Heavyweights invest $100m in Murray-Darling water

The Besen family joins NAB, The Nature Conservancy to back a fund to invest in Murray-Darling water rights.

Graham Kraehe, Cullen Gunn and Rich Gilmore

The billionaire Besen family has joined with National Australia Bank, the world’s biggest conservation foundation and a host of wealthy Australians to back a new fund looking to raise up to $100 million to invest in water rights in the Southern Murray-Darling Basin.

The Murray-Darling Basin Balanced Water Fund quietly raised $27m late last year to buy and lease water rights while protecting culturally significant wetlands that support threatened species in the Basin.

Now with the backing of the Australian arm of the $US6 billion American conservation group The Nature Conservancy, whose local advisory board includes former Reserve Bank director Graham Kraehe and Folkestone CEO Greg Paramor, the fund wants to raise a further $75m from high net worths, institutions and superannuation funds.

“This is the first time in the world where a water fund has been established to achieve the multiple objectives of providing secure water for agriculture, returns to investors and wetland restoration at scale. We are fortunate we have the largest and best regulated water market in the world in Australia that allows us to do this,” said The Nature Conservancy Australian Country Director Rich Gilmore.

Mr Gilmore said the new Water Fund was also the first so-called social impact investment for conservation in Australia, where investors have sought both economic and social returns.

Investors have long looked at the potential of water as an alternative investment to traditional commodities such as wheat or oil and Australia has developed one of the most sophisticated markets for trading water rights in the world.

Since 2007, investors have no longer needed to own land in the Murray Darling basin to be eligible to buy and sell water rights.

Water in the Murray-Darling Basin is allocated to farmers who can either use it on their property or offer it for sale and the federal government decides on how much water can be removed based on rainfall levels. The trading scheme has prompted the likes of California-based Summit Global and VicSuper, one of the nation's biggest super funds, to invest in water trading rights.

More recently specialist fund manager Blue Sky Alternative Investments and the Chris Corrigan and Peter Scanlan-backed Aware Water have established funds to invest in water entitlements across the Southern Murray Darling Basin.

The new Balance Water Fund’s water portfolio is being managed by Kilter Rural, one of Australia’s largest water fund managers with over $110m of water assets and $140m of real assets under management. Its CEO is Cullen Gunn.

NAB is providing $5m debt finance into the water fund on commercial terms through its agribusiness division.

Since December the fund, which is also backed by Melbourne’s Schwartz family and corporate adviser Charles Carnegie — the husband of former Google Australia boss and now ANZ executive Maile Carnegie — has achieved an absolute return of 1.40 per cent, 3.77 per cent ahead of the returns forecast to this point.

According to documentation for the initial raising, equity returns over a ten year period for a fund size of $100m are targeted to be between 5 per cent and 8 per cent per annum before tax.

The fund generates income through the lease of water entitlements and the sale of water allocations to irrigation businesses across the Basin, while the portion of annual water allocations donated to the environment is determined on a ‘counter- cyclical’ basis.

When water is scarce and demand is higher, less water is donated to the environment. When water is abundant and agricultural demand is lower, a higher proportion of water assets are donated to reinstate the natural ecological wetting and drying rhythms of targeted wetlands.

Investor returns are driven by capital appreciation of the fund’s underlying water entitlements portfolio, together with proceeds from the lease of water entitlements and from the sale of annual water allocations not used for environmental watering.

“The first phase has had investors who really understand the value of the balanced outcomes. The agricultural outcomes, the natural outcomes and the financial outcomes. The institutional investors wanted to see a track record — water is a new asset for most of them. So demonstrating some track record has been great,” Mr Gilmore said ahead of the fund moving to raise a further $75m over the coming months.

“Water scarcity is a big issue in the world and that is one of the reasons we like this fund so much — it really is delivering for irrigators. One of the principal tools in the fund is long term sale and leaseback agreements with irrigators who would sell their entitlements into the fund and lease it back. They get the same security as if they owned the asset themselves. Plus they get long term price security which they would not get without the lease agreement.”

Grahame Kraehe, who is also on the advisory board of the fund and was made a member of the Order of Australia in 2003 after sponsoring Australian Conservation Foundation water conservation advocacy and research during his time running wine producer Southcorp, said super funds had shown strong interest in the next raising.

“One of the target groups in the next phase will be some of those super funds keen on environmental and impact investing. The important thing from our point of view is that we are participating in an existing market. We are not a market disrupter. This is the most established water market in the world. And the Nature Conservancy in the US see this as a model for the future,” he said.

Terry Christofides, managing director of the Highpoint Property Group — a related entity of the Besen Family Foundation — said the billionaire family was attracted to water as an asset for its long-term capital growth, low correlation to other assets and its capacity to generate yield. “Introducing water as a new asset class to the balance sheet assists with improving diversity to our investments and thereby reducing our concentration risk,” he said.

“The Besen Family Foundation has a clear mandate to increase its exposure to opportunities that generate positive social or environmental impacts, together with financial returns. The opportunity for this investment to provide water security for farmers and restore important wetlands made this fund a particularly compelling proposition. We were pleased to be among the first impact investors in water and so far the results are encouraging.”

Mr Paramor said he had witnessed first-hand ''the degradation to our lands by denying our natural wetlands and waterways access to their life blood — water.''

“The TNC/ Kilter initiative is a great way of meeting the needs of both agriculture and the environment. This is a bold initiative and destined to be a winner I believe — it also satisfies our family's desire to participate in impact investing,” he said.