What do you do?

We started three years ago under our own account and developed a product that we released two years ago. During that period we have refined the business and investment model. Initially it was a fund that involved acquiring livestock and, ultimately, a profit share arrangement with the farmers, who would run the livestock on our behalf. But since that initial version, we have refined it to the point now that it is purely a financing product. 

For example, we might buy some cattle that weigh 300 kilos. We deliver those cattle to a farmer and then he puts it out to pasture, and when they are at a marketable weight they will sell them. When the cattle is sold we are paid the principle, plus the interest on the lease, and the farmer gets any profit that resolves from the transaction. If there is a shortfall, the farmer has to pay that, just as with any other leasing arrangement.

It seems like quite an exotic asset, what sort of difficulties do you have?

The livestock industry itself might seem exotic to somebody on George Street, but in fact it is an industry that turns over about eight billion dollars a year – that is quite a sizeable industry, and one of Australia’s largest export industries. Looked at from that perspective it doesn’t seem so exotic.

The reason it has historically been exotic is due to the difficulty of identifying which cows are yours. The answer is in the radio frequency identification devices, which are on the cattle’s ears. These devices were introduced about half a dozen years ago and now all cattle in Australia must have one of these on their ear. The device itself is just a small tag, no bigger than an earring, and when the cattle are loaded onto a truck, unloaded into a sale yard or delivered to a farm, they have to be scanned. Each cattle has their own identification and that is lodged with a central authority. So the database of that authority knows where every cattle in Australia is. That piece of technology has allowed the development of this product.

There has been another development – the property security register. While the radio frequency tag allows us to identify physical things, the property security register gives us the ability to identify the livestock from a legal perspective. 

So, a combination of technology and legal development has given us the framework necessary to understand the key risks of running a financing operation in what is essentially a mobile stock.

What client interests have you had?

The fund is quite small at the moment. The growth of the fund has been hampered by poor returns; in our first year we broke even. But since changing the business model to a pure financing operation we are generating returns greater than 10 per cent – around 12 to 13 per cent – and as a consequence, we are starting to see fund inflow. We are expecting the fund will grow to about 30 million dollars over the next 12 months, based on what we can see in terms of investment flows.

The typical investors are those who are looking for income, which could be anyone.

It seems to be structured in a similar way to a bond investment. Is this correct?

The risks are greater if we are comparing it to government bonds, but the returns will be much better. It is like a bond in the sense that it is a finance product, but it’s at the riskier end of the spectrum. How risky is it? I suppose people need to look at the performance of the fund and read up on the risks. It is our job as a manager to mitigate those risks.

How liquid is the asset?

Illiquid investments are no-longer of any appeal to people because they wonder how they are eventually going to get out. The advantage of this fund is that the underlying assets are highly liquid. As I said, the market is large, with a turnover of eight billion dollars. What’s more, you can even auction your livestock over the internet these days.

Because the underlying asset is liquid, we are able to offer people the ability to redeem their investment at anytime, with a maximum of six months’ notice, although generally it’s three months.

How much interest has the fund had?

We’ve taken a more leisurely approach to scaling the fund up. There is a big market, but the important thing is to understand the deal flow on the other side, so you can identify the investors and the leasees – Who is going to use this product, who is going to be the borrower?

It is a big market and there is a good demand from farmers for a financial facility of this nature, but nevertheless, we want to pace it slowly in terms of the availability of the products. We want to maintain a high quality in terms of our counterparty risk, and not be guilty of lowering the loan quality.

Our aspiration is to grow the fund to 30 million dollars over the next 12 months, and then grow it to 50 million dollars after that.