Equity Partnerships in Farming

What is involved in investing in an equity partnership? Farmer Freddy explains ...

After his chat with Jack about Fonterra's latest capital structure proposal, Farmer Freddy pours himself a cup of coffee and sits down to pull together his bank statements and farm accounts for his accountant.

No sooner has Freddy sat down than there is a knock at the door.

"Crikey," thinks Freddy. "Another interruption. You'd think this was Grand Central Station."

"Hello Reg, what can I do for you?" Freddy asks his neighbour Reg, who is at the door, armed with piles of paper.

"Well, Freddy, the other day you said that you'd invested in an equity partnership that operates a dairy farm. I'm thinking about doing something similar but I don't know where to start with all this information they've sent me."

"Well, Reg, remember that most of these equity partnerships are not covered by the Securities Act because only wealthy or experienced investors can invest in them. Since you don't have the protections of the Securities Act, it's really important to get good advice from your lawyer and your accountant. But let's have a look."

Freddy says the best place to start is the Information Memorandum (IM), which summarises exactly what he is getting into.

"And once you've done that," explains Freddy, "you need to start your own due diligence process. This involves looking over the farm, attending open days, confirming that what is in the IM is actually true and seeking advice from your professional advisors. Your accountant will review the financial elements of the investment for you, and your lawyer will advise you on the ownership structure, what your rights and obligations are as an investor, and what risks you will face."

"Right," says Reg, "but what are the key questions I should ask about this type of investment?"

"Well, first, I'd want to know about the value of the property and what the partnership is investing for - capital gain? Cashflow? Clearly the ownership structure is important, especially for risk management and tax reasons. Will it be a company, a limited partnership or something else, and what are the implications of that?"

"And," continues Freddy, "I'd want to know how the business you're investing in is going to be funded, and who is actually going to run the farm, and how (for example, is there a management agreement?).

And, obviously, you'll want to know about what returns you'll get and how you can get out of the investment if you want to."

"Thanks Freddy," says Reg. "That's been really helpful."

"No problem, Reg" replies Freddy. And under his breath, "Any chance of some peace and quiet now?"

Just then, the phone rings. Freddy unplugs it and decides it's time for a lie down.


The content of this document is necessarily general and readers should seek specific advice on particular matters and not rely solely on this document.
If you would like further information on any of the topics in this document, please contact your usual Auld Brewer Mazengarb & McEwen adviser.
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