run it themselves. I think we have a mix, but it starts with that very high bar for talent, and concentrating great people in one place.

When you get that kind of talent, you can do hard things. The average farm manager might not want to give self-driving sprayers and tractors a try, but our guys do. And we use all sorts of different ag tech for a variety of efficiency reasons. We use [inaudible 01:00:12], which is a tool that tracks our equipment as it moves around, to look at optimal pace as it goes through the orchard. We use aerial imaging to see the tree health. It looks at the leaves to see how stressed or not they are. And we can spot problems in the orchard. If you've got orchards the size of Central Park, you need somebody to look at that holistically, and identify areas that are... Something's going wrong. We use sensors in the soil, that look at how hard the roots are pulling, to get the water they need, and that allows us to, really, dial in the irrigation, so we're super efficient with water, which is important to us, from a value standpoint and a cost standpoint.

We use a lot of technology, but all that's really enabled by our team. There's no silver bullet, but it all adds up, and makes us more and more efficient. Yeah. The way we think about our businesses... We invest a lot in our team, that allows us to invest a lot in the farms, from a tech, sustainability, efficiency standpoint. That's ultimately going to drive more returns, and creates this virtuous cycle, where... There's mission embedded into the business model, and that's something that's super motivating to me, and super important, I think, to the overall success of the company.

Will Smith:

We haven't even talked about mission, which we will. But before that, tech, back to the tech. Again, as a complete layman here, I think of... One of the applications you'll hear of drones, for example, is aerial photography for agriculture. I just think, okay, this is a best practice that's been adopted across the agriculture industry. But really, it's probably just like you would see in an SMB, that... Yes, it's a best practice, but in reality, these small operations have not adopted it, and are indeed years from adopting it, sort of thing?

Jack McCarthy:

Yep, yep. Yeah. And I think an example would be... Most farmers in our crops use drip irrigation, like micro irrigation. More and more, that's becoming the norm, to be just as efficient as possible. It's more rare to see people use the types of sensors that we use in the field, because they're not cheap. It's complicated. You need to be able to look at your iPad or your computer in the morning, and dial things in further. And I think, fortunately, or unfortunately, that's not that common in the industry, so I think we definitely use more technology than the average farmer. There's no silver bullet. None of it's going to add 50% to the bottom line, but it all adds up. And it makes us more efficient, smarter, learning, machines. And we're just getting something out of each... [inaudible 01:03:14] We have each season, getting better and better operators.

Will Smith:

Hiring great talent being such a key part of your strategy, do you guys have this really well-honed, aggressive recruiting function? Are you at the schools, where agronomy... The best agronomy schools, and recruiting from within them, sort of thing?

Jack McCarthy:

We have some people straight out of school, but mostly, we're hiring from other farming companies, other family businesses, the agronomy, more like plant doctor type of businesses that are out there, that give farmers advice? We hire from different parts of ag. We do have a very strong reputation, because we treat our people really well. We have a very strong culture. And I think that's made it easier and easier to recruit good talent over time. Recruiting now is much easier than it was four or five years ago, because we've overinvested in making this a great place to be, a concentration of really awesome people. It's hard to describe, but I think... When I talk to other business owners, the more you put into the culture, the more you're going to get out of it. And I think we definitely feel the benefits of that. And in an industry where small businesses can't necessarily do that, large businesses tend to be more stale and bureaucratic. We're very thoughtful about the culture and the value system that we operate within, and that's just paying big dividends in terms of getting fantastic people.

Will Smith:

Elaborate on that. That's a perfect segue to the mission. What is the culture of the mission, the values?

Jack McCarthy:

Our north stars leave the world better than we found it, which, to us, is like the test we apply to anything we do. We want our team to be better off than if they worked elsewhere. We want our investors to be better off than if they invested in something else. We want the farms to be better off than if somebody else owned them. It's the bar we hold ourselves to. We hope that's going to lead to farms, families in the future, we're proud of. A lot of what we're doing is, hopefully, showing the ag industry, there's a better way to do things, sometimes. The way we try to act is being really candid with each other, putting family first, acting like owners, and then leading by example. We want to be really honest with each other. We want to remember there's bigger things in life than work, which is the family first.

