Murray Darling Basin Regional Economic Diversification Program: a review of equity capital investment in the development of high value horticulture

Murray Darling Basin Regional Economic Diversification Program: a review of equity capital investment in the development of high value horticulture

This report is part of the Murray Darling Basin Regional Economic Diversification Program - Queensland. The Agricultural Value Chains and Food Systems group at the University of Southern Queensland was commissioned by Queensland Department of Agriculture and Fisheries to review capital investment for the development of high value horticulture in the Queensland Murray Darling Basin (QMDB).

The research has three objectives:
- To better understand the capital needs of Queensland Murray Darling horticultural producers in supporting their expansion, diversification or infrastructure development plans;
- To provide information relevant to QMDB producers on partnering with investors; and
- To overview investment opportunities for the QMDB region and how economic diversification of the region might be progressed through investment of capital from outside of the region.

The methodology used for this report involves a qualitative ‘multi-stakeholder analysis’ using in-depth interviews with stakeholders across the horticulture investment chain.

First, we interviewed producers in the Murray-Darling region involved in establishing new ventures for their views on capital raising. The producers were established horticultural producers or other crop growers (e.g. cotton) looking to diversify into horticulture or new horticultural crops. The region’s main attribute is a secure water supply and dry sub-tropical climate. Suitable infrastructure for cold storage, packing and/or processing of horticulture produce is limited.

These interviews indicated that the region’s producers are interested in capital raising beyond bank loans, but they had little to no understanding of the process and the requirements involved. Most had made a start at a new venture but were still some time away from production supply to a market.

Second, we interviewed agricultural investment professionals as well as producers from other regions that have had positive and negative experiences in equity capital raising. Our results indicate that there are substantial differences in the perspectives of producers and investors. Cultural change is needed for producers and investors to work together. Agricultural investment professionals have an important role to play in educating both parties about the other and bringing them together.

Potential investors and their motivations are diverse. They include institutional investors such as superannuation funds and private equity funds, private investors such as family offices and high net worth individuals, and corporate investors seeking access to supply of produce for their business.

Investment in horticulture to date has focused on perennials where risks can be more easily mitigated compared to annual crops that are subject to weather, volatile markets and rapid changes in supply. Investment in other horticulture products is evolving and may be linked to export market opportunities.

Producer options include:
Expansion - Entering into an agreement with an external equity investor, pooling resources with strategically aligned businesses or leasing additional land
Exit - Selling the farm and possibly staying on as a manager or in a lease-back arrangement
Business as usual or steady growth/diversification utilising traditional sources of finance.

Some investors are interested in the first option (investing and becoming a business partner) as well as buying farms outright. Sometimes multiple farms are purchased by investors and aggregated into a large farming enterprise. Investors interested in sharing in an existing business look for large, profitable farming enterprises; skilled and experienced farm management; access to a secure water supply; business and financial proficiency of the owners; a comprehensive business plan outlining future growth strategies; and a good fit with their needs and motivations – the right partner.

The main reason to consider taking an equity investor is to enable a growth strategy. This could involve overcoming constraints associated with bank finance or partnering with a strategic investor to add value to both businesses. However, the process of becoming ‘investment ready’ is a long road and likely to be many years in development. It will require some rethinking of the way the business is operated and presented, which would generally benefit from some professional advice. There is a need to help producers to build the required finance and business skills.

Producers wishing to introduce external equity capital into their farming enterprise need to have a clear business plan for the future and a strategy for how to achieve it. They need to understand what they want from an investor and what they will need to give in return. Potential impacts of taking external equity investment include dilution of returns, potential loss of control and the complexity associated with dealing with a third party. In most cases operational control of the business remains with the producer while the investor is involved in strategic decisions, regardless of whether the investor owns more or less than 50% of the business.

We conclude that the region’s high value horticultural production is in an early stage of development and will require considerable effort and capital over a period of time. Investment from outside the region will be needed to drive the majority of development. Investment is needed to develop and increase the scale of high value horticulture production and related infrastructure such as storage, packing and processing facilities.

While some of this may be undertaken by the region’s existing producers, it is expected that investors from outside the region will drive the majority of this development. These investors are likely to include large or corporate horticultural producers investing in the region as a strategic move to increase and/or diversity their production and packing operations. Other investors are unlikely to have expertise in horticulture production and will need to recruit farm managers with the necessary experience and expertise to manage large scale production.

QMDB growers wishing to participate in the development of high value horticulture could consider partnering with investors from outside the region through external equity finance or a joint venture arrangement.

Unpublished USQ project.