Craigmore nears final close

Craigmore Farming Partnership, a New Zealand own-and-operate agri fund with a focus on dairy, expects to hold a final close in June and raise more than the NZ$250 million ($214 million; €154.5 million) target.

Currently on NZ$150 million, the partnership is expecting commitments from institutional investors that are currently doing due diligence on the business. It has one institutional investor in the book and several private investors — high net worth individuals and family offices, according to Nick Tapp, head of client advisory at Craigmore Sustainables, the partnership’s GP.

The institutional close was held last June on NZ$125 million and the founders’ close, which included friends and family, closed on NZ$10 million at the end of December 2011. The founders also contributed previously acquired land to the partnership which has been deploying capital since day one, according to Tapp.

“It has been a good time to buy farms in New Zealand because there has been a fair level of liquidity and we have successfully secured some extremely good farms,” he told Agri Investor. “But we are not finished yet and expect to be fully deployed by the end of 2015.”

The fund is targeting returns of 12.5 percent each year. Operational returns will account for just over half of this, with land asset values accounting for the remainder. Existing assets have already returned 20 percent since December 2011. It plans to pay an annual dividend of 5 percent from 2015.

Until that point it does not make sense to pay out any cash flows due to the upgrade work on many of the acquired farms.

“Some of the land we acquire is in significant distress and needs development, so some of the existing cash flows have gone into that,” said Tapp. “On the flip side, we have seen more attractive land value increases on the back of these improvements.”

Craigmore uses some bank debt as leverage in its acquisitions but would not disclose any further details.

The partnership could come to an end between 2020 and 2023, although Tapp believes there will be much scope to continue relationships beyond this point.

“The partnership life has the potential to be extended because the ownership of farmland assets is a long-term business; it’s not something you can get into and out of quickly,” said Tapp. “But we do understand that some LPs need liquidity and so have provided this some nine years after the partnership launched.”

The fund is 85 percent invested in irrigated dairy farms with 10 percent in permanent crops and 5 percent in sheep and beef.

Irrigated dairy farms are relatively rare worldwide but can enhance returns substantially, according to Tapp.

“Ninety percent of dairy farm operators globally feed their dairy cows on grain,” said Tapp. “In the UK cows tend to be outside for half of the year, whereas in the US they are housed for the whole year and very rarely outside in the field. Irrigated grazing is a real point of differentiation in New Zealand, especially the South Island, and can generate a significant cost advantage compared to other dairy production systems. This is why the sector is growing in the South Island.”

Irrigating the grass that feeds the cows is essential for maintaining good quality food, which in turn leads to higher milk production. At times of drought, milk production levels can fall substantially; Craigmore says North Island production levels fell 40 percent during one such period in March 2013.

Using irrigation is also cheaper than buying grain for feed. Irrigation costs 1.7 cents per unit of energy versus 4-5 cents for grain supplements, according to Craigmore research.

Craigmore charges fees of 1 percent on all drawn down capital and 0.3 percent of gross asset value as a farm management fee. It also takes a 15 percent performance fee over an 8 percent hurdle with a full catch-up at a 50 percent rate.