Emerging markets, and choosing the best way to invest in them, is always a hot topic in private equity and right now, one apparently widely favoured route into them is via investing in agriculture.
Sub-Saharan Africa is the compelling region for many private equity professionals that are looking outside the OECD markets for opportunities. Put the two together, and you’re definitely looking at a topic with flavour of the month characteristics: committing private capital to sub-Saharan African agribusinesses. At this year’s Global Private Equity Conference in May, hosted in Washington DC by the International Finance Corporation in conjunction with EMPEA, it was one of the main talking points.
According to “Private Equity and Emerging Markets Agribusiness: Building Value Through Sustainability,” a new report launched at the conference and produced by the co-hosts together with Credit Suisse, CDC Group and the WWF, private equity firms between 2008 and 2014 made 69 agri investments into Sub-Saharan businesses, and raised $1.3 billion in dedicated capital.
This made the region the second-most active for the strategy, behind only Latin America. And while Emerging Asia mostly involves agribusiness in China and India, Sub-Saharan Africa covers a more diverse area. Investments went into 21 countries ranging from South Africa to Burkina Faso.
The report noted a “discernible shift” by LPs toward Emerging Asia and Africa since 2010. It also predicts that investor demand will stay strong over the next two years, with 66 percent of those polled in EMPEA’s 2015 Global Limited Partners Survey indicating that African agribusiness is on their list of targeted strategies.
There are of course challenges investors must overcome to achieve meaningful exposure. For example, and as Carl Neethling, chief investment officer of Acorn Private Equity, wrote in the report, foreign investors coming in with large amounts of capital and trying to recreate the US institutionalised agriculture model would likely run into difficulties.
“Africa is not the United States,” Neethling said. “[T]hat model just doesn’t work.” In order to absorb larger amounts of capital, the region requires sophisticated farmers to help consolidate farmland, which in turn will create more attractive opportunities for private equity.
Another potential hurdle is achieving exits. According to the report, one factor inhibiting the growth of agribusiness private equity is that few viable exit channels exist.
Paul Nguru, a partner at pan-African agribusiness investment fund Agri-Vie, told PEI during the conference: “The intrinsic nature of food and agribusiness portfolios requires longer holding periods,” he said, adding that the lion’s share of upside in a growth capital agribusiness portfolio typically happens in later stages of a holding period. “This presents a challenge in achieving early exits.”
Nguru that said longer-term funds might be a better option in Sub-Saharan Africa than standard limited partnership vehicles, particularly when it comes to investing in growth businesses that require patience to put capital to work. During extended holding periods, macroeconomic and regulatory operating environments could grow and develop in tandem, he said.
Robert Petty, managing partner at Clearwater Capital Partners, reminded the conference that in order to be successful in Africa, in all sectors, private equity would need to be mindful of how other stakeholders perceived it, and to challenge false assumptions about the industry. Cynicism towards private equity in the region needs to be overcome, he stressed: “We don’t just have a mission to make money,” he said. “Yes we make money, but we also put a lot of money into people’s pockets in emerging markets. We should be proud of that.”
Acknowledging the practical difficulties of doing business in Sub-Saharan Africa, Eytan Stibbe, founding partner of Zurich-based impact investment specialist Vital Capital, told the conference that not only was it important to seize Africa’s manifold opportunities now, but to do so in socially responsible, impact-creating ways. He said: “We can’t wait until corruption is over. We have to be there now and bring along the financial resources and the governance [to help] solve these big issues.”