How to seal off-market deals in the age of mandatory auctions

Select Equities hopes to raise A$100m from a majority of domestic investors before listing the Bio Fund at a 20% to 40% premium. We zoom in on the mechanics of the 'private-to-public' vehicle.

Sydney-based Select Equities has launched a fund majority-owned by Australians that seeks to capitalize on the Chinese middle-class’s growing appetite for better-quality food.

The firm began an investment roadshow for the Bio Fund in Australia last week, seeking A$18.18 million ($13.4 million; €11.5 million) to fund the acquisition of a 4,200-hectare mixed farming property in the Liverpool Plains region of New South Wales. That farm runs approximately 2,000 head of cattle and can grow 20,000 tonnes of grain, or 10,000 tonnes of grain and 10,000 tonnes of cotton depending on crop rotation.

Closing deals of such size, at a time when Australia is tightening restrictions on foreign investment in farmland, could have proved to be a tough challenge. But Select Equities has thought the problem through.

The firm is targeting both Australian and foreign investors, but wants to make sure the fund is made up of at least 50.1 percent Australian investors to ensure it does not get caught by Foreign Investment Review Board regulations. With a majority Australian interest, the fund will be able to negotiate for properties off-market, as it has done with this first acquisition.

“Through this raising process, we’ll look at what the book-build looks like. We’re open to foreign investment, but equally we believe there’s a competitive advantage for us if we can maintain a majority Australian ownership. We also think it’s a good story that will resonate with farmers, that they’re dealing with an Australian counterparty,” Mark Southwell-Keely, the firm’s co-founder and executive director, tells Agri Investor.

He says the firm has already had interest from several Australian institutional investors.

Shared ownership

The model Select Equities has chosen to follow is buy-and-leaseback.

The structure of the lease arrangement is innovative, with the farmer retaining a 25 percent ownership stake on his own lots and deposited plans (DPs) and the Bio Fund taking on the remaining 75 percent on separate lots and DPs. The lease has been signed on a 10-year basis with an option for a further 10-year extension. Future leases are set to follow the same arrangement.

“The valuation we received is specific to our 75 percent lot and DPs. We don’t actually need the counterparty in a worst-case scenario – we can sever that relationship if required [so] we’ve got a standalone farm that’s been valued appropriately and we can deal with it appropriately,” Southwell-Keely says. He’s keen to stress that this would be a worst-case scenario situation only, though, and that the structure of the lease is designed to give the farmer a vested interest that allows him to trade through multiple cycles over the long term, while insulating the fund from some of the market and weather risks.

Select Equities is looking to raise enough money to fund this first acquisition to begin with and will seek more capital only as it identifies further opportunities. The aim is to scale the fund up to around A$100 million through four or five acquisitions, before listing it on the ASX.

Farmland investment trust

This “private-to-public arb”, as Southwell-Keely puts it, is an important part of the return for investors. “We’ve got to do our job properly and execute, and we see that when we do that, in the fullness of time within five years, we can list the product, and there can be another 20 to 30 percent uplift from the private to public,” he says, citing evidence that other listed Australian ag entities trade at a 20 to 40 percent premium to book.

Returns will also come from farm income, with this first acquisition set to deliver a 4.2 percent cash yield in year one to investors. “We think that’s fairly attractive, especially compared with a term deposit, say,” Southwell-Keely says.

Passive capital growth is the other piece of the puzzle. Select Equities’ research shows the average cropland value in the US is around A$12,500 per hectare. The Bio Fund will acquire the property at Liverpool Plains for around A$5,500 per hectare.

“There’s a significant difference in that particular metric and the price we’re paying,” Southwell-Keely says. “We’re seeing a significant demand from overseas capital to invest in our farmland, because it’s comparatively cheap and because of the strategic reasons we mentioned before. We think the passive, long-term capital growth drivers are positive, and that they’ll continue for some time.”

All of this makes for a different approach to traditional farmland vehicles, with similarities to real estate investment trusts.

China calling

The buy-and-leaseback approach is more popular in the US than in Australia, although other recent launches, such as Growth Farms’ new Australian Agriculture Lease Fund, are seeking similar opportunities to Select Equities, suggesting this approach may become more common Down Under.

Underpinning the entire investment thesis is the belief that Chinese demand for Australian produce is only going in one direction.

“At the moment it’s indirect. The price you pay for your lamb and beef is higher than five years ago, and that’s because of the Chinese. That’s real,” Southwell-Keely says.

“But you can see a future scenario where if you’re a farmer, instead of negotiating with Coles and Woolworths [Australia’s two large supermarket chains], you can negotiate with Coles, Woolies, Ali Baba, and a number of other Chinese counterparties, too.

“In five years’ time, I think [the impact] will be more direct, and you can see a different, more positive scenario for our farmers.”