How superfunds and agribusiness can meet in the middle

Australian agribusinesses need equity to fund their growth and take advantage of promising market conditions. BDO national leader for food and agribusiness Anne Lockwood explains what they can do to attract investment.

Australian agribusinesses need equity to fund their growth and take advantage of promising market conditions. BDO national leader for food and agribusiness Anne Lockwood explains what they can do to attract investment.

Superannuation funds amount to nearly $2 trillion of investment capital in Australia and agriculture is one of the biggest industries in Australia’s economy, with prospects for growth driven by hungry markets in the Asia-Pacific and advantageous free trade agreements.

While it seems like a match made in heaven, superfunds actually invest very little in agribusinesses in Australia.

BDO’s research shows less than 0.3 per cent of MySuper assets are invested in agriculture, with the main obstacles to investment centering on a lack of listed products and limited knowledge of the sector among fund managers.

As a whole, deeper insight into the sector and clear investment opportunities have the potential to inspire greater activity in this sector. Given the amount of capital at the disposal of superannuation funds and the prospects for growth within the agriculture industry, crossing these barriers may prove beneficial to both parties.

So what can agribusinesses do to attract more interest from investors, including superfund managers, and what can investors do to pursue opportunities in the booming agriculture and food industry?

Agribusinesses: get investor-ready 

Agribusinesses may want to evaluate ways to make their companies more enticing and visible to fund managers. This could include public listings, although each organisation is unique and will need to assess the pros and cons of such a move.

Before they can draw equity from investors or perform well on the Australian Stock Exchange, however, most farms will need to take some steps to become more investor-ready.

Getting investor-ready means putting the right structures and processes in place to address some of the concerns that typically keep investors at bay.

One of the reasons the industry is typically less attractive to investors is because it’s so volatile. Acquisition by a larger entity or merging with another company to diversify the risk could therefore in some cases prove helpful.

And we have seen this strategy in action recently. A number of sugar companies in Australia have been sold to overseas entities, while dairy co-operatives in New South Wales and Queensland have sold to National Food — a large, listed company — to bring in the capital that can fund their growth.

Additionally, many enterprises in the sector are small, family-owned operations or co-operatives. These structures have their role to play, but may not be as competitive at attracting investment because investors want to know their money will be managed and provide for a strong return on investment.

Overall, agricultural companies should incorporate some of the discipline employed by public companies and corporate enterprises. In other words, they should implement sound financial reporting systems, have an advisory board or board of directors and ensure they hold regular monthly meetings. This greater transparency and controls can make fund managers and other investors more comfortable putting their assets into the business.

Fund managers: develop expertise and seize promise 

Superannuation funds and other investors may want to take a closer look at opportunities in the agribusiness sector. Although these companies traditionally haven’t been a top choice for investment, the sector has potential to expand significantly, especially if companies have the capital to pursue growth.

Fundamentally, agribusinesses need to invest the time and effort educating themselves about the business and how it fits into the sector.

Education has been a small part of agribusinesses’ portfolios and many have yet to invest effectively in acquiring the necessary skill sets.

While this may not be a problem with the day-to-day management of the business, when opportunities for investment arise, managers may not have the skills to see the potential and have employees advocating for those investments.

Education can come in a couple of forms, whether it’s adding agribusiness specialists to the team, or paying for the advice of external agribusiness specialists on a consulting basis. One of the respondents to BDO’s survey noted the agricultural sector “is a highly inefficient (mostly) fragmented market with low liquidity and a need for active management. These conditions have historically presented the best opportunities to extract value add.”

In other words, some of the characteristics that make agricultural assets seem less attractive could actually offer a silver lining; with room to improve — particularly with the right investment — these companies might prove excellent investment choices.

To make smart decisions, funds require good asset managers who are more familiar with the agribusiness industry. They’ll need to know what the options are and which companies have the characteristics to serve as strong investment options.

However, if agribusinesses become more investor-ready and align with larger brands, we’re likely to see more attention given to these opportunities.

Will that prove fruitful for both the agricultural industry and superannuation portfolios? Time will tell, but it could be a very promising match indeed.

BDO has released its agribusiness investor checklist, which covers all the elements a business needs to consider before seeking out potential investors. www.bdo.com.au/agribusinesschecklist