I think what we're fantastic at is acting like owners. We have this very dynamic team that, ultimately, feels more responsibility for the farms than if they owned them themselves. And all of our team has equity, so they really do own them, but I think people act that way, anyway. And then, lead by example to us is, certainly, doing the right thing, but it's also trying new things that the average grower might not do. We have a desalination system on one of our farms, where we can take water that couldn't be used, clean it up, so that it's suitable for the trees, and we're basically using found water that, really, is much more efficient and sustainable. We don't know how well that's going to work, but we're definitely going to try it. And then if it works, we're going to do more of it.

We're going into a new region doing organic conversions. These things are not necessarily every day activities, but we're going to take some calculated risk, try new things, and try to double down on what's working, and not be afraid to try new things, because that's what the industry needs. That's how we describe it to our team. We're really serious about what matters, so culture, results, financial, sustainable, otherwise. We're really informal about what doesn't. We don't have a dress code. We didn't get an office until a year ago. We were working out of closets in shared spaces and whatnot.

Will Smith:

Dollar generals?

Jack McCarthy:

Dollar generals, no fancy trucks. We just don't believe in that kind of bullshit. We want to be really serious about the things that actually matter, and extremely informal about the stuff that doesn't, and keep the bureaucracy out, and the entrepreneurialism high.

Will Smith:

Hearing anything about agriculture is going to, invariably, make contact with the climate conversation, both in terms of doing right by the climate, which I think you've already addressed in trying to move, or go organic where you can, but also in terms of your own prospects, and how climate change may or may not affect the... Especially if you're a long-term play here, and you're not thinking in five-year increments, but in fifty-year increments. I think you've already addressed the former, but if there's more to say about how you guys are doing your best to respect the climate, say more, but then also address how you think about climate change in terms of mitigating risk.

Jack McCarthy:

Yeah. I think we Do a lot on sustainability on the farm. Of course, there's the things like organic conversions that are more known to the consumer. If you're in this sustainable ag world, there's things that are a part of organic farming, that matter. We're not using pesticides in organic. We're using pheromone-based disruption. We emit female pheromone that confuses the pests. They don't mate. The pest population is suppressed. We don't have to kill them. But that affects pollinators, for example, because we're not killing the bad bugs. We're also not accidentally killing the good. We'd use compost to deliver the nutrients our trees need. And compost, generally, improves the soil quality, the soil health, and is capturing carbon. Almonds and pistachios, generally, are carbon-negative, whereas most types of protein is pretty carbon-intensive, like beef, pigs, chicken. All that stuff is carbon-intensive. We're fortunate that we're carbon-negative. And then, we really lean into that when we're doing the organic.

There's a lot we do that, I think, the end consumer doesn't know about today, but, I think, is caring more about over time, and new types of certifications around pollinators and regenerative farming, that I think will be something we participate in overtime, we're probably already doing. And we'll just take credit as those markets and certifications become more clear and defined. The way we position ourselves is... Back to the original north star, we want to leave the world better than we found it. We want to be doing this for a long time. I think we're trying to protect ourselves by buying high-quality water rights, areas that really can, long-term, support these types of crops, because there's some areas that can't. That means good water rights, that are going to have water every year. It's climate position, meaning it's going to have the right weather now, but the right weather in 30 years. That's challenging to do, but it's something that we think is important, given we're trying to build this business for the long haul.

Will Smith:

Mm-hmm. We still got a few more questions here, Jack. I hope you're up for it

Jack McCarthy:

Yeah.

Will Smith:

And some meaty ones too. Okay.

Jack McCarthy:

Good.

Will Smith:

Let's talk about what the business looks like in terms of ownership and all of this equity that you've taken on. Super basic, you are a business, you are not a fund, right?

Jack McCarthy:

Yep. We think about ourselves, increasingly, as a investment firm with one portfolio company. It [inaudible 01:11:48] in both seats, a little bit, but really, it's a business, not a fund.

Will Smith:

Despite the fact that I'm the one who asked the question, can you explain to folks, what the nuance there, is between the difference... What the nuance there... The difference between those two kind of things are?

Jack McCarthy:

Historically, we had a manager entity that oversaw all the different farm entities. We pulled them all into one main business. So now, most of the farms are in one partnership. Our company manages that partnership, like... You might see, in a private equity context, where there's TPG, and then it's portfolio company. They might have lots of portfolio companies. We have one. And we are deeply involved in the operation of it. I think about it more and more like an operating business. We have partners that come into the operating business. The operating business, the Gold Leaf Farming LP, they pay us a management fee, and to carry, for us overseeing it, and running the business. But ultimately, it's one single partnership that has our investors in it, that owns the farms, that does the farming, and all that.

