Sahel Capital Agribusiness Managers Ltd is a Nigeria-based private equity firm, which manages the Fund for Agricultural Finance in Nigeria (FAFIN). Betsy G. Henderson speaks with Mezuo Nwuneli, managing partner and co-founder of Sahel Capital, about agribusiness trends and opportunities in Nigeria and the broader West African region.

What are some of the top agribusiness opportunities you see in Nigeria today?

Right now, we have seven investments in our portfolio: everything from dairy to cassava starch, rice, packaging materials, shea, edible oils and animal proteins. Looking forward, there are three different investment areas we find exciting and where we are focusing our attention.

The first is logistics and distribution: from plain logistics to last-mile distribution and cold-chain. There are many bottlenecks in getting food products to end markets and we’ve found capital investments in this sector help increase the efficiency of moving goods around. Addressing and allocating capital to this sector is top of our agenda for the next couple of years.

The next area of particular interest to us – and where we’ve already invested – is rice. We have an investment in Coscharis Farms, a large-scale integrated rice company with 2,500 hectares of commercial rice farmland. It also sources rice from farmers throughout the community. This is exciting because, if you look at consumption dynamics in Nigeria, it’s effectively gone from minimal consumption of rice in the early 1980s to roughly seven million tonnes annually today. This is huge and signals that rice is becoming a staple food in addition to some of the more traditional tuber crops like yam or cassava. Also, when you look at Nigeria’s current population and its projected growth (Nigeria is expected to add another 70 million people to its population over the next 10 years), we see increasing future demand for rice.

Furthermore, there’s a 2.5 million tonne shortfall between supply and demand of rice right now; Nigeria is a major rice grower but doesn’t grow enough to meet domestic consumption and has to import a fair amount. With our investments in rice, we focus on building domestic rice yields along the value chain on our own farm and for the farmers with whom we work. Given the increasing food consumption demand, I think this is an important place to allocate capital not only in Nigeria, but also in key countries across West Africa.

The third investment area we focus on is packaged foods and snacks for many of the same demographic reasons. Roughly 51% of Nigeria’s population is urban and with one of the highest urbanisation rates in the world, consumption patterns here are rapidly changing. People now look for more convenience and seek out packaged foods, which is different from what they would eat in rural areas. There’s a huge opportunity to invest in companies able to produce a packaged food product at the right price point, which is key because many consumers in the region are price-sensitive. We’re keen on companies producing food products targeting this mass market of a rapidly urbanising population. It is important that we find packaged food producers that have a local supply chain for their raw materials as this helps ensure resiliency against currency fluctuations and other market dynamics.

When it comes to this opportunity in packaged foods, I mean everything from staple foods to breakfast cereals and snacks. Think of your average consumer, someone sitting in traffic on the way home; what are they snacking on during the car or bus journey? If you have kids going to school, what kinds of food are convenient, packaged and ready-to-eat that the kids can take to school? Or middle-class families – where both the husband and the wife work and come home at the end of a long day – which food is more convenient to prepare versus trying to make that food from scratch? Packaged foods can cover the whole gambit but it is important to get the right price point for that consumer. Also, the more nutritious a food product is, the more you appeal to a broader family-oriented consumer base.

However, even if you have the right packaged food product at the right price point, you still have to solve the distribution and logistics challenge of getting the product to end consumers which links back to the first opportunity I mentioned.

Are there any agribusiness sub-sectors in Nigeria you would be hesitant to invest in?

Yes, we wouldn’t do primary production or commercial farming as a stand-alone business as there are too many risks to manage and limited upside potential. That said, we do invest in primary production as part of an integrated agro-processing business; we do this to effectively enable the company to secure raw materials for its supply chain. We’ve found there is better margin capture on the processing side and what we’ve done in two cases – with our rice and cassava starch operations – is we’ve built a commercial farming operation that can supply roughly 20-25% of our requirements; the rest we aggregate from the market and small farmers. In this way, primary production investment helps secure the minimum requirement for our processing plants, which gives us a strategic advantage especially in times when there is limited supply in the market.

For example, right now – as a result of Covid-19 – people are starting to retain crops for their own consumption, versus selling to third parties. Rice paddy prices coming from small farmers have recently spiked because there is limited supply and it is the same on the cassava starch side, where all cassava has gone to staple consumption. Having our own farms mean we’ve been able to partially mitigate this unexpected drop in supply.

We would also be hesitant to invest in commodity-focused export sectors, such as cocoa or cashew. This is because there is limited room for value creation and value is often driven by international commodity prices. For example, with cocoa, a big chunk of the value capture in making chocolate is not on the export of the cocoa. If you’re providing debt facilities it can make sense but if you’re an equity investor looking to capture upside, there is limited ability there.

