There appear to be two key elements to the proposed Pastoral Dairy Investments'(PDI) fund: that charitable trusts, which do not have to pay tax, come on board in a $50 million "co-investors" tranche to invest in dairying and secondly, that the $25 million mum and dad tranche is well oversubscribed, to balance up the two cash components for the initial "cash box" to buy farms.
The farms of PDI will be managed by MyFarm, which separately manages 47 dairy farms and 31,600 cows around the country valued at $487 million on behalf of investors, but which needs a minimum $250,000 to invest.
PDI is offering $1 shares to raise a minimum $25 million, with an oversubscription ability, for small investors, with a minimum $20,000 required. Once farms are purchased, PDI will apply to trade on the Unlisted share platform, and potentially go to the NZX stock exchange within 18 to 24 months.
PDI also seeks $50 million in "co-investor" funds, from high-value investors, institutions and some of New Zealand's 30,000 charitable trusts, who could later convert their stakes into shares.
The total $75 million sought would be used to buy outright up to nine, mainly Southland, Otago or Canterbury dairy farms which would be debt-free; targeting farms running herds of 600-1000 cows, and with potential for 20% expansion.
With no mortgage debt to be serviced from Fonterra payments, PDI is estimating a yield of about 10%, pre-tax, annually with quarterly dividends paid through Fonterra payments.
PDI will be managed by partnership MyFarm Asset Management LP, led by Andrew Watters.
Asked yesterday why there were two tranches, not a simplified one-off initial public offering to raise $75 million, or more, Mr Watters said the $50 million "co-investor" tranche could appeal to a "range of investment interests". He highlighted institutional investors, charitable trusts and high-worth investors.
The charitable trusts, would take a long-term investment view and were not required to pay tax. He said it could be envisioned that 50% of a farm could be owned by charitable trusts and non-taxed profits paid to them, while tax would be paid on the profits to the other 50% shareholders - mum and dad investors or institutions "We intend to use the regular monthly milk payments from Fonterra, or other dairy companies we supply milk to, to pay quarterly dividend payments rather than paying interest on debt used for farm acquisitions.
"Our policy is to distribute 100% of available net free cash," he said.
Potentially, once shares began trading on Unlisted, or later the NZX, charities as "co-investors" could switch to holding those shares, but Mr Watters said the charities would then lose their no-tax status.
He said PDI's being in partnership with MyFarm did not mean they were in competition to buy and manage farms.
Under the management agreement with MyFarm, PDI contractually had got "the first look in" on purchasing farms.
PDI did not believe its sudden interest in buying farms would skew or affect prices, as it wanted only "eight to nine farms", from the country's total of 11,500.
PDI said dairy farms, which in the 2010-11 season nationally provided farmers with average profits of $2991/ha, were offering "very good value" to buy, as the dairy land price index, based on sales to June last year, was 21% below its peak in 2008.
PDI noted that where it intended to buy farms the per-hectare average was $5000-$6000 in Canterbury, and $4500/ha in Southland and South Otago.
While none of the first farms will carry term debt borrowings by the PDI fund or the farms, borrowing might be done later for more farms, subject to a limit of 40% of an individual farm asset, with an overall cap of 15% borrowings against PDI's total assets across its fund portfolio.
"We will be looking to only buy farms that are well-priced, have a development angle, and the potential to be top-quartile milk producers," Mr Watters said.
Under the fund proposal, PDI gets 0.85% in a monthly fee for investment up to $75 million; then a one-off farm establishment fee of 1.5%, plus GST, on the farm purchase price, followed by an annual farm supervision fee (paid in arrears monthly) of 5%, plus GST, based on milk revenue.
Within the $25 million tranche, a fee of 2c per share is payable upon application.
PDI said the fees were designed to be competitive with the historical cost of share-milking arrangements.
The offer opens this month and closes on April 20.
The players are ...
The new Pastoral Dairy Investments would be managed by MyFarm Asset Management, which is 50:50 owned by MyFarm and Agri Capital Services.
MyFarm finds and manages the farms, while Agri Capital Services is contracted to manage Pastoral Dairy Investments.
A minimum 25 million shares, plus oversubscriptions, are being sought at $1 per share; with 30c paid now and the balance within a year.
The funds would initially be in a "cash box" to buy the first farms, then the 25 million shares would go to trade on Unlisted, the internet-based unregistered securities facility. Shareholders would vote annually on moving to an NZX listing.
Who sits where ...
Pastoral Dairy Investments will be chaired by Malcolm Bailey, chairman of the Dairy Companies Association, a director of Fonterra Co-op and a member of the Washington-based International Food and Agriculture Trade Policy Council. Alongside him will be John McDonald, chairman of Pohutukawa Private Equity and a director of Solid Energy and Horizon Energy Distribution, and Alister Body, a DairyNZ director and Mid Canterbury dairy farmer.
Pastoral Dairy Investments will be managed by partnership MyFarm Asset Management LP, led by Andrew Watters and Grant Rowan, directors of MyFarm, alongside professional directors Neil Craig and Brian Cloughley. Mr Craig is chairman of Craigs Investments Partners and also Comvita Ltd, while Mr Cloughley is a past director of agribusiness investment banking for Craigs Investment Partners.
