New capital approach for MIS projects

INVESTMENT in Australian agricultural projects has undergone an evolution during the past 12 months, with the once dominant managed investment scheme model making way for alternative methods of raising capital, and the rise of the carbon credit market creating new opportunities.

Regulatory uncertainty and volatile market conditions have played a major role in the shake-up of the MIS industry, with a number of players exiting the market, rationalising their offering or adopting alternative investment strategies.

The Federal Court's decision in favour of the MIS industry in the long-awaited test case against the Australian Tax Office removed some of the uncertainty that had plagued the industry for almost two years.

The decision, in late December 2008, resulted in non-forestry project managers scrambling to pull their projects together in time for a 2009 raising, with pre-case expectations that 2008 would be their final year of MIS.

Notwithstanding the sector's Federal Court win, total sales revenue for the entire MIS industry in 2009 is expected to be significantly lower than last year.

Preliminary forecasts point to an almost 50 per cent reduction on last year's raising of $1.07 billion, on the back of decreased product supply and demand from investors.

Adviser Edge analyst Shane Kelly expects a limited number of MIS projects to be offered this year.

Of the 23 project managers his company covered last year, he said, only 11 would be in the market in 2009.

"The Supreme Court ruling took the heat off non-forestry managed investment schemes a little bit, but the timing was unfortunate because there was so much uncertainty," Mr Kelly said.

Australian Agribusiness Group analyst Tim Lee said this year would be difficult, in part because of the global financial crisis.

"Managed investment schemes have tended to follow the general market," he said.

"The general market's coming down this year, so we would certainly expect a downturn."

Mr Lee said although the ATO lost the test case, the timing of the decision would have a significant impact on non-forestry MIS this year.

Given that project managers usually had all year to set up their projects, most would be very late, and some would not release their products this year at all, Mr Lee told WA Business News.

"It takes a long time to get a project up and onto the market; it's a long planning period particularly for horticulture," he said.

"So it's very difficult, given the ruling came down essentially at the end of 2008, for the managers to get the particular product out in time for the 2009 financial year."

Great Southern is offering two forestry products this year, and potentially a third almond project.

Managing director Cameron Rhodes believes a combination of reduced investor demand and reduced product supply will significantly cut the size of the market this year

He said that, despite the woes of debt and equity markets, there were still people earning reasonable incomes that were looking to diversify their investment portfolios.

"[Investors] are dealing with an equity market that's extremely volatile, a property market that slowed considerably and cash rates starting to approach 3 per cent. So in terms of an alternative investment class, forestry and agriculture generally offer some true diversification," Mr Rhodes said.

Integrated Tree Cropping will release three projects this year, while fellow forestry player Timbercorp has decided to stand out of the MIS market in 2009 as it undertakes a full company review.

Outside of forestry, Arafura Pearls Holdings will be running an MIS raising this year, with a view to raising between $9 million and $10 million.

"My personal view is that there is a strata of the commercial world that is not impacted greatly by this recession, therefore even if the raising was dramatically reduced against 2008 there's still a fair bit of fertile ground for sensible MIS projects," Arafura chief executive Andrew Hewitt said.

Meanwhile, others have decided to pull out of MIS and are looking for investment from other sources.

Project manager of the Moora Citrus project, Agcorp Australia, said it would not pursue a 2009 MIS raising after raising a total of $8 million over the past three years.

"We've decided not to pursue a 2009 MIS raising due to many factors but mainly the current economic climate and financial circumstances of potential investors," Mr English said.

"We are going to complete the project from funds via shareholders and related entities, banking finance and maybe other potential investors or equity funds."

Outside of the MIS sector, the impending carbon-trading scheme has led to a number of non-MIS companies looking to raise capital for plantations with the aim of participating in the carbon credit market

Investors in forest carbon sink developments are able to receive immediate tax deductions for the first five years as an incentive to invest in carbon credits.

Investment structures vary within this sector, with some, such as ASX-listed CO2 Group, Carbon Conscious and Rewards Group partnering with major emitters to plant oil mallees to create the carbon credits.

Another player, Wisper Forestry Solutions, offers its bundled sandalwood/carbon offset product to corporate and institutional investors.