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EQUITY INVESTMENTS

Farms have typically been owned and operated as family businesses. The traditional path to ownership has been through inheritance, government ballot or as a result of a career in share milking, shearing or farm management. Whilst some of these routes remain, farm ownership by an individual is becoming increasingly difficult.

An alternative to owning your own farm outright is to join with others and invest in an equity partnership.

An Equity Partnership is a farm business owned by two or more parties who have contributed capital to purchase a farm business.  The aim of any equity partnership is to:

  • maximise the return on the shareholder’s investment
  • operate the business at an acceptable level of risk
  • provide ultimate liquidity for shareholders (there must be provision for shareholders to exit the business)

The equity partnership is usually structured as a private company with shares issued to each member according to the amount of money each investor subscribes. The equity partnership (“The Company”) will own the land, plant and any stock and will employ a manager or sharemilker to run day to day activities.

A quality equity partnership should have;

  • A clear business plan which includes the ultimate objective of the partnership, the assumptions used, a capital expenditure budget, production projections, realistic costs and an estimate of future asset values.
  • An indicative investment period and a clear process to allow shareholders to exit from the partnership.
  • A shareholders agreement that addresses decision making, share sales, a share valuation process and how disputes are to be addressed.
  • All staff, sharemilkers and supervisors employed with clear contracts and job descriptions.
  • A clear communication plan.  At a minimum all investors should receive a farm report and budget versus actual financial report every three months.

 

The place of equity partnerships

Why be part of an equity partnership?

Joining an Equity Partnership

 

The place of equity partnerships

The following table presents some examples of how Equity Partnerships can be used to offer a range of solutions to high land prices:

 

 

Opportunity/Issue

EP solution

Farm ownership

With an average price tag of $3 million, dairy farms are becoming less affordable, even for the sharemilkers (in 1993 it ‘cost’ 12 cows per hectare to buy a farm, by 2003 it cost 22 cows/ha). This drop in affordability has meant that it has become more difficult for young people to enter into farm ownership. The same issue affects the sheep & beef industry.

Secure both a job and an investment. A good equity partnership can achieve similar or better results to a large 50/50 sharemilking job. In the sheep and beef industry, a quality equity manager’s job is one of the few ways of new entrants getting into land ownership.

Succession

Farms have now become such a valuable asset that providing for an equitable distribution of the assets to family and/or retaining part ownership for a successor has become problematic.

Allowing you to release equity from a farm property or divide a farm between family members or relinquish part control to a third party and consider part-retirement.

Growth

With increased profitability associated with larger farms/herds and improved production techniques, how can a farmer afford to grow a business through land acquisition and balance exposure to risk?

Buy into another farm but without the high debt/risk. Achieve benefits of scale associated with large farm ownership without the major issues. Spread of risk and debt reduction. Introducing new thinking, ideas and business practices.

Divestment

The long-term prospects for farming look good; how can a non-farmer afford to buy into this lucrative market without high gearing, or a current farmer get involved in another region?

Invest in a different region to spread climatic risk, or to access lower-priced property or buy into the dairy industry from another business altogether.

Investment

The prospects of good returns in farming are very attractive to investors that want to capitalise on this opportunity and buy into the Kiwi dream of farm ownership.

Stay sharemilking or managing where you are but get some exposure to an investment in land. Achieve expansion without extra work. Some partnerships allow you to be relatively ‘hands off”.
Provide an investment that your family can take on and grow.

 

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Why be part of an equity partnership?

You should consider joining an equity partnership if you want to:

  1. As a farm worker, manager or sharemilker, take a positive step towards full farm ownership. By becoming an equity manager your investment is indexed into the price of the land and stock which, over the past 20-30 years has appreciated more quickly than stock alone.
  2. As an investor, buy a quality farm but can’t afford to do it yourself. For many investors being part of an equity partnership is their first opportunity to own land. For others, it is the first step towards full farm ownership.
  3. To minimise the risks associated with outright ownership.
  4. To achieve benefits of scale associated with the purchase of a large efficient property.
  5. If you already have a farm investment, but want to invest in a different region to spread climatic risk, or to access lower-priced property or property of better quality.
  6. To share the experience and stimulation of working with other investors with different skills and experiences than your own.
  7. If you want an investment in tangible assets that has historically produced a sustainable commercial return.

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Joining an Equity Partnership

If you are considering investing in an equity partnership, you should ask yourself these questions before proceeding;

  1. What are my goals and expectations of such an arrangement? What are the outcomes I am looking for?
  2. Will an equity partnership help me achieve these outcomes?
  3. What other options might achieve a similar result?
  4. What is the likely lifespan of the partnership and how does this suit my investment needs?
  5. How do I ensure the other investors are suitable and financially sound?
  6. Who should I consult for advice on different aspects of the proposal?
  7. What significant events or changes would alter my answers to the above questions?

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