The private credit investment opportunity in ag

Thera Capital Management’s Mark Allen outlines the opportunities available for private debt investment in agriculture.

The global agriculture sector is estimated to produce some $2 trillion in value annually and employ more than one billion people. Importantly, over the next 30 years or so, agriculture globally will be required to increase production by some 30 percent to be able to feed and clothe an additional 2.5 billion people.

Agriculture as such offers a compelling investment thematic based on this growth, as well as the fundamental necessity of food and the uncorrelated and defensive nature of the sector.

Unfortunately, asset managers offer limited strategies for investors interested in agriculture private credit, which also provides scalability and institutional quality.

The primary capital requirements in Australian agriculture are associated with term debt (financing farmland, water and improvements) and seasonal debt (financing the production of crops and livestock).

Term-debt deals are usually secured with a first mortgage over the farmland, extend up to 65 percent leverage on the land value, are amortizing loans and are three to five years in tenure.

Seasonal-debt deals are short tenure (around 150 days on average) and supported by a combination security package (ie senior ranking security over the collateral, borrower guarantees, general security deed over the assets of the borrower and caveat rights over the underlying farmland) with a principle and interest bullet payment at the end of each underlying loan cycle.

The combination of several security hitch points for both strategies creates a high-quality credit. If done well, agriculture private credit asset management requires hands-on and on-the-ground management.

In Australia, we estimate that the term-debt market is circa A$85 billion ($62 billion; €53 billion) and the seasonal-debt market is circa A$20 billion. The latter is based on our in-house calculation relative to total agricultural production value annually and converted into a peak seasonal capital use at one point in time over the total complex production cycle.

Private credit investor returns in AUD for a term-debt strategy are around 5 percent per year and for seasonal debt, 8 percent per year.

Investors can participate in an Australian agriculture private debt strategy through a variable coupon note program, a separate managed account, or a conventional fund structure.

The Australian agriculture sector has set a goal to increase annual production to A$100 billion by 2030 from a current level of A$60 billion; this output increase objective will be relying, at least in part, on capital generated from private credit strategies.

The Australian agriculture private credit market offers investors a unique opportunity to invest in real and fundamentally necessary enterprises, through a strategy that provides uncorrelated and attractive returns in a high-quality jurisdiction.

Mark Allen is the CEO of Thera Capital Management