Blue Sky’s laudable move to attract superfunds

The Australian fund manager’s new multi-asset class agriculture fund is an innovative attempt to appeal to more pools of capital.

Interest in Australia’s agriculture sector is hotter than ever – (have you signed up to attend our Australia Forum yet?) – with the fund management market scrambling to get a piece of the pie and launching a variety of offerings seemingly every month.

Typically, investors have gained exposure to Australian agriculture by way of farmland investment. There’s plenty of it. It’s not expensive compared to other developed markets. And there are a variety of ways to make improvements, transition into new, value-added commodities and generally try to access the Asian consumer demand theme.

But this week, Blue Sky Alternative Investments, the fund management firm known for its open-ended water fund, revealed plans for a very different type of vehicle that would give investors exposure to agriculture infrastructure assets, agribusiness private equity holdings as well as water.

Offering some exposure to agriculture infrastructure is nothing new; vertically integrated farmland funds offer some exposure along the supply chain of the primary commodity. But Blue Sky’s 10-year, close-ended fund isn’t offering vertical integration; it plans to purchase individual mid-tier infrastructure assets and lease them back to farmers. Examples the firm gave me include storage and water transmission networks.

And the private equity portion also differs from other products out there: it will acquire minority stakes in family farming businesses to provide them expansion capital for improvements or land use changes.

Blue Sky’s Michael Blakeney and Kim Morison say the thinking behind the fund was to provide LPs broad exposure to Australia’s agriculture industry with low volatility, creating a non-correlated mix of growth capital, yield and alpha returns.

The main driver of this new strategy? Appealing to Australia’s local superfund industry, which this week was found to have just 0.3 percent of its A$1.9 trillion ($1.5 trillion; €1.4 trillion) assets invested in agriculture, according to a report by accounting firm BDO. Various superfunds have told Blue Sky that they do not want to own and operate farmland, pointing to low returns in the past, or be exposed to just one commodity type, so the firm is “seeking to solve for that problem by deliberately offering a blend of strategies”, said Morison.

The BDO survey also points to a dissatisfaction with existing offerings as the majority of MySuper funds surveyed said they don’t invest in the sector because of a lack of investable products.

Market sources were divided on whether Blue Sky’s new fund will attract reticent supers.

“We have this discussion internally about whether agriculture only is too niche and focused for an institution and that institutions would prefer broader real assets exposure,” said one investment consultant. “So there might be more demand for a fund like this.”

On the other hand, a mix of different asset classes, while appealing for diversification, could be confusing on the asset allocation front, argued a discretionary manager. Where does the fund fit in terms of allocation buckets and who is responsible for looking at it within a fund’s investment team?

“I don’t think it is a terrible idea, but you need the right team to be able to underwrite the deal and understand how to value the asset/business,” the source said. Morison responded to suggest it would fit a real assets bucket because all the investments are asset-backed.

But depending on which team looks at it, the returns, projected at between 12 percent and 15 percent, could still look quite weak, argued a local private equity fund manager.

Now of course with any new offering, only time will tell us how successful it will be. A structure like this is untested. But Blue Sky should be applauded for launching an innovative offering. The opportunity to access more than just pure primary production and gain exposure to agri infrastructure and traditional private equity plays may be a helpful way to enable institutions to construct a meaningful and diversified agriculture portfolio. And of course, a means to attract new pools of capital – namely a wary local superannuation industry – into the sector. Even if they bring just a tiny fraction of the A$1.9 trillion industry into the sector, it will be a big success.

What do you think? I will be discussing this and more with agri investors at The Anthologist on Gresham Street, London, tomorrow (April 30) from 5pm. Hope to see as many of you there as possible.