Tall timber dominates as agri schemes cry out for credibility

Agribusiness investment schemes have been through tough times in the past couple of years.

TheAustralian Taxation Office(ATO) and theAustralian Securities and Investments Commission(ASIC) have clamped down on many operators, and investors have become nervous about this type of investment.

The problems stemmed from the generous tax breaks that were offered in early agribusiness schemes. Initially, many investors were only interested in the tax breaks.

Since then, the focus has switched to the investment potential of the scheme and this has resulted in a stronger focus on the quality of management and experience in the schemes.

This year’sMoney ManagementAgribusiness Survey has seen the bigger players become stronger and the new players finding it harder to gain distribution.

Again timber, olives and vineyards dominate the list, with some of the more exotic offerings falling by the wayside. Some players from last year have withdrawn from the market after failing to achieve minimum subscription levels.

Adviser Edge Investment Research managing director Shane Kelly says the sector is starting to enjoy some stability in the number of managers offering managed investment schemes.

“The number of projects remains static in terms of numbers, but in general, the turnover of managers is lower,” he says.

According to the survey, there are 44 projects covering a range of sectors. It is believed there will be about 50 projects offered to advisers this year.

Kelly says the move by planners to use more established managers has resulted in three promoters controlling about 50 per cent of the market.

The three are all timber project managers — Gunns, Timbercorp and Great Southern.

“If you go to the next dozen promoters, they control about 40 per cent of the market, which leaves only 10 per cent for new entrants and others,” Kelly says.

“This means 15 to 20 promoters will be trying to line-up distribution networks with dealer groups.”

PIR Agribusiness Research executive manager Tim Bennett says the bigger agribusiness managers have brought higher levels of managerial skills to the sector, which has put pressure on new players to improve risk profiles.

“We are seeing the same sort of projects being available, but the schemes are better value,” he says.

“The sector is maturing, which means we will see more, larger players being created.”

Bennett agrees it is going to be hard for start-up companies to enter the sector as the larger companies meet the investment market’s demands.

“The larger companies have become the ones that offer the same type of product year after year,” Bennett says.

Australian Agribusiness Group researcher Tim Lee says the quality projects are rising to the top and the better projects are getting funded.

“Tax will always be part of it, that is the nature of the business, but good projects are now more focused on the underlying investment,” he says.

“While there are a few exotic projects, the tried-and-tested projects are getting up.

“The project managers without a track record are going to find it difficult,” Lee says.

There is some movement within individual agribusiness sectors as some promoters disappear and others come in. This has been particularly true with olives — a number of schemes last year failed to gain minimum subscriptions, but have been replaced with new players this year.

The cost of entry into the sector is also seen as a barrier to new players. A project hoping to raise $10 million has to find between $600,000 and $1 million for a prospectus and the necessary approvals.

There are also distribution costs and negotiating contracts for the crops being produced.

“The single-offer manager has suffered as the multi-offering managers build strong relationships with the planners,” Kelly says.

Commissions for the agribusiness sector tend to be two-tier. There is the disclosed fixed commission and then the soft dollars to promote a product. These have included trips and payments for running client seminars.

Kelly says there is a trend away from paying high commissions as planners start to look at the economics of a scheme.

“The project managers have to focus on the strength of the industry they are in and how that will impact on the investor,” he says.

“Researchers are also looking closely at returns compared to prospectus forecasts. We also want to see how the agribusiness product is going to be used and the overall payment for this product.”

Lonsdale Alternative Research group general manager Marty Sammon says his company is looking for more performance-based fees. He favours trails to reduce high up-front commissions.

“We would like to see managers setting fees that are simple, based on something like five to 10 per cent of crop income,” he says.

All researchers agree planners should be looking at the quality of farming techniques used in the project, rather than the fees. However, this means planners should focus on project returns and seek ways of evaluating the forecasts.

Sammon says planners need to be more careful when looking at a project’s assumption of returns.

“Researchers have a criteria on how a sector is performing and how that matches up to a particular project’s forecasts,” he says.

“Some promoters are now offering do-it-yourself calculators for forecasting, which is good, as unfortunately there is a history of generally inaccurate assumptions.”

Projects today are more transparent and seem to be maximising the return for the investor, Sammon says.

“Many offer land ownership, as well as water rights, which is important, especially along the Murray,” he says.

“We advise people to look at projects with acceptable yields based on commodity price and industry outlook.”

A new development in agribusiness schemes is the arrival of wholesale schemes. Almost all managed investment schemes to date have been aimed at the retail market, but two investment banks are looking at launching wholesale investment schemes aimed at high-net-wealth individuals.

These are expected to offer much more ownership of the project by the investor and the manager will take lower fees.

Return assumptions are also expected to be more conservative, with higher internal rates of return.

It is understood the first of these wholesale projects, to be launched shortly, will be a timber scheme.

Kelly believes inflows to agribusiness projects will be about the same as last year.

In the 2002 financial year, it was estimated by Adviser Edge that between $300 million and $330 million was raised.

Northwood Financial Services managing director Rod North also believes inflows will remain steady.

“The market has become more sophisticated with less emphasis on the tax benefits,” he says.

“There will be a higher level of interest as other asset classes have gone sour.”

North says the internal rate of return of many schemes, averaging about 10 per cent, will look attractive when compared to investments such as equities.

Sammon, however, believes there are still a lot of people seeking the tax benefits of schemes rather than looking at the investment quality of the project.

“I suspect there will be a lot of interest in projects this year because people see the property market as overvalued,” he says.

“The agribusiness market is getting better, but there is still some way to go.”

Bennett says moves by ASIC and the ATO have brought benefits to the agribusiness sector by removing players who ran schemes simply as a tax avoidance investments.

“We won’t be seeing a return to the bad old days,” he says.