That said, we did invest in a shea-processing operation in Nigeria that is export-orientated because we believe there is the ability to capture more value in the long term. Right now, we process the nuts to shea butter but you can also further refine it into other oils which is additional value creation. Also, a lot of the factory processes and equipment are comparable for processing other edible oils (such as soy). So, for us, the initial entry into the edible oils space is through shea butter but we’re looking at the entire opportunity across different edible oils.

Whenever we consider new opportunities, we look to invest in staple food products that meet the requirements of a large and growing population, then we try to see where we can make strategic investments to address future food scarcity issues. We also examine import substitution and consider investments in sectors where there is proven demand for imports but there is potential to build local capacity – regardless of tariffs – to effectively swap out those imports. One example of this is starch; many Nigerian multinationals import maize starch for their operations but a good substitute is cassava starch. Nigeria is one of the largest producers of cassava in the world, so we’ve been able to process cassava into starch and swap out that imported maize starch, which is a huge opportunity.

Lastly, another factor we consider when investing is the growing middle class. Although incomes have been squeezed over the past few years, I think from a long-term perspective, the middle class will continue to grow and people will consume more proteins, more packaged food products and will more likely be based in urban centres. We look to invest in companies producing products and food items that will meet this increasing demand.

What agribusiness trends are you seeing in West Africa?

I’ve already touched on demographics but this is a key trend for this region. For context, the median age of Nigeria is 18 years and more than half of the country’s population is under the age of 19; this is a huge segment. Data projections show food demand across all categories – animal proteins, vegetable oils, pulses and crops – growing over 50% between 2015 and 2030. If you compare that globally, it is higher than the food demand in Southeast Asia and roughly twice the growth of world food demand. With a large, growing population, the question becomes: will this increased demand for food be met by domestic food companies or by imports and international companies?

The other thing we’re seeing in Nigeria, although definitely applicable to the whole of West Africa, is increased awareness of food security. There is a growing recognition of the need for increased investment and support of the domestic food and agriculture sector. The Nigerian government has put in policies that, while slightly protectionist, are designed to encourage and drive private capital into this space.

As a result of Covid-19, a lot of countries are realising how critical it is for their food supply chains to be resilient. Earlier this year when countries shut down, container ships got stuck at sea and countries blocked key strategic crops from being exported. It became clear that any hitch in food trade or production can impact national food security. Besides having adequate food stocks, you also have to think about how to get food to the end consumer. This was particularly pertinent in Nigeria, where states ‘import’ food from other states. When those supply chains were disrupted by regional lockdowns, questions arose as to how to get food to consumers.

There is currently a strong interest in agtech, with some ‘traditional’ agriculture investors now backing these companies. How do you view the agtech sector from an investment perspective?

We are quite excited about the potential of agtech but it’s been difficult for us to do early-stage agtech investments with our current fund, which focuses on growth capital for established SMEs. We continue to watch agtech opportunities and feel there’s a lot potential.

When we do come across an agtech firm of interest, we try to stay close and use the services they provide within our portfolio companies. This allows us to evaluate their services, engage with them and consider the scalability of their solutions. If we get excited about their work and ability to add value, we might make an investment down the road.

Elaborate on your most successful investment to date.

I’ll focus on our first investment at Sahel Capital, which is an investment in L&Z Integrated Farms Ltd, a yoghurt-producing dairy farm in Kano State in northern Nigeria. We initially invested in 2015 and although it was one of our smallest investments, it’s also one of our most exciting and rewarding. We have a 25% stake in this family-owned business and have helped build its dairy business over the past five years.

If you look at where things were in 2015 and where it is today, there have been many changes; for example, we helped put in a middle-management level so there are proper processes, controls and institutional structures within the company. The volume of milk it aggregates through milk centres and pastoralists has quadrupled over the past five years and revenues have tripled.

We also helped L&Z build its cold-chain distribution across the country because they have a perishable product that has a limited shelf life; they have to maintain a cold chain from factory to supermarket. In a country that does not have good power infrastructure, this is not easy but we successfully worked together to build that distribution side to supermarkets across the country.

In addition to Nigeria, which countries in West Africa are you most excited about?

The two most interesting countries are Côte d’Ivoire and Ghana. They are both key food and agriculture players in West Africa and, from a GDP and population perspective, there is substantial activity within those two countries. They have slightly different demographic and economic issues to Nigeria but at the same time, we feel there are a lot of opportunities there, crossing different value chains.

These countries also have similar consumer dynamics: rapidly urbanising populations and growing middle classes consuming more packaged foods. Ghana and Côte d’Ivoire import quite a bit but export a fair amount as well and need investments that enable more domestic value capture. There are opportunities in processing different food products to meet more domestic and regional food requirements because you can produce within these two countries and easily export within the sub-region to other neighbouring countries.