Questions arise over capital gains issues, complex fee structures, estimates on some expenses and where Pastoral Dairy Investments (PDI) will offer value, when other investments such as NZ Farming Systems Uruguay, Tasman Agricultural and Dairy Brands left start-up shareholders out of pocket.
Outside investment into the sector also has to take into account myriad details on how its cash will be working, and the potential yields.
PDI estimates a yield of about 10%, pre-tax and fees, annually, with quarterly dividends to be paid through Fonterra's monthly payments.
On one hand, demand for PDI's prospectus during its country-wide roadshow has prompted the potential for a second print run and more than 850 inquiries so far, while recent headlines reflect a strong global dairy demand which is underpinning the economy.
However, in the South, financial analysts specific to the dairy sector are lukewarm to the idea of the PDI fund, its associated costs, fees and potential yields.
New Zealand is not alone in dairying achievements globally.
The majority of other milk producing nations, except China, have all boosted milk production during the past year.
With the fund closing date not until April 20, potential investors will be holding on to their cash and it will be some time before actual investor numbers and their extent is known.
Other than a separate MyFarm fund, requiring a minimum $250,000 investment, PDI is the first opportunity for small "mum and dad" investors to gain a stake in dairying, at a minimum $20,000 investment.
MyFarm, which has its own separate 47-farm fund, will manage the PDI farm stable.
MyFarm executive director Andrew Watters is one month into a gruelling countrywide roadshow, having made about 20 presentations to brokers, farmers and small investors.
He maintained PDI's debt free farm acquisitions, a low cycle in farm prices, MyFarm's management experience and medium-term strong global dairy demand underpinned by Asia boded well for investment.
Historically, start-up investors in other companies have come unstuck. When NZ Farming Systems Uruguay and Tasman Agricultural raised money, the shares then traded at discounted rates respectively more than 20% and 38% below net asset values.
While PDI had maintained the offer was medium to long term to get greatest benefits and should be considered illiquid, one analyst highlighted that the PDI fund would be so illiquid that if for some reason an investor had to exit in a emergency, they could be "well out of pocket".
Mr Watters said unlike PDI, those companies - and he also added in Dairy Brands - carried high debt levels on establishment, never paid dividends and in some cases used 50:50 sharemilkers who took more than 50% of profits.
The Farming Systems Uruguay model, while "pioneering", was based on cheap land overseas and on an unproven business model with no track record.
The $25 million small investor component of the PDI shares being sought could go to the Unlisted unregistered securities facility, and later the NZX stock exchange. Should PDI shares become discounted in value, Mr Watters said PDI had the option to sell a farm, countering the argument that selling a farm in a falling or low market would be offset by commodity demand globally.
Based on PDI's prospectus, another local analyst worked out a $10.5 million farm with total income of $1.8 million, less expenses of $976,000 would provide an after tax profit for the fund of $423,000. The estimates for fees were supervision at $84,000 and PDI operating expenses of $100,000 - totalling $184,000 and "too high" - while the fund got $423,000.
Mr Watters said the analyst's fee estimate appeared "about right" and was in line with the prospectus projections on a similar scenario, but based on a $10 million farm, and $170,000 in total fees. He reiterated the PDI fees were based on the cost which would go into having a 20% sharemilker situation.
He rejected the suggestion that, while the fund was subject to a wide number of variables which could affect dividend yields, the fee-take for PDI remained relatively static.
He said the supervision fee of 5% based on the milk price would be less for PDI if prices fell and the 12.5% earn-out payment for PDI at the point of farm sale was subject to that farm having gained shareholders a pre-tax internal rate of return of at least 8%.
While MyFarm was highlighted as the experienced manager, no individual MyFarm comparisons were used in the prospectus. But Mr Watters offered to provide examples of individual MyFarm returns for analysis.
He said MyFarm operated differently from PDI's model, with higher start-up fees and lower ongoing charges, but that annual PDI returns were expected to be within 0.5% of MyFarm returns.
For this year, MyFarm after-fee, before tax, shareholder returns were expected to be 7.8% and next year within a range of 6.5% to 7%, he said.
"We [MyFarm] run 47 farms and know the costs involved and have got PDI costs as low as we can," he said.
MyFarm and PDI had an arrangement not to compete in buying farms.
When asked if there was any agreement or arrangement where PDI would purchase MyFarm farms, he said, "No ... it would not be proper to be selling a MyFarm to PDI."
Another analysts' query was why PDI had no independent, third party audit of the PDI business model within the prospectus.
Mr Watters said the prospectus was expected to be analysed closely by dairy farmers for investment. The business model was based on credible data from NZ Dairies, Fonterra and the primary industries ministry.
While acknowledging the float was also for small investors without specific dairying experience, he said smaller investors should consider any PDI investment as a "small part" of their wider portfolio.
The prospectus said pastoral dairying in New Zealand had gained 10.1% returns over a decade to 2010, of which 49% was from operating profits and 51% capital gain. Analysts do not see similar capital gains available at those levels.
Mr Watters defended the capital gains data, estimating that capital gains value over the next 10 to 15 years would be above the consumer price index annually, by a further 1% to 2%.
"The short supply globally will make farms more valuable over that period," he said.
One analyst was scathing of claims small shareholders have an opportunity for "ownership" in the dairying sector.
He highlighted that being a shareholder in one of the single company/farm PDI units translated to having no proprietary rights to the land and only unsecured minority shareholder rights.
Mr Watters said that description "was correct in reality", but was no different from standard farm ownership arrangements, including how some trusts now operated for their shareholders.
One analyst noted, "Maybe there is no bank debt but there is investor expectation of better than bank deposit or mortgage rate returns."
While there was no threat of bank foreclosure and farms might break even and management fees got paid, the market would "savage illiquidity and discount further if targets are missed", he said.
Mr Watters said would-be investors "can not side-step risks", be it farm production or the level of Fonterra's final payouts, and they were entering exposure to a cyclical commodity, at present driven by Asia.
It appears that being "first cab off the rank" for small investors to have direct exposure to New Zealand's dairy industry is going to attract a high level of scrutiny at every step.
If this is a time for would-be investors to take notice of the disclaimer "consult your financial adviser", go further and get one with exceptional agricultural knowledge.
PDI fund start-up . . .
• Offer seeks $75 million, with $25 million from small investors and balance of "co-investors" from charitable trusts, wealthy individuals and institutions.
• Oversubscription facility, and directors hoping to raise a total of $75 million to $100 million.
• Initially buy up to nine farms, debt free, in mainly Southland, Otago and Canterbury with herds from 600-1000 cows.
• Properties must have potential for 20% expansion. Any later debt capped at no more than 40% of single farm value.
• Offer to investors: quarterly dividends, after fees but before tax, of 5.5%-6%, then return on capital when sold.
• Each farm to have a separate company for shareholder stake.
• Overseas ownership restricted to 24.9%; below threshold where costly Overseas Investment Office applications would have to be made.
