Agriculture: the new infrastructure investment for super funds

Mike Fitzpatrick
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(pictured: Mike Fitzpatrick)

By Greg Bright

A group of several prominent super fund CIOs and high-net-worth investors recently analysed the investment climate for Australian agriculture. They found that short-term history was against the sector but recent developments were promising for future investment at an institutional level. The consensus was that agriculture could be the new infrastructure.

A symposium, organised by third-party-marketing group Shed Enterprises, took place at Sydney’s Royal Easter Show late last month, with the assistance of the Royal Agricultural Society of NSW and sponsor AgCap, the manager of the $150 million Sustainable Agriculture Fund (SAF).

Big investors who spoke included: Mike Fitzpatrick, the founder of the Hastings infrastructure group; Martin Newnham, chief executive of AgCap; Suzanne Tavill, of private markets advisor StepStone; investment banker Michael Whitehead of ANZ; Brian Delaney, head of strategy and global business for QIC; Steve Merlicek, CIO of IOOF; Mark O’Brien, CIO of NSW Treasury Corporation; and Jamie Nemtsas, managing director of Sornem Private Wealth and farming roll-up group Murray River Organics. Some spoke under the Chatham House Rule.

Fitzpatrick traced his recent experience, as a founding investor in the 2009 establishment of the AgCap SAF, and compared it with the climate surrounding the early years of infrastructure investment.

“I believed that the sector, in 2009, was in the same place that infrastructure was 25 years before… but in the past seven years we have not seen widespread investment from super funds. The majority of investment has come from offshore.”

There were similarities but also some differences between the two real asset sub categories. Among the similarities: strong capital preservation, high gross margins and stable asset prices compared with equities. Agribusiness investment remains relatively unsophisticated, as infrastructure initially was, where returns to investors were “hit and miss” in the early days; and the scale of the opportunity for both is large.

On the differences, Fitzpatrick said: infrastructure is reliant on monopolies, but agriculture has diverse ownership affording an opportunity for consolidation; and infrastructure has evolved through sophisticated risk management and contracting to provide predictable cashflows while agriculture is currently fragmented leading to short term volatility in income which may afford an opportunity similar to energy markets in the early 2000s.

“So, agriculture does a very good job at providing diversification… But accessing the opportunity remains a challenge,” he said. “Super funds are vey big but agriculture is typified by smaller assets. Large-scale farming enterprises have been largely unheard of and, by and large, there is no separation between ownership and management.”

Fitzpatrick said that, seven years on from his initial investment he felt the sector had begun to mature and had started to learn how to manage “third-party owners”.

Brian Delaney of QIC said that super funds were in a very good position to invest in agriculture as a way to match assets with long-term liabilities. The $75 billion manager has been studying agriculture closely, comparing the opportunity against other real assets such as infrastructure, private equity and real estate.

“The top 25 per cent of farms have produced very good returns against equities… and global demand, especially from Asia, [for agricultural products] is growing strongly. It’s a big thematic. On the supply side, out of countries like the US and Australia, it’s at an all-time low.”

QIC’s research indicates that the right agricultural investment portfolio can deliver IRRs (internal rates of return) of between 10-14 per cent, which would sit “comfortably” within a long-term portfolio next to other asset classes.

As one CIO said: infrastructure and real estate looked fully priced, especially in Australia, and there was a need for a new asset class with similar long-term characteristics.

Steve Merlicek of IOOF, and formerly the CIO of Telstra Super, said that investing in farming, to him, was a lot like investing in venture capital, where to be with the top-quartile performers was “so important”.

He said that there was often a disconnect between the macro and micro – for instance. While there is a lot of noise around Chinese demand, many foreign companies still had difficulty making money in China.

“You have to translate the macro [fundamental drivers] into the right products,” he said. “The super industry has a lot of money to invest but you need to give them the evidence…” Merlicek’s advice to investors was: “Whatever you do, don’t invest in a first-time fund.”

StepStone’s Tavill said that one of the reasons agriculture was getting more attractive for investors was that it lent itself to the application of big data, which had the ability to make farming more efficient.

The symposium was told that small inexpensive satellites could now detect a farm’s cattle condition, for example, on a real-time basis, so that timing for market could be optimised. Crop management was similarly enhanced by technology and data management.

At ANZ Bank, Michael Whitehead said, the “new mantra around data and digital” has started in the agricultural sector. “We have been building some amazing models”.

It is this mix of increased technological and analytical sophistication, coupled with the fundamental demand and supply drivers of the sector, that most speakers at the symposium suggested it was ripe for investment by patient long-term investors, such as super funds.Martin Newnham of AgCap, said his firm had completed a lot of work on how to segment the risk profiles of agribusinesses and ensure his fund wasn’t assuming increased risk in order to chase additional return. This controlled approach has led to AgCap focusing on “core Agriculture” being scalable, land based operations with bulk commodities.

Recent performance in the fund has reflected the controls implemented and lessons learnt; pleasingly now consistently delivering above benchmark returns. This fund positioning allows AgCap to focus its portfolio expansion on capital preservation whilst leveraging an excellent team across a range of farms with core commodities. Under this plan, AgCap planned to double the size of its Sustainable Agriculture Fund, to $300 million under management, in the short term via a modular and efficient deployment of capital. AgCap is also exploring bespoke mandates on behalf of overseas institutional investors.

“We’re adopting what we believe is a sustainable and sensible approach by having a staged process to our growth,” he said.

AgCap looks to capitalize on the “family model” of farm ownership and management by entering into partnerships with the farmers, which allow the introduction of the latest technology and commercial techniques to enhance the returns from the farms. The manager also looks to build scale through farm amalgamation.

It diversifies its portfolio, currently involving five “aggregations” of agricultural properties, by water source and geography. The portfolio is “land rich”, with about 78 per cent of it’s worth due to the land.

Newnham echoed the other big investors at the symposium, saying the agriculture offered a different set of risk factors for investors, thereby enabling them to diversify their own portfolios.

Note: Shed Enterprises is a company associated with Investor Strategy News.

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