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Blue Sky targets Aussie super funds with new $300m strategic fund

Blue Sky Strategic Australian Agriculture Fund will invest across agriculture infrastructure, agribusiness private equity and water entitlements offering an IRR of 12%-15%.

Australian asset management firm Blue Sky Alternative Investments is targeting the A$1.9 trillion ($1.5 trillion; €1.4 trillion) local superannuation industry with a new fund that will offer exposure to three agricultural asset classes: mid-tier agri infrastructure, agribusiness private equity and water entitlements.

Australia’s local pension industry has traditionally stayed away from agriculture investments. But Blue Sky is confident the Blue Sky Strategic Australian Agriculture Fund, which is targeting A$300 million, will attract commitments from local funds.

“We have spent several years speaking to domestic institutions about what they want,” Kim Morison, managing director, real assets, Blue Sky Alternative Investments, told Agri Investor. “Institutions tell us they want agri exposure but not necessarily to be farmers and have their capital tied up in the passive ownership of farmland. Historically the returns for owning land have been pretty low and that is not exciting for them.”

With this new fund, Blue Sky is hoping to offer investors a new and diversified way of getting exposure to agriculture across Australia away from farmland and without the need to choose a certain region, commodity type or agricultural strategy. It is targeting an internal rate of return, net of fees, of 12 percent to 15 percent including a 6 percent annual cash yield, according to fund manager Michael Blakeney.

“By combining three deliberate strategies, we think can get the right mix of capital growth, from the water portion; yield, from the infrastructure portion; and alpha returns, from the private equity portion,” said Blakeney. “It also reflects what we have done to date across various direct investments in our portfolio.”

The company is now holding initial conversations with investors to get feedback on the new vehicle before formally launching the fundraising process and setting the terms. The management fee is likely to be around 1.5 percent.

The water entitlement portion of the fund will pursue a similar strategy to Blue Sky’s existing open-ended Water Fund, established in 2012, which generates annual income from the sale of volumes of water allocated annually to the water entitlements held by the fund. This portion is expected to return 10 percent to 12 percent.

In the agribusiness private equity portion, Blue Sky wants to provide family farming businesses with expansion capital. This could be used to develop existing land, improve operations, create greater scale, or transition into new agricultural products. It is targeting 12 percent to 15 percent returns and will draw on the expertise of Blue Sky’s existing private equity team.

“By applying the same investment approach as the private equity team do but to agri, we will team up with good operators that have limited access to capital, invest in their businesses, and let them get on with what they do best,” said Blakeney.

Blue Sky estimates that a A$25 million investment made last year into a farming business where the land will be transitioned into a higher and better use could reach an exit worth A$60 million.

The infrastructure portion, which offers “something unique” in the agriculture investment universe, will target mid-tier supply chain investment opportunities such as water transmission networks, transport, processing and export facilities, storage, handling and other market infrastructure. This portion will operate a buy-and-lease strategy, leasing the assets back to local farmers.

“We are seeing a need for neutral ownership of critical infrastructure in the agriculture industry,” he said. “Farmers would not trust traders to own these assets and do not have enough capital to own them themselves.”

Deal sizes across all three strategies will range from A$15 milion to A$40 million.

Blue Sky Alternatives Investments has A$1 billion of assets under management across real assets, private equity, private real estate and hedge funds. Its water fund has posted annual returns of 12.7 percent since inception and its co-investment in the Willunga Basin Water Company has returned 16 percent since 2013.

According to a recent report from accounting firm BDO, Australian super funds in the A$364 billion MySuper product range have less than 0.3 percent of their assets invested in agriculture, with 1 percent as their maximum exposure.