Equity partnerships offer farm options

The relatively easy pathway over the past decade to secure bank financing for farm purchases and expansion has got considerably rockier recently, prompting some re-thinking about farm retirement options for aging farmers, and career advancement for younger ones.

This conundrum is one Bayleys has been working hard to try and resolve, bringing those keen to exit, into conversations with the next generation keen to get into their own farm business.

“For retiring farmers it comes down to their ability to exit with capital to live out the rest of their years, and we have committed considerable resources to putting them and younger farmers together to discuss equity partnership possibilities,” says Bayleys’ national director rural Duncan Ross.

He says for the past generation bank funding has been a key platform to enable farm transactions, growth and exit. Now equity partnerships that involve the new owner and other passive investors seeking a reasonable cash return are looking attractive.

“In the past, equity partnerships have had something of a chequered history as an ownership structure,” says Duncan.

He points to the massive conversion move made from dry stock to dairying throughout Canterbury and Southland from the early nineties.

“Often capital came by way of several parties stumping in a portion of capital, with the bank putting up as much as 60-70 percent required for the conversion project.

“Generally, it was a race to get the land’s main returns as capital gain from the conversion. The bank debt played a big part in limiting the properties’ cash flow returns in these investments. Too little was left to commit to developing the project and re-investing back into it.”

Today the tighter bank lending conditions make such structures far lower in debt levels, with investors tending to be more focused upon annual cash returns and taking a longer- term view of the farm business, to the benefit of its operations.

Through its extensive national network of agents who are in regular contact with farmers and investors, Bayleys has identified a groundswell of interest in equity partnerships.

Bayleys Gisborne, Hawke’s Bay and Wairarapa recently organised a seminar on equity partnerships. The response to the event ended up being so strong they were compelled to delay it until after Level 2 restrictions lifted, on account of the numbers for the Havelock North event far exceeding the 100 maximum meeting limit.

Simon Bousfield, Bayleys Gisborne director and rural salesperson and his colleagues oversaw the successful sale of two larger East Coast stations that underscore the appetite for farm investment, and a younger generation’s interest in having a stake in their own land.

Panikau and Mangaheia stations had several potential investors come forward keen to invest alongside skilled farmers who may have also wanted to invest but lacked the equity for outright purchase.

“Mangaheia ultimately sold as an equity partnership deal with two families coming together to form a farm business entity keeping the existing manager on and establishing a board to oversee the running of the business.”

He says in a low interest rate environment, equity partnerships may not only offer an appealing rate of return to investors, but also somewhere for retiring farmers to leave a portion of their funds.

“It could be they leave some of their money in the property getting a better return than in the bank, while getting enough out to move off the farm and pursue retirement.”

Bank attitudes to these lower geared equity partnership models are also positive.

ANZ commercial & agri regional manager Marcus Bousfield says with capital gains being a lower portion of farm returns today, the investors attracted to equity partnerships are taking a longer-term investment view.

“Today’s value proposition for equity partnerships involves a number of factors that weren’t historically considered. Non-financial returns around environmental stewardship and farming as ‘a way of life’ need to be balanced with expected financial returns.

“The goals of investors will need to consider all of these dimensions and who will ultimately be the person with the skills to deliver the optimal balance. This is where a large opportunity lies ahead for younger farmers with an ability to demonstrate their ability to perform ahead of their sector peers.

“They require the farm to offer sustainable earnings, which comes down to having a good operator involved to deliver those returns.”

He says this demands the skills of the top quartile of operators. He advises any younger farmer considering an equity partnership to honestly assess their own benchmarked ability before seeking investment with others.

He urges younger farmers to take an open mind about equity partnerships early in their farming career, and have a clear objective in mind when they embark on one.

“Be realistic with your time frames and surround yourself early with good people and good advice. A good team becomes your earliest asset when starting out.”

It is important to bring an acceptance that not all decision making is under your control, and acceptance of others’ views and values you are in business with is also critical.

Alan Maxwell of BM Accounting and Advisors in Hawke’s Bay says the interest in equity partnerships has deepened in recent years as succession issues have arisen for retiring farmers, and the ability for the next generation to be able to buy these farms.

“It’s less about interest rates now and more about access to capital, when it comes to farm investment.”

He says equity partnerships can offer a solution to capital sourcing and succession. However, some important factors to consider are having partners who all share common goals, having a good team of advisors, and a clear structure around the business.

“Banks are showing an interest in these types of structures, not least because they encourage an improved level of governance and financial awareness,” Alan adds.

For farmers wanting to exit farming, an equity partnership can provide a way to do so, while also being able to keep the land in the family, albeit with other investors on board.

“And that can be a good thing, bringing in new people with new ideas, it is just a case of everyone being open about what they want from the opportunity.”

Duncan Ross says leasing and lease to own arrangements are also options for easing one party in and one out of properties, and one looking increasingly appealing in a near-zero interest rate environment.

“The rate of return for a leased farm property of about four percent is looking very appealing in this setting, while also enabling new energetic blood to run the property.

“From a land-owners’ perspective they could, with the right structure, end up in better shape with good cashflow, less stress and maybe even the ability to continue living on the farm,” says Duncan.

As a growing number of aging farmers explore opportunities to exit in a tight lending market the prospects for more lease deals are expected to grow rather than diminish.

The rates of return offer the same appeal as the rates low debt equity partnerships can generate.

“Bayleys have a very strong network of agents with clients interested in investing within the farming sector – we have the resources and contacts to help get interested parties together to consider their equity partnership options,” says Duncan.

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