SLM Partners negotiates hybrid investment

SLM Partners, the  agriculture investment management firm, is negotiating an A$20 million – A$30 million investment with an undisclosed institutional investor that is likely to be a combined debt and equity package, according to Paul McMahon, managing partner at the firm.

The SLM Australia Livestock Fund, a 10-year own-and-operate private equity fund, held its first close in 2012 on A$75 million after Danish pension fund PKA came in as a sponsor investor. Now SLM is structuring a hybrid deal of both straight equity and convertible debt to suit what will be a first-time agriculture investor.

“A typical issue for first-time investors is where to fit an asset in their portfolio — it does not fit into traditional asset buckets — but with this hybrid they can dip their toe in the water to get some agri exposure but without going fully into equity,” McMahon told Agri Investor. “The debt component makes it more familiar to them.”

The investor is still a few weeks from confirming its participation in the fund. SLM is targeting A$150 million and is aiming for a final close at the end of the summer.

Since first close the fund has deployed nearly the full A$75 million. This has involved acquiring 480,000 hectares of land in 15 different properties across southern Queensland and northern New South Wales and transforming the land to suit the firm’s farming technique known as holistic planned grazing. The fund’s placement agent Bernd Meissner at Kronstein Alternative Investment Advisors calls it “Serengeti farming”.

This method involves moving cattle from one paddock to another every few days in an effort to replicate how herds migrate in the wild and produce a sustainable ecosystem.

“If you look at herds grazing in the wild you will notice there are huge numbers in a herd and they stay closely bunched up to protect themselves from predators. They are always on the move in the search for fresh pastures,” said McMahon. “The herd will come into an area and have a huge impact by non-selectively grazing and trampling. They may then not come back for many months, giving the land time to recover.”

There is no set formula for how often the herd will be moved on each farm as that will depend on the weather and the operator’s objectives. “If it rains and there is a lot of new grass growth we can move the cows quickly through the paddocks. When cows are calving we can slow down the moves so they don’t lose each other,” said McMahon.

Altering the land to suit this method involved creating several plots of land — one farm went from 20 to 200 paddocks after 600km of new single-wire electric fencing was installed. It also required investing in water infrastructure to ensure each paddock has enough drinking water for the cattle. The fund is using capital to acquire large numbers of cows as the goal is to double the stocking rate compared to conventional management.

Conventional farms will typically have a small number of cattle in each paddock that rarely move. SLM’s farms will have large numbers of cattle in a single herd, constantly moving. On one of the properties it has fully developed, the fund was able to carry 50 percent more cattle than the historical stocking rate during 2013 – one of the driest and hottest years on record – “just by getting the grazing and water infrastructure right”, said McMahon.

And 3,500 cattle are being moved as a single mob on one of the SLM farms already.

This model of beef production is also low cost, according to McMahon.

“There is no need for fertilisers or seeding, as the cows produce their own manure and the movement of the herd allows the native pasture to flourish,” said McMahon. “The goal is for the animals to get all their nutrition from pasture, rather than purchased feed. The cost of labour is low, as once the infrastructure is in place, one or two people can manage a herd of a few thousands animals.”

SLM considered other parts of the world including South America and the US but settled on Australia for its first project. It is likely to establish operations in other parts of the world at a later date.

“Australia is the best place to do this type of cattle farming because there are large amounts of land with year-round grazing and no harsh winters,” said McMahon. “And the country’s two main problems — natural grassland degradation and climate volatility — can be addressed through our method.”

“The land degradation is in large part down to the inappropriate management of livestock. Under our system, the herds are moved across the land leaving areas to recover and regenerate for months at a time. This can also help to mitigate the impact of climate change and in particular climate volatility. Land that has less bare soil, more soil organic matter and healthier plants will be more resilient to both droughts and floods.”

Equity investors in the fund buy stapled securities that give them a share in the company that operates the land and owns the cattle, and a unit in the trust that owns the land.

SLM Partners charges the typical 2 percent management fee and 20 percent carry. Its GP commitment was 1 percent of the fund’s total.