Private Capital Pulse: Episode 2 – Agriculture

TRANSCRIPT EPISODE 2

Hello, I'm Jon Ireland, and welcome to the latest edition in Private Capital Pulse, brought to you by DLA Piper.

Great to have you with us again, we're here, as you know on Private Capital Pulse to talk to you about the stellar growth in private capital markets. Now measured in the trillions of dollars, private capital investors are actively pursuing yields and alternatives to traditional public markets, and what we're looking to do with the Private Capital Pulse episode is unpack some of the trends and analysis in this space, with the benefits of insights from some of our DLA Piper experts and market leaders.

I'm very, very pleased today to be joined by Emma Kendall, who's a partner in our funds practice, and one of our tax partners, Eddie Ahn, to be talking all things "Ag". So, agricultural investments is one of the array of asset classes now fitting into the private capital sphere. We’re developing and increasingly seeing an institutionalised market in that space, and so I’m very keen to hear from Eddie and Emma on the latest stuff going on in that market space.

So, Emma and Eddie welcome. Thanks, Jon. Thank you. Great to have you with us, maybe just to kick things off can I ask you, what are you seeing in the market generally in "Ag" and "Ag" investing? Maybe, Emma, if I could throw that to you in the first instance.

Well Jon, it's certainly an interesting space and one which we're seeing a steady uptick in activity over the last five plus years or more. I think it's an area which has traditionally been pretty hard for institutional capital to access, and we're seeing a bit of a turnaround in that regard.

I think the market’s sort of bifurcated if you like, well maybe it's three channels deep. There's the traditional owners of agricultural land and businesses, which are the very much family owned farmers holding the land and usually holding only one property. There's the smaller funds that are less aggregated and have maybe sometimes only a single property also, but which are raising private capital and then at the other end of town, if you like, although it's the not town, there's the big aggregators that are bringing much larger portfolios to market.

And, so we're seeing a real sort of drive towards that large aggregation play, and I think you know the asset classes is definitely, as it becomes more available, it's becoming increasingly attractive because obviously institutional capital can't spend a lot of time trying to access really small investments, you know they need to deploy big cheques. These people have got, you know, money to spend that rivals the GDP of small countries and they've got to send it out the door, they can't be hunting small investments.

So, access and capital are kind of two intertwined things, so I think this big aggregation play the more it comes online, the more it comes online. It's a self-fulfilling prophecy.

I also think that the asset class is increasingly attractive because we live in a “VUCA” world if I can use a bit of jargon there. It's, Volatile, Uncertain, Complex, and Ambiguous which Harvard Business Review recently summarised as being “hey, it's crazy out there”. So, I think the “hey, it's crazy out there” means you know diversification is more and more attractive and the institutional and high net worth market is increasingly seeking diversification, so these alternative non-correlated asset classes are running hot.

I think the aphorism about not putting all your eggs in one basket is particularly appt for an "Ag" investment class.

That's interesting. I mean it certainly seems that the asset class in-and-of itself is coming to the fore, possibly for you know, diversification opportunities. But that aggregation piece is very interesting too, you know realising the sector's value, and sense in a portfolio for a very large "global". And certainly we've seen instances of the offshore pension funds coming in and having a look at Australian assets there.

I think, you know, Australia is a pretty settled sovereign risk target for offshore capital. Eddie does a lot of offshore tax, inbound tax and outbound tax advice, are you seeing that too Eddie that offshore capital coming in seeking this asset class?

Definitely, and that was just the one thing I was going to add was just to see the type of investors that we are we are seeing in this class. And I've definitely seen there's more appetite from foreign investors into this asset class and a big part of it, Emma, as you said is the diversification with perhaps some of the traditional real estate assets not being as favourable at this time that foreign capital is still looking for a home in Australia. And so with a growing sort of "Ag" fund sector, there is a growing foreign interest in this sector from what I've seen as well.

Yeah, I think there's a bit of an allocation sweep, isn't there between, office property, for example, is still weathering the storms of COVID and the switch away from office working, people are keeping their powder dry in terms of office allocation. And then infrastructure, traditional core plus infrastructure assets are kind of supply constrained, a lot of privatisations have swept through the market already. So, that I think those two allocations are kind of pushing a bit more towards an "Ag" allocation for this institutional capital.

Yeah, that's really an important point to see how this subclass if you like, or specialist asset class, looks within a broader portfolio of real assets as an option, given that whether it be a twin or multi-speed effect that's happening in that market space at the moment because of duplicate or macroeconomic issues at hand.

