You might think that Australia’s recent devastating bush fires would ring the death knell for a new farming fund looking to invest a quarter of shareholders’ money in the country.
But far from it, according to investment managers at Capital Advisory Partners (CAP), who hope to raise up to $300m (£229m) for the launch of the Global Sustainable Farmland Income Trust (FARM) next month.
While the huge livestock losses suffered by Australia’s cattle ranchers are shocking, CAP founder Sven Miserey says they underline the point FARM is trying to make.
‘Australia’s experience shows the need to stay away from arid areas without access to water,’ said Miserey, a former head of credit and money market funds at Commerzbank and manager of Coast Freehold Income, a ground rent fund.
‘Australia is a vast continent,’ added co-manager Ian Monks, a chartered surveyor with a career in advising institutions and pension funds on agriculture investment, ‘which is why we’ve gone to the North West, which is sub-tropical and our main crop there will be mangoes.’
According to the investment company’s prospectus, CAP, which was founded in 2006 but has just $94m under management, has identified 18 farms it would like to buy over the next 18 months. The top 10 are projected to account for 80% of its assets, the second biggest with a 14% weighting is a mango producer in Australia’s Northern Territory.
Seven of the 10 are US farms, specialising in mixed nuts, tree fruits and grapes in the West Coast, and bell peppers and lettuce on the East Coast.
The only other non-American farm in the list is a blueberry grower in Portugal, blessed with a good climate and access to Europe.
The message is clear. FARM wants to buy modern, sustainably run farms in developed countries. It has a bias to fresh fruit and vegetable producers, where growing consumer demand supports high prices, and other speciality crops.
The managers, who also include Kristof Bulkai, a soft commodities trader turned agricultural fund manager, who previously worked at Thames River and Liontrust, have an explicit aversion to mass market commodities where pricing can be volatile.
They say FARM is different from previous farming funds, which focused on one crop or country, by taking a diversified and global approach.
‘We’re not buying large-scale cattle ranches in the middle of the country,’ Monks said in reference to Australia.
Financially stable farms are obviously preferred with FARM’s target list citing businesses that typically generate earnings of more than double their base rent.
The timing of FARM’s flotation in the midst of Australia’s environmental catastrophe may not be ideal, but no one can deny it chimes with growing investor interest in the environment, social justice and good governance, the reformers’ trinity of ESG.
‘Sustainable agriculture is a necessity not a gimmick,’ said Monks, who believes farming has grown beyond the chemical excesses of 25 years ago when increasing production was all that counted.
He pointed to the environmental and community benefits achieved from good farming and said the emphasis on modern agriculture was to maximise output for minimum input.
To this end FARM wants the farms it buys and leases out to adhere to the LEAF (Linking Environment and Farming) food assurance scheme run by one of the investment trust’s non-executive directors, Tom Green.
In addition, Monks said the farms would be high-tech, using robots and driverless machines where possible and, even more crucially, data analytics to pinpoint when and where crops should be grown and pesticides employed in a targeted way.
FARM is aiming for a 7-8% total annual return, with quarterly dividends providing 4.25% of that when the fund is fully invested.
The attraction of agriculture is that returns should be uncorrelated to public stock markets, giving investors much-needed diversification.
However, although an ancient asset class, farmland has traditionally been the preserve of private investment funds out of reach of ordinary investors. FARM wants to increase investor access and start to raise the risible less than 1% of global stock market capital allocated to the sector.
And while a 7-8% projected return looks similar to virtually all investment company launches, Miserey believes FARM could generate more. According to Bloomberg data, fresh fruit and vegetable prices have risen at 4.7% a year, higher than the 2.7% rate of overall food inflation, which could bode well for FARM.
Also, on eight of FARM’s 18 targeted farms the investment company will receive a share of crop sales on top of the base rent, which opens up the possibility of higher returns.
If launched, FARM investors will pay the CAP managers an annual fee of 1.25% of invested net assets up to $200m, falling to 1.15% up to $300m and 1.10% up to $500m. A 0.35% annual fee will be paid on cash.