South African agribusiness private equity firm Agri-Vie is currently fundraising for its second vehicle, which is seeking $175 million to invest across the agribusiness value chain. The fund is on target to hold a first close on around $75 million in the second half of this year. Its first fund closed in 2010 on $100 million and is fully invested across downstream, upstream and agricultural inputs assets, including some greenfield forestry plantations.
Senior partner Avril Stassen talks to Private Equity International about the opportunity set in the agribusiness sector, LP concerns and the need to invest in infrastructure.
How have you seen your LP base develop since Agri-Vie was founded in 2008?
In the case of Fund I, we had 65 percent in value and 75 percent by number of LPs from the DFI community, and it was split between African, European and American DFIs. The balance came from the non-DFI community, split between South African private capital and US foundations.
[In Fund II] we’re hoping to have a larger component of private capital by final close. We hope to get towards 50 percent from private capital.
It’s a combination of LPs that have invested [in Africa] before and some that have not invested before. Predominantly [it’s] LPs that have invested [there], but there also are a growing number of LPs that have not invested before.
What are some of the questions and concerns of LPs that have not invested in Africa before?
The key considerations are around the risk-return trade off, in other words, yes, Africa has got good GDP growth potential, but can PE returns match and outperform those of other emerging markets as well as developed markets, considering the high investment risk?
The second consideration is a perception that a lot of new capital has been raised for private equity, and the concern that that will drive up the prices for the assets.
The third consideration is that if you look at the exit history or track record of African private equity, it’s obviously fairly new, and there’s still the remaining questions whether the exit environment can prove the investment thesis around expected returns.
People are unsure still about Africa. They hear all the positive stories around GDP, but we have obviously elements or pockets of political instability, currency issues, currency volatility in certain regions, that from a macroeconomic point of view also worry investors.
It’s fact that we’ve seen quite a lot of currency volatility in Sub-Sahara Africa, particularly over the last year. It has just proven that choosing countries rather than a region may be a good strategy. If one considers that Sub-Sahara Africa is 53 odd countries, you can’t paint it all by the same brush. The macroeconomic conditions vary quite dramatically from one country to another, so there is no “African story”, as it were. There’s an overall African story, but when it comes to investments you have to be very specific about the country [and] the sector where you invest.
As you mentioned, a lot of capital has been raised for private equity in Africa so far this year – close to $2.9 billion, according to PEI’s Research & Analytics division. Is that having an effect on pricing or your competitor set?
I think it’s true that the quantum of capital that has been raised has increased. However, if one looks at it from the penetration of private equity capital in the Sub-Saharan capital markets, [it’s] very, very small. We certainly have not experienced that it’s impacting on our ability to execute transactions or yet impacted dramatically on the competition around deals. We think there’s enough investment opportunity to absorb that capital quite comfortably.
There’s only one or two other [funds] that directly compete with us that are dedicated food and agri funds, but we’re also aware that a lot of the generalist funds have identified food and agri as an area that offers attractive investment opportunity. There has been an increased interest in food and agri in Africa from private equity funds, so we do anticipate more competition going forward.
There are very few sector-specific funds in sub-Saharan Africa. Why do you think the food and agriculture sector warrants a standalone fund?
Food and agriculture is still such a large part of the GDP of sub-Sahara Africa, if you exclude South Africa, more than 60 percent of household expenditure is allocated to food. Seventy to 80 percent of formally employed people are employed in food and agri, so it is a very important sector, much more important in the African context than many other markets around the world.
When we look at the food and agri market, we think there’s enough investment potential to justify a standalone fund, particularly if you consider the way we define the food and agri space. It’s all along the value chain, so all the way from inputs and services to the sector, as well as companies operating in the sector, and then downstream activities in logistics et cetera. It’s a very wide area.
The tragedy of Africa is that the bulk of processed food products sitting on the shelves are actually imported from elsewhere, and the big drive is for that to be locally produced.
A lot of our businesses are about building and replacing imported product with locally value-added product. The second strategy is to expand the product offering that is very limited in a lot of countries in Sub-Sahara Africa.
For example, one of our investments is an integrated meat processing business in Tanzania where currently there’s a big shortage of processed meat in the domestic market, whether it’s supplying the retail trade or the hospitality trade. The strategy there is to create a local industry that is vertically integrated from feed-lotting and natural pastures through to slaughtering, to adding value converting all of the by-products into saleable products, and to replace imported meat products.
How much is lack of infrastructure in the countries where you invest hampering development?
Without a doubt the poorly developed supply chains in a lot of the countries where we focus is a stumbling block, and the role we’re trying to play in our investment companies is actually to help build those supply chains, both in getting product into the factory and getting product out of the factory to the consumer. In many of those countries the infrastructure development has commenced, but still has a long way to go, so that’s one of the reasons why we have decided to follow a more vertically integrated business model rather than to just focus on one stage of the value chain.
Allied to that, we do believe that logistics, warehousing etc. is a very interesting area for investment. We haven’t directly invested in logistics companies linked to the food and agri space yet, but we certainly think that going forward it’s an area where we will likely be making some investment.