April 27, 2016

by Lynda Kiernan

Securing good partners is key to successful investing – a tenant that Blue Sky Real Assets embraces. This is evident in the firm’s third single-asset private equity co-investment it originated with Kialla Pure Foods. GAI News had the opportunity to sit down with Michael Blakeney, Investment Director with Blue Sky, to discuss this unique investment at this week’s Global AgInvesting 2016.

Historically, Blue Sky has structured its single-asset investments as a co-investment linked with an operating partner as a means of building a historical track record and educating investors. Previous co-investments conducted by Blue Sky include ventures with Customized Farming Management and other investors, and Southern Cross Farms. The firm’s most recent is a co-investment with Kialla Pure Foods and is set to capitalize on the increasing demand for organic grain.

Market demand for organics is booming – not only in Australia but also in Asia and the U.S. but the bulk of Australia’s organic grain is grown on dryland, or rain-fed operations, creating a challenging seasonal domestic supply to the processing industry.

Seeing a need, Blue Sky and Kialla plan to take conventional farmland, expand with irrigation infrastructure and water rights, and convert it to organic production. Together with Kialla’s leading organic grain processing and milling business and its marketing and exporting capabilities, this will create an integrated supply chain feeding a high-demand market.

Under the terms of the co-investment, Kialla will maintain approximately 70% of its milling business, and will invest 20% into the farming business, while in turn Blue Sky will take approximately 30% of the milling business, and 80% of the farming business. In addition, Kialla will act as the operating partner, bringing its young, progressive, management team that has deep experience in irrigated organic grain production, a history of earnings growth and a history of building markets to conduct and oversee the conversion of the farmland

“We think that ‘s very good alignment,” Mr. Blakeney told GAI News. “That ‘s very much the model for our agri private equity strategy.”

The investment will provide Blue Sky exposure along the full organic agribusiness value chain, from water rights, productive irrigated farmland for the production of organic grain, to grain storage and handling facilities, to processing and milling capabilities, and Kialla’s marketing and export business. Through these exposures, the investment will encapsulate everything that Blue Sky targets in its investments, including:

1. Water rights, through the irrigated farmland, farmland development, through the conversion of conventional farming operations to organic production
2. Infrastructure through Kialla’s processing and milling facilities, and
3. A strong market story driven by surging demand, creating a compelling opportunity.

Additionally, a market premium is indeed locked-in through an existing offtake agreement with the farmland. Although Blue Sky is aware that there will likely be a yield discount associated with the conversion to organic production methods, the market premium will more than offset this discrepancy. Click here to listen to Mr. Blakeney explain more.

Looking down the pipeline, Blue Sky envisions a somewhat short timeline for an investment of this kind with an expected exit occurring within four to six years. Kialla will have the independent option to decide whether to exit at the same time.  Given the particular exposures, synergies, and advantages inherent in this investment, the firm is targeting a return on investment in the high teens.

“We always look at the exits before we get in. It’s probably the first or second conversation we have with our operating partners,” says Mr. Blakeney. He goes on to explain that there are three determined possible exit routes for this investment – an exit through a trade sale, whereby a larger milling business would look to buy the venture, an exit to a secondary, or a fund that is aggregating these types of assets, or through a split of the venture resulting in the sale of the milling business, the farming business, and the water rights respectively.

As compelling as Blue Sky’s single-asset structure is, the firm is attracting larger institutional investors, and moving forward, its investment vehicle structure will likely reflect this shift.

“The single investment funds have been really good for our existing investor base,” says Mr. Blakeney, “but we’re moving into a far more institutional investor base at the moment. As you’re probably aware, we have First State Super, one of Australia’s largest pension funds investing on a separate managed account with us, and we’re building this bigger fund, the Blue Sky Strategic Australian Agriculture Fund, to provide solutions for more institutional investors, so we don’t envisage a lot more of these single asset type funds.”

It would seem that looking to the future, the sky’s the limit for Blue Sky Real Assets.

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