The Wattle Watch

In any given month, Wattle Partners meets with many different professionals offering a new investment product, idea or scheme. Most are a pass from us, but now and again some pique our interest.  

This month we met with met with Barwon Investment partners about their Healthcare Property Fund but were surprised to learn about their Listed Private Equity capabilities.

With estimates of some $1.2tn in capital committed to private equity funds around the world, there is some concern the market is becoming flooded. In just the last few months a number of Australian equity managers, including Pengana, have launched listed private equity funds that invest into illiquid, unlisted companies. As part of our meeting with Barwon regarding their Healthcare Property Fund, we were surprised to hear about their innovative solution to benefitting from the private equity boom.

What is the fund?

To put it simply, the Barwon Listed Private Equity Fund seeks to invest in listed companies involved in the Private Equity sector. This includes buyout firms, who acquire and then sell companies, private debt providers, who lend to these companies and sometimes take ownership stakes, alternative asset managers, who manage the underlying funds and derive performance fees and finally, private equity backed listed companies. The opportunity set around the world is much larger than we expected, at 950 companies and over $1.7tn in market capitalisation combined across the likes of TPG, KKR, Oaktree, Blackstone and Berkshire.

Barwon have been running this strategy for over 11 years and have accumulated $350m from sophisticated investors and family offices. The fund has delivered a return of 19.8% per annum over the last 10 years and 14.4% per annum over the last three.

Whilst it can be difficult to understand why an Australian fund manager has a competitive advantage in this sector, it seems they are one of very few around the world who have chosen to focus on this area of the market. The fund will invest into just 20 individual companies, based on bottom up stock selection, will not use leverage and offers daily liquidity. They seek to generate a return of 3% over the public markets return and provide full transparency into the underlying portfolio.

The fund is highly diversified, with the largest allocation (36%) to buy out firms or those offering growth capital like 3i Group and Onex. This is followed by private debt provides (20%) like Oaktree capital and Blackrock’s specialist lending company. Next is alternative asset managers (27%) including Blackstone and KKR, providing exposure to the many funds raised and managed by these companies in the last decade. 16% of the fund is then allocated to companies currently backed by PE firms, including Australia’s Cardno and Gentrack Group.

In an environment that is becoming more difficult to generate positive returns every day, we continue to seek out opportunities and specialists who can add value in their areas of interest. It is these groups and people who have built a competitive advantage that are best placed to deliver better than average returns at substantially less risk than listed markets and which warrant further consideration.

The Wattle Watch

In any given month, Wattle Partners meets with many different professionals offering a new investment product, idea or scheme. Most are a pass from us, but now and again some pique our interest.  This month we met with Warrakirri Asset Management, who are launching a Diversified Agriculture Fund.

Whilst agricultural property has a tainted record in Australia, due primarily to the tax-driven Great Southern and Timbercorp schemes of the 2000’s, there is an increasing supply of investable opportunities run by professional operators in the industry. Warrakirri is a well-known name in the agricultural space with over 20 years’ experience directly operating farming properties and running discrete mandates exceeding $1bn for industry and other sovereign wealth funds.

In 2018, the group has decided to open their capabilities up to the wider market.

The company plans to launch the Warrakirri Diversified Agricultural Fund in 2019 and raise up to $100m in capital as part of the first raising. The capital will be used to buy, develop and own a diversified portfolio of high quality agricultural properties leased to the best operators in the industry. The targeted properties will be valued at between $10m and $30m and the fund will target a return of between 7 to 11% per annum over the 7 year investment period of the fund.

The management team intend to diversify the portfolio across all of Australia and include all aspects of the production cycle including water entitlements, livestock, vineyards, fruit and nut trees as well as processing and infrastructure assets like greenhouses. Importantly, the fund will have gearing capped at 25% and will be managed on a capital calls basis, with 25% of committed capital due on application and the remaining expected to be called within 12 months.

We will cover the investment in greater detail in a later issue, however, as many readers know some of the best performing investments in recent years have been agricultural property trusts like Arrow and Rural Funds Group. It is yet to be seen whether Warrakirri can deliver a similar return profile, however, given the heightened volatility in markets we see an increasing need for less volatile, non-market linked assets.

The fund requires a minimum investment of $100,000 and is restricted to wholesale investors only.

The Wattle Watch

In any given month, Wattle Partners meets with many different professionals offering a new investment product, idea or scheme. Most are a pass from us, but now and again some pique our interest. The following is an outline of the opportunities that we think deserve a second look.

