What the PSP/Hewitt deal means for Australia’s agri market

Agri Investor is in Australia this week for its inaugural Australia Forum in Melbourne on Thursday. While here we’ve met with a number of readers in Brisbane and Melbourne, including a trip up to the gulf country to visit a cattle station owned by Australian Pastoral Fund.

A deal that has come up in conversation quite a few times during is the joint venture that was signed between Canada’s Public Sector Pension Investment Board (PSP) and the Hewitt family, an established livestock operator, earlier this year.

While everyone seems to have a slightly different take on the deal, it was generally seen as a good partnership that solves some of the fundamental issues in the sector: providing much needed expansion capital for family farming operations; ensuring full alignment of interests between operator and investor through co-ownership; and providing local access and footing for a foreign investor.

A recent trip to Neumayer Valley Station and related conversations with sources highlighted the importance of the latter point particularly. Agriculture is very much a relationship-based industry. An investment operations manager needs to have a good relationship with his farm manager because they will spend a lot of time together, discussing strategy but also socialising during visits to the farm. Managing a cattle station is a lifestyle choice for the manager and his family and it’s important that investment managers understand this dynamic and the needs of that family if they are to produce good returns.

As an experienced and relatively large-scale operator in the sector, and a family itself, the Hewitt family will understand these dynamics and relationships. It should also have experience of navigating drought, cattle price volatility, distribution and so on. As my recent trip showed me, there are numerous moving parts at any one time in cattle farming alone that could take decades to understand and manipulate, so PSP’s alignment with an operator like this puts it in a strong position.

Now, of course, there are successful families and unsuccessful families, so as with all investments, proper due diligence must be done. It is also worth assessing the dynamics of such a family business; is the younger generation set to take over running the business? Is there a risk that the family might lose motivation after years and years of doing the same? These are the questions one investment professional in Melbourne asked.

And how is the family business set up? Does it have a corporate board structure? The Hewitt family’s professional structure was a key attraction to PSP, according to sources close to the deal.

While JVs like this might cut out the traditional fund manager, there are plenty of opportunities for consultants and other service providers to play a role. The popularity of this deal in the industry also emphasises the wider push towards direct farmland investment in Australia which several investment management firms are positioning themselves for, some involving close ties with large family farming businesses.

Concerns around the failure of some first-time funds and projects are top of mind for many industry participants. But Australian farmland investment is an evolving market with plenty of room for innovative structures and ideas around alignment. And the industry is certainly not short of passion and ideas. It will be interesting to see which direction the farmland investment market takes and whether the Hewitt/PSP deal will be a model for more to come.