Australian agriculture is one of the most capital-hungry industries in the country, and one of the hardest to get financed through traditional banks, especially when the deal doesn’t neatly fit into a standard product mould. There’s always been a gap between when farms need funds and when institutional lenders can deliver but over the past decade, that’s changed. What’s become more and more viable as an alternative is private credit, particularly for agribusiness deals that need a lender that’s actually got a clue about what they’re lending on, before slapping a credit framework over the top of it.
What Private Credit Actually Means in An Agricultural Finance Context?
Private credit is nonbank lending from fund managers and specialist lenders who know their stuff. It’s a very different beast from a standard bank loan not just because of the types of security they’ll accept (it’s not just about the land anymore), but because the covenants can be tailored to the specific cash flow quirks of each farm or business, and the whole process is driven by the lender’s own internal timeline, rather than some committee’s arbitrary schedule. Merricks Capital are a specialist private credit outfit with a focus on agricultural lending across Oz and New Zealand. They offer finance right along the agricultural supply chain from the farmers who grow the stuff to the people who build the infrastructure and processing plants.
In terms of the capital stack, private credit generally sits as a senior or stretched senior facility often an alternative to bank debt, where the banks just can’t or won’t lend. And that’s because more and more lenders are getting into the game now, and they’ve actually got some real sector knowledge under their belts. The growing importance of private credit in Aussie ag reflects the banks getting a bit more conservative in these sorts of deals, and specialist lenders getting more and more clued up over time.
The Agricultural Supply Chain Where the Cash Flows
Primary production lending covers a huge range of things from broadacre cropping and dairy to horticulture and food processing. Each one’s got its own cash flow patterns, asset mix, and exposure to all sorts of risks from commodity prices to climate disasters. A lender who really understands the sector will structure each deal to match the specific risks of the business, rather than just slapping on a generic template.
Infrastructure and processing assets are starting to make up a bigger chunk of the ag lending market now. Things like irrigation systems, packing sheds and cold chain infrastructure, grain storage, and food processing all need financing that’s patient enough to see the asset get to where it can actually make some real money. These investments are where the real long-term value is but they do tend to have some pretty dodgy cash flows in the early days that standard lending frameworks just can’t handle.
The Investor Side: Why Institutional Capital Gravitates Towards Agricultural Private Credit
From the point of view of the investor, the key reason to consider private credit in Australian agriculture as an investment opportunity is the asset-backed nature of return generation that is different enough from market cycles in equity and fixed income markets. Valuation of agricultural land and infrastructure does not correlate with listed equities, which provides diversification for institutional investors. Managed credit fund structure provides income and asset-backed security with the help of professional investment management, allowing investors to have access to the asset class managed by a team of professionals without the complications related to direct farm management.
Evaluating A Private Credit Agricultural Lender: What to Look for As A Borrower
Internal sector expertise vs. origination only model is the most important difference to comprehend. A lender that uses specialists with a true agricultural background in the credit evaluation process evaluates the deal in a different way compared to the lender that uses general credit frameworks when it comes to evaluating agricultural transactions. Questions asked in the process reveal the type of lender. Fully funded capacity, i.e. capacity to invest the money using their own capital without syndication to third parties, provides faster execution and a higher probability of the deal completion. Merricks Capital is a fully funded lender which allows investors to invest with confidence in good opportunities without syndication risks.
Why Use Private Credit Instead of a Traditional Lender?
The most obvious situation is the time-sensitive acquisition in which case the bank credit committee approval takes too long. Another example is the infrastructure development deals with complex staged drawdown structure that cannot be accommodated by traditional lenders. The same can be said about refinancing at the end of the bank loan with the need for additional capital.
The complicated equity structures, partnership buyouts and balance sheet recapitalisation usually require a lender who will understand the deal and who is willing to deal with its complexities. The unique combination of flexibility, sector expertise and fast deployment of capital in agricultural private credit became a regular source of financing for Australian agribusiness.