Maybe, Eddie, just flicking to you on that investor perspective, which we sort of started unpacking there. But, how do you see the opportunities and challenges for a private capital investor whether that be offshore or onshore, possibly offshore might be facing a, you know, a more complex environment than the onshore, but do you have any particular views from a tax perspective?

Sure. No, definitely there are some challenges from a tax perspective for foreign capital for this type of asset class. There have been some tightening of the tax concessions especially for foreign sovereign wealth funds, for foreign pension funds, and in funds generally.

And so, with that, we've been seeing a bit of a, decrease in the size of the investment cheques in order to now qualify for these new narrow concessions. But also, in terms of administration, we're seeing fund managers requiring foreign investors, who would normally have qualified for these exemptions, requiring that they obtain a tax ruling from the ATO to provide certainty before the Australian fund manager will apply the 0% withholding tax.

So, in terms of also, not just decreasing the amount of their cheque size for investments, it's also increasing the amount of administration involved in terms of having to apply for tax rulings, getting external tax advice in order to obtain the exemptions that were previously much more simpler to obtain.

Yes, on the administration side though I think we are, or at least we hope to see a decrease in the administration costs of "Ag" focused funds, partly because the tax benefits that the stapled structures and the old school bifurcated structure used to try and access have largely disappeared, which I think is, you know, although we see a lot of those structures hanging around the people quite attached to the idea of them, ultimately we should see a simplification of fund structures because the benefit of the more complex dual structures just isn't there anymore. Do you think, Eddie?

Definitely, in terms of the structuring and the impact that's happening with the changes to remove agricultural assets from being able to qualify for the reduced withholding tax rates for managed investment trusts, you are right, we are seeing a simplification of the structures from the historical dual trust structures to more a single, streamlined single trust structure. So, on the administration side, that is simpler. But, of course on the flip side, the 15% tax rate that used to be available is now gone and now it's, you know, back up to a 30% rate,

And that's, you know, that's compressing yields, right?

Exactly. And, whether that makes this type of investment as favourable as it was before, it does make it more difficult. So, we are seeing that while "Agri" is something that they're interested in, if the tax rates now make it no longer as favourable in terms of overall return, in terms of yield, definitely seeing foreign investment just have a sort of second think about investing into "Agri" funds.

Although I think though then we're probably looking at juicing up the asset class a little bit. A couple of favourable tailwinds there, "Agtech" is a specialist asset class. We act for some pretty exciting companies doing innovative things in "Ag", you know, feeding cattle seaweed to reduce their carbon emissions and other exciting developments, I think a slice of venture alongside your land exposure, or your more traditional commodity exposure can juice up the returns.

I think carbon is the next, you know, big frontier that the "Ag" asset class is opening up to. I think there's definitely benefit to aggregator plays in the carbon market, or with a carbon spin, individual farms are, it's a bit unfair to expect them to do their day jobs and run their business and hedge their currency and predict commodity movements and then as well, trade carbon on top. These are busy people, and I think there's a real opening there and the big carbon producers are, you know, definitely moving into this market as a way of meeting their decarbonisation targets.

It's an interesting diversification play, and a branching out from some of those more traditional land usages, applying those sort of carbon production, or carbon proponent solutions, that I think are on everybody's radar to see, you know, how the emerging uses and use cases line up with investor appetite and whether indeed that brings our own superannuation funds into this sector, even more than previously is whether the net 0 targets and objectives are met.

Yeah, I just don't see this tailing off at all, Jon. I think the SFDR in the EU sends us pretty strong signals about what's coming this way and approaches in the US vary widely between the blue states and the red states, where some are pro and some are anti, but the general trend is towards decarbonisation. I just don't think this is a theme that's going away at all.

Well, on that note, I think we've got a very clear sense that "Ag" is very much here to stay and is going to be developing and something that'll mean an increasingly more significant piece and will be even more important from a global investing perspective, including in the private capital investor space.

So, we might leave it there. Thank you very much Emma and Eddie for your terrific insights into the market. And, we'll say goodbye until next time. So, thanks again for joining us.

Just a final note to say if you are interested in this area, please do tune in for the next episode. You'll catch all the previous episodes wherever you get your podcasts or vlogs, and in the meantime, if you’ve got any particular topics you'd like us to cover, please do reach out to the contact details in the notes to this episode or myself, Jon.Ireland@dlapiper.com, and we'll look forward to seeing you next time. Thanks for joining us.