“In terms of financial performance – because we are primary production, farmland and water managers – we just haven’t been exposed to any economic downturn at all [from the coronavirus]. In fact, probably quite the contrary.”
Angus Ingram, investments and partnerships manager at Kilter Rural, tells Agri Investor that the firm’s investments – like those reported by most other ag fund managers in Australia to date – have performed strongly during the covid-19 crisis.
“In a sense, a silver lining to this crisis has been an increased focus on ag and its investment resilience,” says Ingram. He points to the asset class’s lack of correlation to traditional investment indices and markets, its relatively low volatility (compared with public equities during a crisis like this) and the still-strong levels of capital growth of Australian farmland.
“They’re all pretty compelling investment fundamentals really,” he says.
Fundraising challenges
Where Kilter Rural has encountered some challenges during the crisis is in fundraising.
The firm is still actively raising capital for its three open strategies: the open-end Kilter Water Fund, a straight play on water in the southern Murray-Darling Basin; the open-end Balanced Water Fund, an impact investment vehicle it launched with The Nature Conservancy in 2015 that has grown to A$64 million ($44.3 million; €39.3 million) in AUM; and the closed-end Australian Farmlands Fund, which was launched in 2018 with a target of A$500 million to invest in both farmland and water rights.
“If [investors] want to invest in a scaled way, they typically want to see the assets, so at this stage that’s a challenge”
Ingram says that although investor appetite has remained strong – and possibly increased owing to ag’s fundamentals at a time of uncertainty in other parts of the economy – securing those commitments has proved more challenging than before the pandemic struck.
“There are pros and cons,” he says of the current fundraising environment. “With an additional focus on video calls, it means you can normalize having meetings across different time zones, rather than just agreeing to meet someone when they get over here in six months’ time. In some respects, we’ve actually spoken to a lot more people that we may have only seen when we travelled.
“But ultimately, you’ve got to really meet people face-to-face to build trust and progress those relationships in meaningful ways. It has been positive in some respects. But if they want to invest in a scaled way, they typically want to see the assets. So at this stage, that’s a challenge.”
As a result, Kilter Rural has lowered its fundraising target for the Australian Farmlands Fund to A$300 million, having initially planning to raise capital in A$100 million tranches. The vehicle has a 10-year term and Kilter Rural has now set a closing date for fundraising of December 21 this year.
“It’s a roll-up strategy in essence, to purchase, redevelop and repurpose [farmland], so we think we should put a time limit on capital raising so investors can reap the benefits of that farmland improvement” he says. “It’s aligned with the strategy to have a closing date [in December], and we’ve revised the target to A$300 million given where we’re at with covid and our ability to meet investors face-to-face and so forth.”
Institutional interest
Ingram says interest from offshore institutional investors has remained “really strong”, but that onshore interest from Australian superannuation funds remains “lukewarm”.
“My take on it is that Aussie superfunds have historically struggled to identify managers with strong track records in Australia. Now, there’s a few more than there were 10 years ago – we were probably one of the first to secure a commitment of the size we did in 2004 [an initial A$175 million from VicSuper] outside of Northern Territory and Queensland beef.
“It was pretty progressive at the time and certainly outside the comfort zone of a lot of superfunds then. And to VicSuper’s credit, they’ve received really good rewards for that investment.
“Interest onshore is much better than it used to be because us and others have a demonstrable track record of managing institutional capital in Australian ag investments, which wasn’t the case 15 years ago.”
One of the crops that Kilter Rural has found most success with in recent years is organic tomatoes. The firm planted its first tomato crop in north-west Victoria in 2011 and has since grown to become one of the largest growers of field tomatoes in Australia.
Ingram says it is a challenging crop to grow, but the firm has invested strongly in sub-surface drip irrigation to ensure it can efficiently apply water and nutrients to the plants, thus enabling it to ensure consistency of supply.
“Interest onshore is much better than it used to be because us and others have a demonstrable track record of managing institutional capital in Australian ag investments, which wasn’t the case 15 years ago.”
“[We have] the largest field of sub-surface drip irrigation in the country now and the investment in that capex and technology really transformed our ability to deliver a consistent crop. And critically, we design these fields so they can withstand an increased frequency in weather events.”
The firm has seen an increasing number of summer storms events where anywhere between 50 and 120 mm of rain can fall over a couple of days. It is therefore vital that fields are able to shed the water to protect the crop.
“Going back to 2016 when we had an enormous wet season down the east coast, there were a lot of tomato growers who dropped out of the supply chain because they couldn’t demonstrate [to processors] that they could deliver a crop during those extreme weather events.”
Sustainability focus
This resilience to both extreme wet and dry weather has helped generate strong returns for investors, Ingram says, with capital growth showing no signs of slowing down significantly.
The most recent available figures from the NCREIF Australian Farmland Index showed that the appreciation return for farmland on an annualized basis in Q4 2019 was 7.7 percent. This was in spite of an exceptionally dry period in the eastern states over the previous 12 months.
“It really talks to the underlying demand across the globe for ag assets in areas that have demonstrated low sovereign risk,” Ingram says.
“If we go back 10-15 years, eastern Europe and South America were pretty attractive for corporate and institutional investors, but a lot have been burned. If investors want exposure to uncorrelated, real asset-backed, diversified assets like farmland, they’ve really only got Australia, North America and small parts of Europe.
“Ag in Australia has been efficient for a long time because it’s one of the least-subsidized markets in the OECD, so it’s resilient to weather and economic cycles. In that regard I think it’s proven itself through the weather volatility that Australia is known for.”
On efficiency, Kilter Rural has long had a focus on sustainable and regenerative farming, with these practices baked into the investment mandates of both the Balanced Water Fund and the Australian Farmlands Fund.
“If investors want exposure to uncorrelated, real asset-backed, diversified assets like farmland, they’ve really only got Australia, North America and small parts of Europe.”
Ingram argues this is one of the “key differentiators” for Kilter Rural from other asset managers and that these themes are proving increasingly attractive to institutional investors, especially overseas.
“There’s no-one else out there that’s re-vegetating landscape on the scale we’re doing it, and in the Australian Farmlands Fund up to 30 percent of our land under management will be re-vegetated or re-forested for eco-services, to enable us to access carbon markets.”
Kilter Rural chief executive Cullen Gunn told Agri Investor in 2019 that the firm believed investment in irrigated agriculture did not have to come at the expense of the environment – a message Ingram reiterates.
Overall, Ingram says, the covid-19 crisis has not been “hugely disruptive” – and if anything, he would expect the focus on regenerative agriculture to be strengthened.
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