Will Smith:

Okay. 350 million in assets, is that number set to just grow indefinitely? Is there a ceiling, or as long as you can find deals, you can keep growing that number?

Jack McCarthy:

I think our business is going to, sometimes, grow, sometimes not, depending on where we are in the markets that we're in. This is a particularly attractive buy opportunity in almonds, because price has been low for three and a half years. These crops tend to have cycles, where price gets high, all the growers make money, they overplant. Five or six years later, those orchards come online, and create too much supply. Price falls in a time like this, where price is low, and nobody's planting. People are ripping out or abandoning orchards, and so supply is falling. And demand will keep growing and cause that to boom again, as it outstrips supply. There's going to be moments like today, where we want to be acquisitive. And then, there's going to be moments where prices are pretty high, valuations are pretty high, and we're going to be, probably, not growing quite as much in those periods.

Will Smith:

And you referred to examples earlier, where a couple of firms who have done this playbook over decades, there were two big buying opportunities, where they were very acquisitive in their intervening years, just sat on their capital, or didn't deploy more capital.

Jack McCarthy:

Yeah. And I think we see that... Certainly, if you read Berkshire Hathaway letters, you're going to read all about that kind of stuff, like buying in the opportune moments that only come around once every 10 or 15 years. And then, even in ag, we see that with the family farmers we really respect, built their...

Jack McCarthy:

... that with the family farmers, we really respect, built their businesses that way, like the one I mentioned. Yeah.

Will Smith:

But if you had to guess, just to give us a sense of ceiling or potential here, what do you think that $350 million number is after this buying window, after you've gone through this acquisitive period?

Jack McCarthy:

Yeah, I don't know. I think there's about 1.5 million acres of almonds in California. Maybe that's $50 billion of assets. So it's a big market. As I share, a lot of that is not of the quality that we'd want, and so it's a smaller portion that we'd want to buy. But I do think this is a big market with a lot of opportunity and it's something that we're excited to keep building a business around. So I don't know, and it's definitely hard to say how the growth will play out, because we do want to be very flexible and grow when it makes sense, not grow when it doesn't. But I do think it's a big market in almonds and pistachios and then probably some other crops that over time, would make sense to use a similar model to get into as well.

Will Smith:

The structure of ownership, so what does your equity look like to whatever extent you can share and your co-founder and then the managers who you really want to see thinking like owners over their farms? And you said that they probably would anyway, but you've also given them equity to juice it further.

Jack McCarthy:

Yeah, so our investors are limited partners in a limited partnership. So we have a limited partnership that they come into. That capital allows us to acquire the farms, and if we do well and the assets appreciate in cashflow, we earn 20% of the profits, a carry type of model or promote. And so that's where my equity comes from. We also grant 5% of the profits off the farms to our team. So a private equity firm would have an option pool for its management teams. That's the same concept. So we have 5% of, if a farm makes a hundred dollars, $5 are going to go to the asset manager, the farm manager, some of the farm operators, the accountant who's involved with that farm. And usually, I'd say the asset manager and farm manager are going to be some of the bigger investors in their properties via that program and really feel a lot of ownership over how the farm does over time.

And what I see is a strong incentive to go the extra mile, make tough decisions on things that are working or not working. A good example I always share is our big property in Arizona. I go down and visit occasionally. I was driving back to Indiana during COVID, where I'm from originally, from California all the way through the night, ended up in Kingman, Arizona at like 6:00 AM on a Saturday, pulling the gate, let myself in. But of course this is a strange car pulling onto the property. And I've been there two minutes and I see a dust cloud coming at me 50 miles an hour. It's our foreman, Jerry, who, for whatever reason, was monitoring the gate at 6:00 AM on Saturday. "Excuse me, can I help you guys?" I was like, "Jerry, it's me." So that stuff, a typical employee is not going to do that at 6:00 AM on Saturday, come check on who is pulling into my operation. But our team really thinks of it as their farms, not like my farms or our investors' farms. And I think that mindset is just the whole ball game really.

Will Smith:

I wonder if they feel that way. I mean, you've developed a culture to enable them to feel that way. But I wonder if there's also something in the nature of presiding over land that lends itself to somebody feeling like they're a guardian, a custodian of a particular bounded space of land. You know what I mean?

