Words by: Anne Lee

The role of equity partnerships has morphed and changed considerably over the last 20 years, but the fundamentals of what makes for a successful equity partnership haven’t, Tony Cleland says.

Tony and Alison Cleland have been long-time investors in an equity partnership that has gone from a business owning one farm in northern Southland to one with interests in 10 properties.

It owns five farms outright and has shareholdings in the remainder.

Tony was also a founding shareholder in farm investment management and farm advisory company FarmRight.

Back in the 1990s equity partnerships were seen as a way for largely established North Island dairy farmers to partner up with others and invest in the opportunities of converting land in Southland and Canterbury.

The capital gains and business growth available made for a some seriously positive investment returns.

Those returns were rapid, but it was the short-term horizon that could create in investor expectations that caught some equity partnerships out, Tony says.

“It confused things in the end for some because they went into equity partnerships with a short-term view and the capital gain side of the story hid the fact that the underlying operational performance wasn’t there.

“It’s something we’ve always set our farm systems up for, right from the start – they have to be profitable from an operational sense.

“Sure, you might get a drought or something that interrupts the business but fundamentally the farm has to make money every year,” he says.

That good operational performance is one of the two top attributes of successful equity partnerships, he says.

The other one is alignment of the people in both their values and their horizon timeline.

“If you’ve got business performance and shareholders with the same values you can deal with just about anything that comes up,” he says.

The view must be long-term, and decisions have to be made on the basis of what’s good for the company not what’s good for the individual.

“If you have a short-term view you’re more likely to be in it for yourself and if ‘it’s all about me’ then that’s where things start to break down.

“There are some very good operators out there who just couldn’t work in an equity partnership because that focus on themselves and what they were getting  out of it meant there just wasn’t the level of trust between the parties that needs to be there.”

And trust must be there because these are the people you’re going to be making decisions with in two, 10, 15 years’ time, he says.

So when people are considering equity partners they have to look at the values of those potential partners to make sure they’re aligned with their own values.

“And that’s where people can come a bit unstuck. Aligned values doesn’t necessarily mean we’re all going to come up with the same solutions and think exactly the same things.

“You want diversity in thinking but not in values and principles so when you go to debate something you have the same intent and the same values around it but different ways of thinking going into it.

“People can get sucked into looking for the wrong things – people who agree with them rather than people who might disagree and challenge your thinking on decisions and strategy but will have the same values as you.”

‘You want diversity in thinking but not in values and principles so when you go to debate something you have the same intent and the same values around it but different ways of thinking going into it.’ 

Over the years as the business has grown Tony says the number of shareholders and governance structure of their equity partnership has changed.

In the last three years a number of equity partnerships they’re involved with that have similar shareholding have been rolled into a larger company.

“It’s gone from where we had four farming couples – four entities, with each entity having a director to where we have 14 shareholding entities although the original four entities are still the majority shareholders.”

There are five directors – two of them the original farmer investors and three from finance, business advisory and accounting backgrounds.

That’s brought more diverse thinking and business acumen to the board. They could bring in outside directors but haven’t opted to do that.

“At the start we had some things written down – the shareholders’ agreement and exit clauses – but we didn’t look at them.

“Now we have quite detailed documentation and rules – how we make decisions if there’s conflicts and rules that are there to protect everyone so no-one ever gets caught out but we’ve always been able to reach decisions and we’ve never had to pull those rules out to get through anything.”

Some of the minority shareholders have come and gone over time and the  partnership has survived various life events and changes.

The success of the partnership hasn’t been that its stayed the same but that it has been able to change, Tony says.

“But we’ve always had people who look at the business and say – how can we do things better – it wasn’t just looking for opportunities to grow, it was about doing things smarter and evolving with the times.”

The exit provisions have changed too. “The company has a termination date (about 10 years away) so unless 90% of the shareholders agree it will be sold at a specific time.

“But there’s the ability to cash out shares every year – there’s a mechanism to do that – although there’s a discount on the value of the shares to account for the liquidity factor.”

The company is obliged to buy the shares unless the transaction puts the company outside its agreed equity band.

The company benefits in that it gets the shares at a 5% discount and the remaining shareholders get that benefit.

If the company goes outside that band it must sell assets to bring it back within it. The shareholders are all at different life stages ranging from in their 70s to late 40s and with different things going on in their lives. For some, the termination date is too far away and they want money out sooner, for others it’s too soon and they’d like to see the partnership continue.

The mechanism and ability to cash shares out at a 5% discount each year is better than only being able to get shares out if someone is willing to buy them.

The long lead-in time to the termination date means those who want to continue with the company have time to grow their shareholding as others sell up.

“There’s time to make sure there are enough people left in the equity partnership who want to and can carry it. There’s time to bring other people in who want to do that.”

Communication has gone from informal 20 years ago – when each of the shareholders had a good understanding of what was happening on the farm to a very formal reporting system.

The shareholders don’t have daily access to management but can see monthly reports if they choose to and receive a detailed annual report.

Tony says there are just as many reasons equity partnerships will work today as there were 15-20 years ago and while some reasons have changed the long-term horizon, operating profits and alignment of people need to be the same.

As people look to the structure as a means of progression they must ensure the young person coming in as the equity manager shares all those fundamentals too.

“If they’re there for five years to get enough equity to buy their own block of land and leave then that’s probably not going to work.

“Good operators who have the ability to run a great business and want to partner with a team so they can be part of a bigger business are the people who will be successful – not an aggressive entrepreneur who wants to get rich in a hurry.”