Legendary entertainer PT Barnum was once claimed to have noted that “there’s a sucker born every minute”. If he was talking about investors in agribusiness managed investment schemes, he would probably be right.
One of the best investigative business journalists in Australia, the Financial Review’s Angus Grigg, wrote a fascinating article today reporting that Macquarie Bank, Australia’s very own version of a vampire squid, is raising $50 million to fund timber MIS projects. That Macquarie would be able to raise $20 from investors in agribusiness, given the collapses of Timbercorp and Great Southern Plantations in the past few years, is remarkable.
Over the course of little more than a decade, Timbercorp and Great Southern raised more than $8 billion from “grower-investors” (and the ASX-listed companies themselves were once valued by the share market at more than $1 billion). By 2009, more than $3 billion had been lost, as grower-investors, originally lured by generous tax concessions, realised that the return on their investments were far lower than promised by the promoters and their financial advisers. (In Great Southern’s case, it was running what amounted to a virtual Ponzi scheme, admitting in its annual reports that it used shareholder monies to inflate returns for grower-investors in earlier schemes when the company realised that its timber projects were actually losing money).
The figures suggested for Macquarie’s timber projects are stark. Grigg noted that “in its 2010 prospectus, Macquarie is offering one-hectare plantation lots for $10,208, which does not include any interest in the land. This is nearly five times more than Timbercorp investors received when their holdings were sold by liquidator KordaMentha earlier this year”.
While investors receive an up-front tax deduction, the prospect of an investment losing money should be enough to dissuade even the most contrarian financier pause.
However, despite the odor surrounding investments in agribusiness schemes, not everyone is negative about the projects for Macquarie’s timber projects. Independent expert Australian Agribusiness Group saw fit to rate Macquarie’s MIS project 4.25 stars out of five.
AAG boss Marcus Elgin told the Financial Review that “we have an expectation that Macquarie is doing a better job than others in this space”. Admittedly, given that the two major agribusiness companies collapsed amid a sea of debt and alleged Ponzi schemes, that would not appear an overly difficult task.
Of course, this isn’t the first time that AAG (or other independent experts, including Lonsec and Adviser Edge) have been slightly over-optimistic about the prospects of agribusiness managed investment schemes. As Crikey noted in June 2009 Adviser Edge, AAG and Lonsec rated several of Timbercorp and Great Southern’s Projects four out of a possible five stars — in some instances, those high ratings were given a short time before the companies collapsed.
Perhaps coincidentally, the independent advisers who provided such glowing reports on the managed investment schemes were, in most instances, paid by the promoters of those schemes. For example, AAG noted in its report that it’s parent company is “paid a standard and fixed fee by project managers (i.e. the product providers of agribusiness managed investment schemes) of $29,920 for the first project for each project manager and then $17,325 per project thereafter for that project manager. Any associated travel, accommodation and reimbursements are additional to this charge.” Crikey’s discussions with other independent advisers confirm a similar payment structure is common in the sector.
Crikey is not suggesting that those payments affected the advisers’ impartiality in any way, but investors may have reason to question the independence of the alleged independent advisers given that an adviser may find their business substantially reduced should they suddenly announce negative outlooks on projects.
But even if investors lose out, there is one party that will most likely end up a winner from the schemes. That of course is Macquarie, which is eligible to receive a management fee of 5%, lease fees of 4.5% and a possible “productivity performance fee” of 15% (fees of up to 12% are payable to financial advisers by Macquarie). Macquarie is also able to reap additional income through the provision of full recourse debt to grower-investors. Therefore, in the event that the project (unlike many schemes operated by Timbercorp and Great Southern) is successful, owner-growers could find themselves forking out a third of their return in fees.
Agribusiness schemes — where you lose some, then you lose some more.
Adam Schwab is the author of Pigs at the Trough: Lessons from Australia’s Decade of Corporate, featuring the history of Timbercorp and Great Southern Plantations.