Jack McCarthy:

I think that helps. Yeah. I think that's part of it, but I really think we happen to be in a business that is very tangible and I think that helps. But we just have a very special group of people that, whether they had equity or not, would really treat it like it was their own and think about it like it was their own and do the hard things, negotiate the extra little bit to save money and drive the maximal performance that we want. And I don't know, we're just really lucky, I think.

Will Smith:

So you had said maybe in the future, you look at other crops to do kind of a similar playbook. And let's again kind of define key elements of this playbook, but actually abstract it out because... So basically an industry that maybe where a lot of the kind of mom and pop, it's very fragmented. A lot of mom and pops, they're not necessarily using the best practices or the latest technologies, and yet there are operators out there who could basically run the businesses better, let's call it. But those operators don't have access to capital to go buy their own. So you're building a business around marrying capital with these businesses that can be improved with the operators to run them. The obvious question is, I don't think I said the word farming in that description once, I wonder, this is just me spitballing, could this model be applied to a bunch of different industries? And maybe this is what private equity does and I just don't realize it, but how do you react?

Jack McCarthy:

Well, I certainly think it's this search ecosystem. I think whether it's formal searches or more informal that I know is a big part of who listens to this podcast, I think that is what the search ecosystem is and sort of taking high talent people and giving them the keys to run a business that has good potential. So I think we happen to be pretty focused on agriculture and see a lot of opportunity for that mindset in agriculture. But a lot of the companies we look up to, like I mentioned, franchise businesses, if you look at like Chick-fil-A franchisees, they're extremely selective, like how they hire the right people to go open up a new Chick-fil-A, and it's a bonanza when a new Chick-fil-A opens up and those are well-run operations.

We look at Alpine Investors, a private equity firm that's really done this model of buying smaller businesses, but bringing in high talent people to the senior levels of those businesses and really focusing on the people side of the value creation. So I think you're right that it definitely applies to lots of different things. We happen to be focused on agriculture and I think there is a lot of opportunity in agriculture for this kind of model. But yeah, I think you're right, is search and other places as well.

Will Smith:

And I guess I often just come at this not from the investor mindset or the private equity firm fund mindset, but as just the searcher mindset, the person who's going to buy the business, and many of those, the vast majority see themselves as the owner operator of a single business. And yes, they may then acquire more and more and build something larger, but I wonder if rather than people in the audience thinking about buying a single HVAC business, they think about your playbook, where they set out to buy 10 HVAC businesses in Virginia and they focus their energy on finding great managers of those businesses instead of themselves being the owner operator of an individual business. And again, as I hear myself talk, I guess, yeah, this is a playbook that maybe traditional search investors are effectively doing, although they're doing it across multiple industries and maybe industry-focused private equity funds. That is the playbook. So maybe it's not quite as novel as I think.

Jack McCarthy:

Yeah, I don't know. I mean, I just definitely have found the people is the whole ball game and when you get the right person in the right seat, which is we use a system called EOS, which I'm sure a lot of people in this community use, that's from Jim Collins or from EOS, but it's so real and you really feel that click of somebody being like, "Wow, this is just working." So we spend a lot of time on that because we find that it works. I find it to be really motivating. I think our team does too. Yeah, we're just super focused on that because I think it really matters.

Will Smith:

People in the audience, for searchers in the audience, the idea of buying a single farm, so not doing what Jack and Gold Leaf are doing where there's this hundreds of millions of dollars of capital deployed, but buying that one pistachio farm and improving it and bringing best practices to bear on it, is that something that you think a searcher should consider or do they need the level of expertise your agronomists and so on, people have really been educated in this, is that really who should think about doing this? Because as you well know, many searchers do buy businesses that are highly technical, HVAC businesses that could stand in that I keep using, those are very technical businesses, and so searchers who have no HVAC experience will buy them and make a success of them. Can the same thing be thought of here for single farm acquisitions?

Jack McCarthy:

I think possibly. I mean, I think we definitely occasionally see a younger guy that manages to raise capital around buying a farming operation, and I think that's awesome. One thing I talk about in one of our letters a year or two ago is this isn't a winner-take-all business like in tech where you need to scale it to survive. We can sit at our current size and do quite well over time if we operate well and have the right farms. So I think there is opportunity there. I think we get little bits of advantage over time as we get a little bit bigger. But it's not so substantial that you can't imagine owning a couple hundred acre farm and doing well with it. You do need some amount of scale, but it doesn't need to be our size to work.

