Capital: a catalyst for growth
GroundCover™ Issue: 115 | Author: Catherine James
Capital investment is a hot topic for grain growers. The issue generally is where third-party investment will come from and whether it will commit to a 20 or even a 30-year investment horizon.
“The challenge is to get them to invest on day one, then if you deliver a great investment experience you will forge a long-term investment relationship,” says goFARM Australia director Liam Lenaghan.
“So you should begin by asking ‘Is my business investment-ready?’”
Usually, growers rely on retained earnings or debt funding as a source of investment and development capital. However, the amount of capital available from these sources is often limited relative to the opportunities, and can therefore inhibit farm business growth.
“However, structuring a farm business so it is ‘investment-ready’ can open the way to accessing capital from sources other than the farm or the bank. This enables farm businesses to expand and improve returns on investment, while managing the risk profile of the business,” Mr Lenaghan says.
Potential investors will be attracted to a farm business that is ‘investment-grade’. That is, it offers:
- good earnings performance;
- a talented and proven management team;
- quality natural resources;
- appreciable scale around managing the cost of production;
- commodity specialisation; and
- quality information and data to support investment decisions.
Assuming the business is investment-grade, the next step involves being investment-ready. Mr Lenaghan cites the following as key areas for consideration:
Are investors coming into a company, unit trust, partnership or other arrangement? Have asset protection mechanisms and taxation implications been considered?
Astute investors will recognise and be attracted to the operational expertise in a farm business. Where does control rest and how is this determined? Beyond operational matters, there need to be clear decision-making frameworks around the strategic direction of the business and asset base.
It is reasonable for a significant investor to have a voice on matters that influence the application of their capital.
Events and mechanisms that trigger an exit from the business need to be discussed up-front. There should be guidelines that outline the strategy and repercussions for both entry and exit. It is too late to have these conversations when a crisis hits.
Dividend and distribution
Each party must state their expectations of managing surplus cash to ensure it aligns with the business’s objectives. This needs to be genuine and transparent to maintain a trusted relationship that is prosperous for all involved.
The expectations for communication need to be understood. Ensure you have a guide for how often and the format that will be used for reporting.
Executive chair of Bega Cheese, Barry Irvin, agrees that the solution to diversifying capital supply lies in getting the business strategy right. Do this before worrying about where the capital will come from.
Speaking at the Australian Farm Institute’s ‘Funding Agriculture’s Future’ conference in June 2014, Mr Irvin said if your business strategy is right, capital will find you.
Mr Irvin also said that, as part of that strategy, the industry itself needs to change the paradigm of the traditional family farm business structure. Family farms need to be liquid assets, such as a property trust or an equity partnership of collaborating farms.
Also, if you consider a third-party investor, make sure it is for the right reasons. That is, growth of a profitable business, rather than to help manage debt.
At the conference, Mr Lenaghan discussed an example of a grain-growing business doubling its landholding from 4000 hectares to 8000ha without increasing its debt burden.
“A triangular arrangement established a stand-alone financial entity to buy extra land. Equity was contributed by the grain producer and third-party investors,” Mr Lenaghan said.
Investors were attracted to the fact the grain producer put in his own money. The investor was also provided with a stable return from the grower, who leased the asset from the financial entity. A clear pathway to asset improvement was identified and set out in the management arrangement. This underpinned the capital growth expectations of the investment arrangement, providing further investor confidence.
“This was a win-win situation. The investors accessed an asset that might not otherwise have been available to them and the grower secured a significant production gain, plus an opportunity to buy the asset outright in the future thanks to a clause in the funding agreement,” Mr Lenaghan said.
This relationship has thrived and discussions have now shifted to seeking further expansion opportunities.
More information:Liam Lenaghan,
03 9221 6335,
GRDC Project Code ORM00011