New Zealand's regulations around overseas investment rank it 48th of 53 OECD countries for ease of access for foreign investment. Yet, despite that ranking, and the anti-foreign investment rhetoric that seems to bubble up in election years, there is ample overseas interest in investing in our agricultural sector.
It is coming from around the world from investment funds and businesses that understand the prospects of long-term investment horizons matched to growing demand. These investors understand New Zealand's production and processing capabilities and its potential for further growth.
We need more foreign investment as there is a clear gap between national savings and the levels of investment required.
One of the looming opportunities, and a rapidly growing source of capital in the sector, is equity partnerships. In essence, equity partnerships bring external investment funds, sometimes pooled, sometimes from single entities or investors, into a sector which has historically - and riskily - relied more on debt.
If the benefits of an equity partnership, such as scale and different skillsets, can be unleashed then returns may well be higher than those of the average farmer. Anecdotally, the majority of returns from equity partnerships have been in the form of capital appreciation rather than periodic cash dividends.
Such new approaches to agri investment in New Zealand are critical. ANZ's insight report Greener Pastures identified the potential for New Zealand's agribusiness sector to capture another $0.5 - 1.3 trillion in exports by 2050. But, to achieve this, it identified a need for up to $340 billion in international and domestic investment, to enable production growth and support farm turnover.
At ANZ we have access to a local and international pool of around $160 million looking for equity investment opportunities. Other operators in the field are also seeing increasing demand with some set up to give access to retail investors and others working with large family holdings, high net worth investors and trusts to pool capital and find opportunities.
Equity partnerships bring a mix of skills and capital that supports growth and expansion and they are a rapidly emerging pathway to farm ownership. They spread the risk of investing, can release equity for succession planning, and unlock the benefits of investing in the sector without having to own a farm.
In our latest ANZ Research Agri Focus report we note some critical success factors in an equity partnership:
• A robust, achievable strategy for value creation
• Appropriate due diligence
• Good relationships and common objectives and motivations between shareholders
• An appropriate business structure
• Robust business processes and systems
• Clear communication with regular meetings
• Agreed procedures for entry/exit of shareholders and for resolving any disputes.
At this stage of evolution of such partnerships it is difficult to quantify their returns but logic would suggest returns are similar over the long run to the average farmer which is 3-7 per cent return on assets plus 5-10 per cent capital gain per annum, depending on the sector.
Capital gains in the future seem less certain and are tied to productivity improvements.
At ANZ a major focus for our agribusiness team is creating "investable businesses". That means helping owners address and improve areas such as productivity, governance and management. The overall goal is to enhance returns through consistent improvements in productivity driven by research, innovation and good management.
Creating clear separation between governance, management and operational matters helps address several issues for owners and potential investors and overcomes investor concerns around transparency of revenue streams and liquidity of their investment. That separation shows potential investors where the business is heading, how it is performing, where in the business their investment is going, and how their investment is performing.
Seeing how well a business performs helps address the liquidity concerns some investors have about getting their money out of an involvement in the sector -- strongly performing businesses or holdings will sell more readily when it's time to exit.
Productivity gains are also readily recognised and this again helps investor confidence. Top performing agribusiness operations can achieve returns in high single figures and even low double figures. Raising more businesses to that level of performance -- a task for private, government and industry based organisations -- again makes the sector more attractive to investment.
Further constraining interest in the agriculture sector are the long-term investment horizons, and short-term volatility in earnings and fluctuating commodity prices that spook investors. However, we see a long-term positive trend.
Investors and fund managers used to looking at quarterly or yearly returns need to understand the long-term trend of rising commodity prices.
Emerging middle classes in massive markets such as China, India and Indonesia are driving an upswing in demand for protein. The opportunities for New Zealand are potentially huge. But attracting capital will be key to fully capturing them.
Graham Turley is ANZ New Zealand's Managing Director, Commercial and Agri.