Will Smith:

And to be clear though, you, a searcher, would have to partner with, you'd have to have your manager. I mean, if you ain't doing the farming-

Jack McCarthy:

What we see is somebody that looks like one of our farm managers that bootstrapped a farming operation over time, that's what we tend to see. But not necessarily somebody from HBS or GSB going and buying a farm. You do need the farming and agronomy expertise and it takes a long time to learn because you only get one crop a year, so you only have one feedback loop per year. So I think that's why the industry is so long duration, because you don't get to learn quite as fast as you would maybe in other businesses.

Will Smith:

Sure, sure. Yeah, that is an interesting challenge of agriculture. But Jack, just to be clear, why couldn't an entrepreneur buy a business and have a farm manager, that already has a farm manager, they hire a farm manager, and so they're the Jack of that particular business?

Jack McCarthy:

For sure. I think they could, and I think it's definitely possible. It takes time to get basically that relationship going and it's some of the things of why has this space not been institutionalized, like the overlap of talent and capital and stuff. So I think it's possible. What we've seen more of is a couple cases of more of a younger farmer that gets into the business themselves, finds the capital to do it.

Will Smith:

Great, Jack. Well, one last kind of big topic I want to hear more about is just a few elements of being a long-term business. First of all, kind of a technical question, is there going to be a moment where you return the capital to your investors or what does that look like? How do they think about the return on deploying a quarter billion dollars into something that's indefinite? How do they think about that?

Jack McCarthy:

Yeah, I mean I think when we were buying these as individual farms, eventually, we would sell the farm. And I think now, a pistachio farm lasts for like 50 plus years. Almond farm lasts 25 years, so that could be quite long-term, but that's how we originally thought of it. Now that we have it as one business, we really think of it as building the business over time and creating off-ramps for our partners if they want that. I think a lot of our partners want the long duration compounding. Some of them want a shorter duration than that. And so I think the next phase of the business is really focused on raising to take advantage of the almond cycle where it is coming out of that. And I think there'll be opportunities to recapitalize, let people cash out if they so choose.

And I just really think about this as one of my companies at TPG, where maybe a different firm, a different owner owned it before we did. They took it through one phase of the business, we were taking it through the next. And I do think we're going to be with the business for a long time, but the partnership group might stay pretty consistent. It might turn over a little bit as we raise money in, offer chances for liquidity, but we're definitely thinking about the business long term. And I think a lot of our investors think that way too. But not all are planning to be 25 year hold.

Will Smith:

Jack, when you were thinking about how you wanted to model this as long-term or not, one of the other businesses that you mentioned earlier in this interview, forgive me if I'm butchering it, but I guess it was Brandon, what Brandon had worked on before where he did acquire a portfolio of farms for the Canadian fund, do I have that right?

Jack McCarthy:

Yeah, they planted, developed a bunch of orchards and then sold that to a Canadian pension.

Will Smith:

Yeah, thank you. And so you must have considered that yourself as what you Jack would go do. How did you decide to do something that is going to require decades of your life? What did you like about truly long-term commitment as opposed to something like what Brandon did?

Jack McCarthy:

Yeah, I think there's some personal aspects of it and then some more industry aspects of it. When we look around our industry at who's been successful, there's just a very long-term industry. So we look at companies like Cargill or Driscoll's that I mentioned, and those businesses were built over many decades, if not centuries. I think Cargill was founded in the mid 1800s and is still around today. And that's the type of businesses we really look up to, and really what's worked in agriculture. This is not a business where you can sort of buy, turnaround and flip like in real estate. And so it just doesn't work. And the businesses that have been successful in our space are very long-term oriented. And so that's something that is sort of just foundational about the industry we're in.

I think I also just admire those businesses a lot. And I think I personally enjoy building something or the sort of act of building it. Trying to make a great company out of nothing is very inspiring to me and something that gives me a lot of energy. So building our great team, building a great portfolio, learning every year and improving every year, and that stuff doesn't happen overnight. It's not like a quick mastery kind of industry where you can just come in, do something and have a great result, maybe tech or something. So for us, I think it is a long-term compounding type industry. And that's something I found really motivating and I think matches with my personality and just what gets me excited about coming to work every day. So I think it's the industry, but it's also personal.

