VicSuper CEO: How to do water well

Michael Dundon tells Agri Investor the A$20bn fund entered the asset class opportunistically but is now thinking about diversification. Here are some lessons for other supers looking to follow suit.

Michael Dundon, who grew up near Adelaide, in rural Australia, has long had a natural affinity for agriculture. It is thus fitting that VicSuper, the A$20 billion ($14.9 billion; €12.9 billion) superannuation vehicle he helms, was one of the first to bet on the asset class – without help from a fund manager.

And yet that decision was largely opportunistic, Dundon tells Agri Investor during an interview at the institution’s Melbourne headquarters. Nine years ago, VicSuper was offered the opportunity to fund some transformational work on patches of land north of Melbourne. Over the period that followed, it ended up putting together a 9,000ha portfolio, getting its agriculture holdings to between A$250 million and A$300 million.

VicSuper’s experience provides lessons to other supers seeking to build agri exposure. The fund’s dedicated program grew farm by farm, each transaction carefully negotiated with communities in the northern part of the state. Since inception, the plan has also included a significant development component, based on widening access to Australia’s scarcest resource: water.

Buoyant returns

That strategy has followed a dual track. First, the fund set about to deploy better irrigation techniques across the fields – which are mostly used to grow broadacre crops – through developing new infrastructure and putting systems underground. But it also sought to maximize the opportunity offered by water entitlements. Helped by Kilter Rural, its asset manager, the fund created products allowing it to purchase water rights and lease them back to farmers.

That strategy has since paid off well. “Water is a scarce resource. We now have very strong unrealized gains,” Dundon notes, adding that such investments are also good for the farmers themselves. “That unlocks capital for farmers, while still granting them access to water.”

VicSuper has a post-tax return target of 10 percent, which Dundon says the fund is close to achieving. So what next for its agri portfolio? “We are open to considering doing more. We are not constrained geographically,” he explains. In fact, “it would need to be something that brings us commodity and geographic diversification,” he adds.

Earth, wool and fire

Spreading risk would be useful, Dundon observes, because despite the fund’s extensive use of irrigation, some volatility remains. “There are still some spikes in temperature.” He singles out permanent crops and livestock as potential targets – though he emphasizes that, in terms of allocation to agri, VicSuper is roughly where it wants to be already.

For peers looking to get involved with agriculture, the greatest challenge is building scale, he believes. Australia’s largest super funds manage between A$50 billion and A$80 billion in assets; a meaningful allocation to agri would require them to deploy more than A$500 million – not a given in today’s market.

Dundon is optimistic about pricing in the water sector. As far as land is concerned, however, he notes a bit of a slowdown in interest from overseas, partly due to the recent tightening in foreign investment regulation. But he’s not worried about the long term.

“The supply is fairly fixed. There is opportunity for a lot more land usage still in Australia.”

The 2018 edition of our Australia Forum takes place at the Grand Hyatt in Melbourne on June 20th. Follow our coverage of the event at @Agri_Investor and on