Horticulture’s Changing Tastes are a Win for Private Credit

Shifting demand trends in horticultural production, driven by new export markets and aging plantings, are creating significant capital investment opportunities in Australia and New Zealand. This dynamic aligns strongly with Merricks Capital’s hard asset lending strategy.

• There is an attractive capital gap in the sector. Horticultural output in Australia and New Zealand is projected to grow 8-10% annually over the next five years (ABARES, StatsNZ), requiring an estimated $10-12bn in annual investments. Currently, there’s a net shortfall of approximately $7-8bn (AgriFutures Australia).
• Private credit can help bridge this gap by providing funding for land acquisitions and CAPEX for developing orchards, vineyards, or water infrastructure. This is particularly true for the horticulture sector where many investments fall outside bank lending appetite as they have minimal capacity to service interest until the assets mature (often 3-5 years).
• We are seeing renewed appetite from institutional equity to purchase horticultural assets on a sale and leaseback basis. After slower transaction volumes in 2023, four institutional funds have entered exclusive due diligence or executed contracts for purchasing assets across our lending book. Lease rates on these assets range between 6.0 to 8.5%, reflecting today’s higher risk-free rate.
• At a farm-operating level, many operators are optimistic about 2024 yields with high irrigation water levels and softening prices for key inputs like fertiliser and fuel. Southern Cross Farms, one of our key asset monitoring partners, notes a sustained domestic and international appetite for acquisition and development. There is strong interest in citrus assets due to growing export markets in Southeast Asia and new pistachio plantings driven by rising consumer demand.
• Our due diligence for horticultural assets is comprehensive. The process includes assessing the underlying security, including independent reliance valuations, assessing tree or plant health, reviewing operator capability, and evaluating the business model viability, including modelling sensitised yields and commodity prices. The specific region is also fundamental to our credit assessment as it impacts our evaluation of local infrastructure, water access, reliable labour, and proximity to packing and processing facilities.

Over the past five years, Merricks Capital has demonstrated a robust track record, successfully funding over $250m in diverse horticulture projects. These loans include wine grapes, apples, cherries, avocados, and other stone fruits, consistently yielding substantial returns. This week, we received the first part ($14m) of full repayment for funding that supported a New Zealand apple business. The business transacted its orchards in line with 2022 valuations despite the region being significantly impacted by Cyclone Gabrielle in February 2023, representing a favourable outcome for the lender and the borrower.