Will Smith:

Yeah. Well, I too just think businesses that are century businesses are so cool. It's so neat. And you really think about Gold Leaf in those terms? You aren't going to be around in a hundred years, but you hope and expect that gold leaf might?

Jack McCarthy:

I hope that's what we're building, is that level of strength and durability. I hope it lasts beyond me and I hope I do this for a long time, but I hope it lasts beyond me. And I think we're going to have lots of different things we learn and lots of different iterations of how we operate, but I hope that what we're building is pretty lasting, and that's definitely how we approach growing the company and building it.

Will Smith:

And just again, kind of on working with investors when you're thinking about something so indefinite, permanent equity is a phrase that you hear about a lot, but I've heard some people also be kind of skeptical of it because permanent equity they'll say is, "Well, that just means rather than seven years, it means 15 years," or, "Rather than seven years, it means 20 years." So it's a longer time horizon, but it's not really permanent or indefinite. Do you have any thoughts about that that you can educate the audience on how to think about that?

Jack McCarthy:

Yeah, I mean, I think we don't seek to have no accountability from our partners in that they're stuck and to nothing they can do about. I think sometimes the permanent equity thing is aspiring to have things that aren't good for the business, we want-

Will Smith:

No, what do you mean?

Jack McCarthy:

Well, I just mean I think we like that our investors ask questions and get involved and are helpful to us as we grow. And I think we are hoping to build an investor base that is long-term oriented, but still, like us, has a high ambition level and high bar for what we're building. So I don't know. I think we don't necessarily think of our equity as permanent. We think of it as partners that want to be along for the ride, but we have to keep earning their trust every day and demonstrating good performance every day. So that's like an everyday, month, year commitment, and we try really hard to do right by them and do a good job for them, even if the vehicle is set up to be longer term than that, and sort of the legal docs are set up to be longer term than that. So I guess that's what I mean.

Will Smith:

Okay.

Jack McCarthy:

My team's going to laugh at this. I always use so many Berkshire Hathaway analogies, but they talk about their investor bases carefully crafted over many, many years, and they were really reluctant to do the B shares that they eventually did. They basically felt they had an awesome group of people that were their partners and they didn't want to change that up, because they'd spent a long, long time telling them what they were building, getting people who are on board for that. And there is that aspect of, "Hey, here's what we're doing. Are you signed up for that?" And trying to get that more perfect match between who are your partners and what are you trying to build? Is everybody on the same page? So anyway, I think it's a constant work in progress, but it's something that we think about a lot to have the right type of partners for what we're trying to do.

Will Smith:

Yeah. Well, as you guys grow and become more successful and better at what you do and your reputation precedes you, I imagined kind of a flywheel will kick in with respect to your investors the same way it does with your access now to the best farms and your access to the best talent. All that stuff kind of gets easier as your reputation grows. You can kind of become selective with who you hire, what you buy, and then also whose capital you take.

Jack McCarthy:

Exactly. Yep, exactly right.

Will Smith:

Jack, what didn't we talk about that you wanted to? Did we miss anything?

Jack McCarthy:

I don't think so. I think, no, it's been fun to share the story, talk about the different aspects that are similar and different from the typical business that's on your program. And now it's been awesome to be here. So thanks.

Will Smith:

Well, this is where I'll ask how people should reach out or connect with you, but you did mention an annual letter. Is that something the public can get?

Jack McCarthy:

Yeah, I think we have it on our website. I try to put together thoughts on what we learned each year and share that out with our investors and other people. We're pretty open book, so we have lots of information on our website, which is just goldleaf.ag, G-O-L-D-L-E-A-F.A-G, and whether you're interested in learning more, coming to work with us, investing with us, all that information is on our website and contact info there to reach out. So always love meeting people interested in ag and trying to get more involved in food production and sustainable food production.

Will Smith:

And so if people want to reach you directly is still the best way via the contact form of the website, or can they hit up on LinkedIn?

Jack McCarthy:

Yeah, my email's jack@goldleaf.ag and our website has a variety of contact details too. But yeah, feel free to reach out and I'll get you the right person.

Will Smith:

Great. Jack McCarthy, thank you very much, sir. What a fascinating venture you're working on here.

Jack McCarthy:

Yeah. Thanks for having me.

Will Smith:

Thank you. I hope you enjoy that interview. Make sure you subscribe to the Acquiring Minds channel below. We are now publishing twice a week, so tons of new interviews and stories to come, stories that will help you along your own path to acquiring a business.