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Opportunities for private equity investment within the sheep/beef and deer industries.

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Executive Summary

Use of private equity is well established in the agriculture sector. The dairy industry, in particular, has used private equity partners to fund purchases and conversions, successfully driving growth of businesses across different stages.

This report identifies the limitations and opportunities of private equity for the sheep and beef industry, where capital constraints and cash-flow issues are an inherent hurdle to growth.

Modern farming systems, technology, and sciences are evolving along with the way businesses are being financed and governed.

This evolution is influenced by such factors as investment costs, social and environmental pressures, availability of skill sets and price volatility – factors that shape how we farm today and into the future.

The backbone of New Zealand agriculture is family- farmed businesses. The industry has been further shaped over the last two centuries by strong trading cycles influenced by political and environmental dynamics ranging from economic recessions, global conflicts and subsidies, to technological and land use advances and high interest rates.

While the traditional family-owned farm remains a strong part of the agriculture industry now and into the future, structures are evolving with the rapid growth of corporates, foreign investors, multi shareholder businesses, leases and their relative hybrid models.

My views and interest in private equity are based on my personal background of growing up on a family farm, my education, work, business experience and the family succession process.

Capital – or lack of it – is probably the largest factor influencing the sustainability and growth of my farming businesses.

The focus on both cost of capital investment in the farming business and on ownership structures has elevated rapidly, driven by high levels of capital appreciation in the last two decades.

Perhaps the issue is best demonstrated by a discussion I had with a former employer about the cost of buying a farm, this was about the in the year 2000. He reflected on how tough farmers thought things were in the 1980’s when the capital cost was about three times the gross turnover of a stock unit. He noted that this was nothing compared to where it sat in 2000 – nearly eight times the gross turnover.

So, 16 years after that discussion, the cost is over 10-12 times the gross turnover, and there are now far greater compliance costs and social and environmental concerns increase the cost of doing business.

While high capital gains have created wealth, this has created its own challenges around succession and entry into the industry. Issues over land availability, land use change and investors paying aesthetics values for marginal producing land have all impacted on the environment we farm in today.

I hope this report will stimulate debate and highlight opportunities with the use of private equity for the benefit of industry businesses.

Opportunities for private equity investment within the sheep/beef and deer industries – Edward Pinckney