Patagonia Sur: Conservation, Capital, and Investor Strategy

Overview of the Patagonia Sur Business Model

Warren Adams held 60,000 acres of land in Patagonia, Chile, and planned to achieve a 15% internal rate of return by developing multiple revenue streams, including eco-tourism, carbon credits, water rights, and sustainable land development. He had raised $20 million in capital from high-net-worth investors (HNWs), but was being blocked by institutional investors who were less willing to take on the risks they associated with Adams' venture, Patagonia Sur. Managing so many different revenue streams was seen as highly difficult, and institutional investors viewed Adams' plan as unlikely to do more than break even on a yearly basis.

The main issue for Adams was to unite conservation with capitalism. He intended to do this by bringing in major institutional investors and developing a win-win strategy — one in which investors would benefit financially while Patagonia would benefit from conservation. This vision was embodied by Patagonia Sur. Because acres of land could be purchased for as little as $200, the plan appeared low-risk from Adams' perspective. The central problem, however, was that his for-profit plan was open-ended, was not structured as a fund, and established no clear timeline for when returns would materialize, even if shares could eventually be liquidated.

One aspect of the business plan involved developing plots "sold" to individuals — titles were not transferred; rather, "keys" to the land were sold, meaning individuals owned shares in the corporation and could develop the land in accordance with rules set by the corporation (Segel et al., 2012, p. 5). Thanks to various credits from the Chilean government and a heating carbon credit market, Patagonia Sur had been profitable in its first year of business (p. 7). Eco-tourism and water resources represented additional revenue streams. Revenue generation was not the primary issue, however — the primary challenge was convincing institutional investors that they could exit their investment by selling shares on the secondary market, which remained nascent (p. 11).

The Investor Divide: HNWs vs. Institutional Investors

HNWs were not as concerned with risk because they were not under a deadline to receive a return on investment and were willing to let their capital sit in the property, which would increase in value over the coming decades. For them, the risk was mitigated by the appreciating nature of the asset. For institutional investors, the risk was not mitigated. They would need their investment to remain liquid — meaning they could quickly withdraw funds via a sale if necessary, either to return money to clients or to exit the investment. There was nothing liquid about Adams' plan, as far as institutional investors were concerned, and by withholding their funds they were effectively blocking his business plan from proceeding.

The best reason for HNWs to invest in Chile was the land itself — it was inexpensive and would most likely rise in value as demand increased. HNWs recognized this and were willing to hold the investment long-term, viewing it as a legacy asset that could be passed on to their children. Institutions, by contrast, did not want to wait fifty years for a return. They wanted the ability to sell at any time and realize a profit. Even if Adams' plan generated income, it remained illiquid. In order to win over institutions, Adams would have to demonstrate a clearly defined exit strategy — one that identified the secondary market, proved that buyers existed, and confirmed that their investment would not be locked in indefinitely. He had raised $30 million, but his goal was $300 million — ten times as much — and he believed only institutional investors could deliver it.

Three Strategic Alternatives

With this context in mind, several options were available to Adams. First, he could develop an exit strategy that would reassure institutional investors by demonstrating that the secondary market for shares in Patagonia Sur was more liquid than they assumed.

A second alternative would be to forgo institutional investment entirely and take the company public by offering shares on the open market. This would allow Adams to raise the capital he required, though it would also draw attention to the project and potentially invite competition in the region — driving up land prices, which was precisely what Adams wanted to avoid. His entire strategy depended on acquiring land cheaply before prices rose.

A third alternative would be to scale back the scope of the project, concentrate on just a few revenue streams, and focus on conserving a more manageable portion of land using the capital already raised. This approach would allow the business to stabilize and develop gradually over several years, during which time Adams could build his brand, attract additional investors organically, and allow revenues to speak for themselves. Rather than securing $300 million upfront, capital would accumulate over time — with less public scrutiny, less competitive pressure on land prices, and a more sustainable growth trajectory.

References

Segel, A., Ibanez, N., & Verjee, J. (2012). Patagonia Sur: For-profit land conservation in Chile. Harvard Business School.