There needs to be innovative thinking around investment structures for the agri sector, writes Ross Verry.
There is no question that private business owners are getting older across all sectors and the issue is particularly stark in the agri sector. This trend has the potential to shape the New Zealand, if not the world economy over the next 10 to 20 years, and it could go either way.
If you are familiar with the sigmoid curve as it applies to business, the demographics of the agri sector suggest that it is in the "mature" phase of its life cycle. You would also know that after the "mature" phase, comes "decline" — something to be avoided as the turnaround can be long and painful.
Many farming business owners in New Zealand have invested huge amounts of capital, time, energy and skill to get their business to where they are now. They are nearing the end of their careers but may want to see their legacy continue and their businesses thrive and to continue to provide them as owners, with sufficient reward to enable them to enjoy the retirement that they deserve. That responsibility may need to rest with the next generation or other operators.
The three scenarios below outline where the mature owners often find themselves:
1. If they have been consistently profitable and if they are lowly geared, with new operators they may be able to extract some capital and an ongoing dividend stream, retaining ownership of the business without requiring new capital.
2. New capital may be required to support this exit strategy. If so, they will need to be "investor-ready" — i.e. evidence of past performance and value creation, a strategic plan, quality operational and financial reporting, good governance and liquidity for the new shareholders.
3. The alternative if 1. or 2. isn't possible, is to sell.
Of the options above 2. and 3. require new capital. The dairy industry in particular is struggling to attract capital.
In some cases these agribusinesses have become victims of their own success. The combination of the value they've created, the scale that they've built and the difficulty accessing capital for or agri, has made solutions challenging.
Mark Hiddleston, MD of Commercial and Agriculture at ANZ recently highlighted that traditional sources of funding have been impacted by changing political and economic factors.
There are now stricter economic tests for foreigners investing in farmland in New Zealand. And bank credit has tightened due to reduced risk appetite, banking regulatory changes and a number of concerns around what compliance and regulatory changes will mean for farming businesses earnings and costs.
So there needs to be new, innovative thinking around investment structures and some thinking about different types of investors.
If the situation isn't addressed, the opportunity to continue or reset the "growth" path on the sigmoid curve is going to be impacted and a large opportunity for NZ agriculture missed.
There are two things required to attract new investors to agri. Firstly, becoming investor-ready as discussed. Secondly, education around the opportunity and performance of agriculture as an investment class. Over time, agriculture has out-performed most of the more traditional asset classes such as stocks and bonds. There is also some good opportunities for investors, investing directly into farming assets, to influence business performance with their own set of skills and experience. The key is developing or having access to an understanding of "what good looks like" and what is required to get there.
If we can get those key elements right, it opens the opportunity for more direct and proportional investment in farming businesses from new sources of capital.
Many farm owners, particularly younger ones, are becoming more comfortable and attracted to the idea of co-investing with external investors, especially if they provide experiences and skills that can help them be successful. This could be in the form of a "city" investor, who could bring for example, governance or financial management experience.
Alternatively, the younger operator may benefit from the more operational experiences of a retired farmer who has exited the industry and has capital to reinvest. The retired farmer can put some of their capital to work in a sector they are familiar with and understand well and can add further value with their experience and skills. As well as enhancing the returns they could also be giving back to a sector that has probably served them well and can help promote the success of the next generation. This should be a great source of new capital.
In summary, agriculture and food production are attractive sectors for external investment, providing strong returns and an opportunity through direct investment to influence strategy and execution.
Syndex, with others, is working hard to make these opportunities more investable, we now need the investors to recognise this and invest.
● Ross Verry is chief executive of Syndex.