Increasing private debt opportunities show ‘industrialization of Australian ag’

Increasing opportunities for private debt investments in Australian agriculture show the maturing of the asset class, Ben Craw of Oxley Capital Partners has told Agri Investor.

While banks are still active and participating in lending to agricultural businesses, Craw said that Oxley Capital Partners, formed by him with backing from Gunn Agri Partners in 2019, is seeing a lot of activity in the private lending space.

“Where operators may not want an equity investor to come in, or do not have the balance sheet to support an equity investment, but are looking for capital to help them grow or transform their business, private debt has a big role to play,” he said.

“If you’re looking at risk-adjusted returns as an investor, bond rates are negative and interest rates are almost zero, so private lending is really value-accretive. In terms of the capital stack, a traditional bank may just not be able to get there because of loan-to-value ratios or another reason, so we’re starting to see more and more opportunities to bring in a piece of private debt, not dissimilar to what you see in real estate or infrastructure with mezzanine or subordinated debt. It shows the industrialization of agriculture in Australia.”

Craw was speaking to Agri Investor following the release of a market update from Oxley CP to clients, which said: “Australian agriculture has been enjoying strong market signals, supported by high commodity prices, low exchange rates and cheap debt. Current favourable seasonal conditions are stoking market confidence with domestic producers as parts of eastern Australia experienced the wettest start to a year in nearly a decade.”

Oxley CP was established by Craw last year after leaving PwC and assists clients in gaining access to debt and equity capital, as well as providing corporate advisory services in areas including capital raising, strategic reviews, corporate due diligence and restructuring.

Craw said that investor appetite for Australian assets has remained healthy, but that covid-19 restrictions have slowed down some transactions where offshore investors are involved.

“Investor activity remains but has been stymied by the logistics of getting across borders and inspecting assets. You’re still seeing buoyant transaction levels among [small-to-medium-sized] family farms, but for larger family farms or corporates who are talking to folks offshore, a lot of them like to be on the ground to inspect assets and eyeball the operators and management.”

This could open opportunities for other sources of capital, Craw said, with Oxley CP seeing increased levels of interest from domestic high-net-worth individuals and family office investors.

“They’re looking at farmland in particular as an asset class that’s uncorrelated from their existing investment portfolio, and whether that’s using a joint venture arrangement to fund growth or using the sale-and-leaseback model, it gives the operator an opportunity to grow more quickly than they would through organic means.”

Covid-19 impacts

While market fundamentals remain strong, and an upturn in weather conditions has buoyed confidence, Craw said that clients had seen disruption to operations and supply chains brought on by covid-19, some of the effects of which will continue to play out over a long period of time.

“Some have had a proverbial sugar hit, like protein processors for example, but that will normalize as we get over panic buying,” Craw said.

“A couple of operators we’ve worked with export their commodity products into South-East Asia, mainland China and Japan, so [managing disruption] comes back to the relationships they have, what their product offering is, and their ability to be a low-cost, efficient producer. If you’ve got that low-cost model, you can ride out the shocks as best you can.”

Some bigger farmland operations might find reduced flexibility in being able to shift business models quickly, Craw said, further emphasizing the need for all producers to be lean and efficient so as not to get stung by supply chain disruptions.

On longer-term trends, Craw said there has “definitely” been a consumer shift away from high-value products to ‘value’ products, and that some producers may have to increase their focus on domestic opportunities.

“Those businesses with product and market diversification will adapt early – others will need to identify alternative supply chains they can focus on, be that domestically or offshore. There is going to be a level of domestic consumption, but some models are geared up to export markets, so some shocks will continue to play out in that respect.”