Agri-logistics emerging as attractive new asset class for investors

Businesses and properties associated with food production and distribution attract growing interest from private equity funds, real estate investors and more traditional agri investors.

“Investors are really interested in value-added food production,” CBRE director of agri-logistics Stephen Caffery tells Agri Investor. “We are good at big, broadacre agriculture in Australia, producing bulk commodities – but capturing those higher prices is important as well.”

And alongside those higher prices there are, of course, potentially higher returns for investors.

Caffery sees a growing trend in private equity investment in food and agriculture in Australia: what he and others call agri-logistics. The term encompasses the supply chain infrastructure involved in processing and distributing food at any point during production, from the farm gate to the supermarket shelf.

CBRE figures show that more than A$1.5 billion ($1.0 billion; €933.7 million) of physical assets that fall under the agri-logistics umbrella have changed hands in the past two years. These have included Charter Hall’s A$207 million acquisition of the Ingham’s portfolio in December 2018, comprising 27 poultry supply chain assets; and Qualitas’s A$388 million sale and leaseback of Allied Pinnacle’s portfolio of 10 grain-handling and food-processing facilities in March 2018.

Both deals, according to Caffery, involved real estate fund managers specifically targeting food-processing facilities because of their unique characteristics.

“We’re seeing interest from traditional industrial investors that really understand these assets quite well but are looking to invest further down the supply chain,” he says. “You’ll see those guys purchasing food-processing facilities around major capitals and regional centres. We’re also seeing interest from institutional investors – that have usually invested in traditional farmland – in looking up the supply chain, as they want to find assets in that processing and distribution space as well.

“The property guys talk a lot about the quality of the covenant and who the tenant is [when making an investment]. But if they look at the tenant and realize this is a company that supplies 40 percent of Australia’s meat chicken market, say, they see that’s not a business that’s going to fold overnight. It’s going to be around for the long haul.”

This, Caffery says, means investors are viewing agri-logistics facilities as defensive assets ahead of a potential downturn in the cycle, because people will still buy food that requires processing and distribution during a recession.

The Allied Pinnacle and Ingham’s deals are typical of the space, where a processor can sell and lease back its property to free up working capital to reinvest in the business. Another on the market now is a portfolio comprising two warehouses owned by Melbourne-based food processor Flavour Makers. CBRE senior director Ben Hegerty is managing the sale of the facilities, which are to be 100 percent let to Flavour Makers for 12 years. He says the portfolio has attracted interest from food funds and agri-logistics funds, and he expects it to be sold for around A$30 million.

“In agri-logistics there’s the stable rent covenant, generally an economic rent structure, and inevitably a high retention rate with plant and equipment well-embedded into the rest of the businesses,” he says. “It ticks all those boxes.”

Finding value

It’s not just the physical assets that are attracting interest. There are also plenty of recent examples where the associated processing and distribution businesses themselves have been bought or sold by private equity firms that see opportunities to generate higher returns than they could get through owning production assets.

Sydney-headquartered Pacific Equity Partners in February sold flour and bakery products business Allied Pinnacle for A$950 million to Japan’s Nisshin Foods, thus generating a significant return for investors. Allied Pinnacle sold and leased back some of its facilities last year.

More recently, Coca-Cola Amatil sold its SPC food and vegetable processing business to Shepparton Partners Collective, a 50/50 joint venture between private equity firms Perma Funds Management and The Eights.

“Everything about this company is attractive,” says Perma Funds Management managing director Hussein Rifai. “The brand has been embedded into not just the Shepparton community but the Australian psyche for 100 years, and the management team is fantastic. All in all, it makes the ingredients for a fantastic company.”

Rifai says the joint venture saw an opportunity to increase production at SPC’s cannery in Shepparton, Victoria, by reducing complexity and waste while freeing up the management team to introduce new technologies and innovation to help increase efficiency. From this, too, the business will be able to increase the amount that it exports.

“This business used to generate 70 percent of its revenue from overseas and now we’re down to sub-10 percent, if that,” says Rifai. “There’s a humongous growth opportunity there. And we have all the components for it: the Australian reputation as a clean food source, and the product that you’re getting from the Goulburn Valley area is some of the top produce anywhere in the world.”

China does represent a big part of the opportunity, he says, but it should be placed in context: there are also major export markets in India, the Middle East and the rest of south-east Asia that SPC is not tapping into.

Rifai adds that the team at Shepparton Partners Collective has a wide variety of experience in different aspects of the food processing and supply chain businesses, hence the attraction to SPC and its strong existing brand recognition.

The SPC sale, and the other recent sale-and-leaseback deals for property only, show why Australian agri-logistics facilities and businesses are attracting investors. The food production companies or facilities in question are closely linked with strong overseas demand for their products. They also offer higher returns than farmland or more defensive characteristics than traditional real estate.

This means agri-logistics is seeing interest from investors looking to move both ways along the risk curve – and, for many, the subsector is proving to be an interesting sweet spot in the middle.