It seem counter-intuitive, particularly with all the talk of food bowls for Asia, that a sector which represents more than 25 per cent of New Zealand’s economy is widely perceived as difficult and inaccessible for investment – whether those investors are retail, large fund managers or overseas looking to invest in New Zealand’s agricultural success story.
Few successful agriculture-based businesses are listed on the NZX, especially when you consider how significant a contributor agriculture is to the economy. Many successful agri-businesses are co-operatives or highly successful, family-based operations and therefore not readily available to outside investors.
But even our most successful agri-businesses find it difficult to shore up capital positions and ensure access to funds for future business development.
So where is the investment coming from that will drive growth and productivity gains in New Zealand?
New Zealand’s regulations around overseas investment rank it a lowly 48th of 53 OECD countries for ease of access for foreign investment. Yet despite that ranking and the political anti-foreign investment rhetoric that seems to rise to prominence in election years, there is ample overseas interest in investing in our agricultural sector.
That money is coming from around the world from investment funds and businesses that understand the prospects of long-term investment horizons matched to growing demand. These investors understand New Zealand’s production and processing capabilities as well as its potential for further growth.
We need more foreign investment as there is an obvious gap between national savings - what we can finance domestically - and the levels of investment actually required in the sector.
However one of the looming opportunities and a rapidly growing source of capital in the sector is equity partnerships. In essence, equity partnerships bring external investment funds, sometimes pooled, sometimes from single entities or investors, into a business sector which has historically – and riskily – relied more on debt.
If the benefits of an equity partnership (i.e. scale, different skillsets) can be unleashed, then returns may well be higher than those of the average farmer. Anecdotally the majority of returns from equity partnerships have been in the form of capital appreciation rather than periodic cash dividends.
Such new approaches to agri investment in New Zealand are critical. ANZ’s insight report Greener pastures identified the potential for New Zealand’s agri-business sector to capture another $NZ0.5 – 1.3 trillion in exports by 2050. But to achieve those goals the report also identified a need for up to $NZ340 billion in international and domestic investment to enable production growth ($NZ210 billion) and support farm turnover ($NZ130 billion).
At ANZ we have access to a local and international pool of around $NZ160 million looking for equity investment opportunities. Other operators in the field are also experiencing increasing demand with some set up to give access to retail investors and others working with large family holdings, high net worth investors and trusts to pool capital and find opportunities.
Equity partnerships bring a mix of skills and capital that supports growth and expansion and they are a rapidly emerging pathway to farm ownership. They spread the risk of investing in the sector, can release equity for succession planning, and unlock the benefits of investing in the sector without having to own a farm.
In our latest ANZ Research Agri Focus report we note some critical success factors in an equity partnership:
- a robust, achievable strategy for value creation
- appropriate due diligence
- good relationships and common objectives and motivations between shareholders
- an appropriate business structure
- robust business processes and systems
- clear communication with regular meetings
- agreed procedures for entry/exit of shareholders and for resolving any disputes.
At this stage of evolution of such partnerships it is difficult to quantify their returns but in ANZ’s Agri report we note logic would suggest returns are similar over the long run to the average farmer which is 3-7 per cent return on assets plus 5 - 10 per cent capital gain per annum depending on the sector.