Colombian cropping project seeks $50m – exclusive

Star Crop has partnered with local operator MSU to launch an agricultural development project in Colombia’s Eastern Plains.

UK-based investment management firm Star Crop has started fundraising for a $50 million agricultural land development project in Colombia in a rare opportunity for investors to get exposure to Colombia’s agri sector.

The project will convert grasslands in the country’s Eastern Plains into row cropland to produce soybeans and corn. This region only opened up to investors around 10 years ago but has over 4.5 million hectares of land suitable for agriculture, according to Santiago Fernandez, co-founder and director of Star Crop.

Family offices and university endowments have started the due diligence process and are most likely to make up a large proportion of the investor base, Fernandez told Agri Investor.

“It is a bit too frontier and greenfield for institutional investors at this stage,” he said. “But we have had fantastic response on Colombia and were surprised how much due diligence investors had already done on the country; they are much more comfortable and knowledgeable about Colombia than we previously anticipated.”

“The concept has already been proven by investors and companies who have developed very successful projects in the region, and there is an outstanding import-substitution case in a country that needs over 700 thousand new hectares of grains to substitute imports for animal protein,” he added.

The $50 million in equity will fund the development of 10,000 hectares of leased land and will be invested over a five-year period. There is also scope to scale the project to 16,000 hectares at between $75 million and $80 million in total.

Less than 10 percent of the capital will go towards leasing the land; the majority will go on soil correction, working capital, machinery and other infrastructure, according to Fernandez.

The project estimates that operational returns over a 10 year period will be between 6 percent and 8 percent a year, but the overall return on the investment will be higher at exit, according to Santiago Fernandez, co-founder and director of Star Crop.

“The operational yield takes into account the first five years when the project is still in development mode,” he told Agri Investor. “By year 10 we expect operational yields to be much higher at around 20 percent. This means that the value of the underlying business should give exiting investors a 14 percent to 17 percent return overall.”

Exiting after 10 years is not a set strategy and investors have flexibility because they are investing into a company structure, according to Fernandez. “Investors can take liquidity at any stage they want, although the longer the project runs, the better the returns look. Once the project is up and running, there will be scope to raise a significantly higher amount of capital – and at a premium valuation – to develop another three to four clusters in the same region,” he added.

If the firm were to sell the business, which would include the leasing contracts, there is a big pool of potential buyers, according to Fernandez. They include development finance institutions, strategic players, local pension funds, local operators and big traders.

The land will be leased on a perpetual basis and under a crop-share agreement; the leases are automatically renewed as long as the land is being operated under certain terms.

Star Crop will charge less than 1 percent in management fees based on the net asset value of the project while the farm operations will be managed by MSU, a local operator, which will take a fee based on performance and earnings before interest, taxes, depreciation and amortisation.

The project is aiming to start soil correction during the fourth quarter of the year and start planting soybean at the beginning of 2016.