 

THB Global Microcap Fund

We recently met the team who manage the THB Global Microcap fund. We have been talking to Brookvine their Australian partner for some time. Essentially the fund gives a dedicated exposure to US Small and Micro-cap stocks, THB or Thomson Horstman and Bryant has been managing this fund since 1982, has a small team of 17 people and manages just under $800 million US. The definition of a US Small or Microcap stock is something still very large in our Australian language, the average company has a value of Us$530million. The funds aim is to outperform the Russell Micro cap Index net of fee by 4% every year. The fund since inception has been doing this comfortably, with a return since 1998 of 14.8% per annum versus the index of 8.2%, and the S&P of only 6.7%. The interesting thing to note is that the annualised volatility of their fund is only slightly above that of the S&P 12.8% vs 10.1% They have been able to achieve such a return by having a true long term view, while constructing, well-funded, low risk companies that have been able to grow revenue, earnings and book value through internally generated cash flows. Essentially the ream has a well proven process of generating ideas, doing the fundamental research and then construction portfolio, while applying risk monitoring while the position is held.

Reasons for liking this sub sector

  • 45% of the US Microcap universe has no published earnings estimates, offering opportunities for active management;
  • The sector is neglected by the major research houses on Wall Street;
  • Management skill has enormous impact on the direction of smaller, mostly single product line companies;
  • 60% of all microcap companies have zero debt;
  • Microcap companies typically have strong alignment with ownership and control;
  • The returns of this sector has been enormous, in fact your portfolio would have done 3.2 times better than investing into the S&P 500.
  • The median CEO is paid total compensation of $1.7million in the microcap sector, versus the S&P 500 where it is $11.7million.
    Should you consider investing?The fund offers investors an exposure to a very interesting space in the US Market. They fund has done very well for a very long period, the management and process seem very sound. Not for everyone, but one that investors looking for a real return over the next 5 years should consider. The fund is available at a minimum of $50,000 and has a cost of 1.25% per annum.

    CBA XI CAPITAL NOTES

    Commonwealth Bank of Australia, or Commonwealth Bank, will raise AUD 750 million in a debt form instrument—to be listed on the Australian Securities Exchange, or ASX, they will be called CommBank PERLS XI Capital Notes, their ASX code will be CBAPH. This issue will provide Additional Tier 1, or AT1, regulatory capital for Commonwealth Bank.

    Any holders of a holder note the CommBank PERLS VI Capital Notes (ASX Code: CBAPC) will be asked if they want to reinvest CBAPH.

    CBAPH is a fully paid, convertible, transferrable, redeemable, subordinated, perpetual, unsecured note with a AUD 100 face value and mandatory exchange date of April 26, 2026.

    Mandatory exchange on that date is subject to exchange conditions. CBAPH may be exchanged earlier as a result of a trigger event or Commonwealth Bank exercising an option to call the security two years early on April 26, 2024.

    Distributions are discretionary, noncumulative and fully franked with a dividend stopper. Distributions will be paid quarterly in arrears, based on the 90-day bank bill swap, or BBSW, rate plus a margin in the indicative range of 3.70% to 3.90% per year. For example, using the current 90-day BBSW rate of 1.91%, this equates to a gross running yield in the range of 5.61% to 5.81% per year

    Face value: AUD 100 per security.

    Minimum subscription amount: AUD 5,000 (50 units).

    Amount to be raised: Commonwealth Bank plans to raise AUD 750 million via the issue of 7.5 million securities, the securities will pay 90 Days BSBW plus between 3.7-3.9%. This assumes the CBAPH distribution is fully franked.

    Frequency of distributions: Quarterly on March 15, June 15, Sept. 15, and Dec. 15. × Franking: Distributions are fully franked. If a distribution is not franked, the cash distribution amount will be increased to compensate for any franking shortfall.

    Dividend stopper: If a CBAPH distribution is not paid in full within five business days of the scheduled payment date,

    (refer to Septembers monthly for a full article on franking credits and the affects legislation change)

The Wattle Watch

In any given month, Wattle Partners meets with many different professionals offering a new investment product, idea or scheme. Most are a pass from us, but now and again some pique our interest.  The following is an outline of the opportunities that we think deserve a second look.

