Kilter Rural targets May first close for A$500m open-end fund

The Kilter Agriculture Fund will invest in farmland water and is targeting A$65m in a first fundraise that will close later this month.

Kilter Rural has launched fundraising for a new open-end vehicle, the Kilter Agriculture Fund, with a long-term target of A$500 million ($337 million; €305 million).

The fund will invest in mixed farmland assets as well as water, with up to around 25 percent of the fund deployed into the latter. A portion of that will be invested into the long-standing open-end Kilter Water Fund.

The vehicle is targeting annual returns of 10-12 percent, with a yield of 4-5 percent and capital growth of 6-7 percent. Kilter Rural expects a portion of the income to come from the generation of carbon credits but has launched with a conservative base case around carbon prices.

KAF has a A$65 million seed asset under contract, which will be funded by the initial fundraise from the vehicle. It is a mixed farmland aggregation located in the Southern Riverina region of New South Wales, covering approximately 7,000 ha across three stations. It also has access to 3,500ML of groundwater.

Kilter Rural CEO Cullen Gunn told Agri Investor that the firm has access to a pipeline of around 14,000 ha of adjacent farmland acquisitions out to June 2024 that can help rapidly increase the scale of the fund’s portfolio.

“We have been looking for assets where we can use our expertise to uplift value,” he said, with the firm intending to use the assets for a combination of dryland and irrigated row cropping initially, as well as grazing a flock of Merino sheep.

“We’ve leased the properties out for now until 2024, which gives us time to build the operational team and de-risks the entry point for investors,” Gunn said, adding that the upcoming revaluation cycle in June is expected to provide an immediate uplift for investors who get in during the first fundraise.

The strategy is a diversion from Kilter Rural’s previous strategy of acquiring much smaller properties and aggregating them to form assets of scale, as it did for VicSuper for many years.

Gunn said the properties have been well-maintained already but there is still room for improvement. One area the firm is targeting is native forest cover, with a target to deliver a 30-40 percent increase in this area over time to improve biodiversity – and potentially generate additional financial return from that as well.

“We have been very conservative around the carbon and biodiversity base case, but we definitely think there is an upside potential to that [in our financial return],” Gunn said.

The firm’s base case forecasts a yield of 0.7 percent from carbon and biodiversity, compared to 4 percent from cropping and grazing income and 0.9 percent from water income. It is also targeting land capital growth of 5.4 percent and water capital growth of 2.1 percent.

After a management fee of 1.25 percent and operating and interest expenses of 1.85 percent are subtracted, a base case of 10 percent returns is achieved.

The fund’s exposure to water has practical benefits beyond providing diversification for investors and helping boost returns, Gunn said, as it well help provide liquidity for investors. Following an initial three-year lock-up period, there will be opportunities for investors to secure redemptions after a 180-day notice period, which the fund’s deployment into the Kilter Water Fund can help to facilitate.

Gunn said Kilter Rural is targeting a first close for the fund by the end of May 2023, with the A$500 million target a long-term goal for what is an open-end vehicle. It has received strong interest from its traditional base of impact investors, family offices and high-net-worth individuals, Gunn said, with commitments from institutional investors possible as the vehicle grows.

“We wanted to make this an open-ended fund so that we can influence as much Australian land as possible over a long period of time,” he said, adding that it would seek to add further assets to the portfolio in other parts of Australia’s eastern states.

Kilter Rural is 61.49 percent-owned by Australian Securities Exchange-listed fund manager Regal Partners and has around A$270 million in assets under management.