Should you invest in a food infrastructure fund?

It had been a long time coming. Melbourne-based Qualitas, originally a real estate specialist, was looking to make its first investment in the food and agriculture sector, but opportunities were few and far between. Late last year that elusive asset finally emerged: an A$400 million ($302 million; €252 million) portfolio of 10 flour-milling and bakery operations owned by Allied Pinnacle, a giant of the industry, was up for sale.

Qualitas decided to buy the asset, and built a fund around it. “It’s a fund where the underlying cashflows come from an agricultural product which makes up about 20 percent of Australians’ diet,” Mark Fischer, a co-founder and managing director at the firm, tells Agri Investor. Should the facilities ever stop functioning, he says, the country would probably face food shortages.

But Australia’s fundamental need for flour was not the only reason why the firm was keen to set up the Qualitas Food Infrastructure Fund, of which the flour-milling portfolio is the single asset.

“Over the coming period, we feel, there’s going to be an increase in crossover-style investments. The traditional real estate, infrastructure sectors and – at least in Australia – agricultural sectors are all starting to converge,” Fischer says. Core real estate has become quite expensive, infra is fraught with regulatory and political risk and agriculture is a “developing institutional sector,” he notes. “This transaction sits in the middle of those three investing types.”

Flexible exit

The QFIF is targeting a total size of A$204 million. It has already reached a first close, Fischer says, that was “heavily subscribed” by existing investors and covered the “vast majority” of the targeted amount. LPs currently comprise domestic investors, Asian insurers and European pension funds.

In recent weeks, Qualitas started talking to potential new investors that it hopes will help it to seal a second and final close in Q3 or Q4. Their commitments should also allow the firm to free up some of the balance sheet capital it has pledged to close the Allied Pinnacle transaction.

The LPs of QFIF all share a long-term investment outlook, says Fischer. “The consensus was that seven years was a good starting point. But there’s appetite for potentially remaining for an extended period.” He explains that investors may decide to hold on to the portfolio once the vehicle reaches its term.

And that’s the key selling point of QFIF’s hybrid strategy: it affords investors the luxury of being opportunistic about when they want to exit, says Fischer. Should valuations warrant it at a given point in time, they can decide to cash out and pocket a tidy profit, he reckons; if not, then they can just continue collecting the cash flows and “make a very nice level of baseline return.”

Between the buckets

The properties were sold subject to eight 30-year lease holdings and two 15-year leases held by Allied Pinnacle, guaranteeing stable cashflows. Fischer says the portfolio will make cash-and-cash returns, after tax, of 7.3 percent. The fund has a total return target of more than 10 percent post-fees, part of which Fischer expects to come from value-add opportunities the firm has already spotted.

He sees little chance investors will be confused by the portfolio’s hybrid nature. “We have a very strong following among sophisticated institutional investors, whose primary focus is on the stability of underlying cashflows. And this asset has a very dominant market share for what is a core food staple in our country.”

Yet the opportunity does not seem to have attracted all investor types to the same extent. Fischer says LPs who committed to the fund used either their real estate or infrastructure allocation; no one invested out of an agriculture bucket. The big ag investors Qualitas spoke to, indeed, had an objection.

“They thought the income profile was too sheltered from commodity-price risk. We felt it was a positive feature of the fund but those who invest in ag, understandably, want exposure to commodity-price risk,” Fischer says.