Growth Farms – Australian Agriculture Lease Fund

We met with David Sackett, the Managing Director of Growth Farms. David’s group has recently launched a new fund called the Australian Agriculture Lease fund. The fund plans to raise $100million to invest in farmland across Australia. Growth Farms has a long track record of managing livestock, irrigated and row cropping assets, with about $430 million being managed already.

Most readers would know that Wattle Partners has been a big supporter of the agricultural industry with strong recommendations of Rural Funds Group (RFF) and Arrow Funds Management, both have proven to be very impressive investments,  showing an annualized return of over 30% per annum over the past 3 years.

We do still recommend both investments, however David had some very succinct points that made us consider his fund as an alternative.

Farm leasing is a well-established strategy in the US and Europe but not so much in Australia. It’s seems to work very well for investors and tenants (farmers) as there are mutual benefits.  The size of the farms they target are commercial and well run but typically farmers wanting to expand, however the farms are too small for institutional investors like pension funds and as such provides a return benefit to the investors.

The idea is that leasing provides a stable cash flow based on rental yield and avoids much of the volatility that comes with direct exposure to agricultural markets. David commented that the “the leasing model gives farmers opportunities to expand their businesses without having to find the capital to buy more land” and noted “many existing farms are sub-scale and capital constrained. Leasing overcomes this”.

“On the flip side from an investor’s point of view, leasing provides a stable cash flow based on rental yield and avoids much of the volatility that comes with direct exposure to agricultural markets.”

Australian Agricultural Lease Fund’s investor support base and earnings will be assessed after five years, but the intention is to give it a 10-year life span David did make the point that many agriculture funds are charging uneconomical rates to the farmer, he commented “that funds charging 6-7% rental will send the farmer broke eventually”.

He said while the new fund’s 4.5pc rental rate may be considered a “bit of a stretch” for some aspiring lessees in the livestock sector, in the wake of recent jumps in grazing land values, it was “certainly not at the top” of the leasing market’s range.

“If somebody with an existing family operation sees a place next door, we may well be interested to partner with them”. “We’ve been in this game, looking after other people’s investments, for a quite a while and we know the sort of discipline required.”

Acquisition opportunities would likely range from sugar cane country to irrigated grain and dairy properties, with the fund paying attention to areas where current seasonal or commodity market trends may make land valuations more attractive.

Growth Farms expected the yield after fees to be about 4%, and then farmland values to appreciate over the long term at 2% to 3% more than the consumer price index, thanks to rising commodity prices and productivity gains.  So, a total return over time of low double digits with very limited volatility.

 

Should you consider investing?

The short answer is yes. With low to negative correlation to other assets, the fund seems to have found a submarket (direct to farmer) that offers a low risk way to get exposure to a diversified portfolio of Australian agriculture.  Wholesale investors are invited to invest a minimum of $100,000 to join the fund.

Aoris Funds Management

During the week we met with Stephen Arnold, the Chief Investment Officer and Portfolio Manager of a new global share fund. Aoris is reasonably new to the market, however, Stephen was previously managing close to $1bn with Evans and Partners under a similar strategy and consistently delivered returns in the top 10% of similar managers. As independent investment advisers, and investors ourselves, we are regularly approached by managers seeking investors for their new products as they know we are not tied to major institutions and are willing to consider new managers or strategies.

We will provide a more detailed review of this fund as we undertake more extensive due diligence, however, we must say we were impressed by our initial meeting. In our view, this is a manager who knows what they are good at and understands the issues with a great deal of the industry. The fund is high conviction, holding only 10 to 15 companies, seeks a return of 10-12% and gives no consideration to any index when constructing its portfolios. At its most simple level, the fund is focused on avoiding businesses with key risk characteristics of high financial leverage, low profitability, rapid asset growth and expensive valuations. Readers will likely expect most people would avoid these companies, however, that is unfortunately not the case, and in fact it drastically reduces Aoris’ investment universe to just a few core sectors.

In terms of the investments they seek, it is businesses who are increasing their real earnings, not accounting for adjustments, and dividends year after year and reinvesting a portion of their profits back into their business. They are not seeking to identify the next Amazon, Apple or Google, but rather invest in the solid, profitable businesses that we use every day.  This fact alone means they will complement well with higher growth managers and provide valuable diversification.

Should you consider investing?

Not yet, Wattle Partners is doing a lot more work on this one but see the fund as a potential investment in the Wattle Partners Value Bucket. We will provide more information once we have completed our due diligence on this investment.