Pearl Capital Partners is a fund manager that invests in agribusiness enterprises in East Africa. The firm has offices in Kampala, Uganda and Nairobi, Kenya. Its most recent fund, the Yield Uganda Investment Fund, has made seven investments in Uganda worth over €5.8 million. These include: Sesaco – a processor of soy products; Chemiphar – an internationally accredited analytical lab; Raintree Farms – a producer of moringa products; Clarke Farm – a company specialising in robusta coffee for the premium export market; and Naseco – a certified seeds business.
Betsy Henderson spoke with managing partner Dr Edward Isingoma Matsiko about opportunities in the agriculture sector and the investment lessons he has learnt.
Which agribusiness sub-sectors in East Africa are you most enthusiastic about from an investment perspective?
One sub-sector I’m enthusiastic about is agricultural inputs – such as seeds, fertiliser and pesticide – that are critical for food security in East Africa. We have seen fake inputs in the market, things like imported fake fertiliser and chemicals, even fake seedlings. Here in Uganda, for example, some farmers planting avocado seedlings won’t know if those seedlings are viable until four years later when it is time to harvest, meanwhile they’ve invested all their savings in that crop.
Another area I would highlight is long-term plantation crops, such as avocadoes, coffee, tea, cocoa and macadamia. These crops take a long time to grow – for example, a macadamia plant takes seven years before you will see break-even production activity. But when these crops start yielding, they will usually yield for 20 to 30 years. This is one of many reasons why you need to invest in agribusinesses for the long haul, as some of these plantation crops require a long-term approach.
In addition, there are also good opportunities in fish farming and poultry – sustainable animal proteins for the mass market.
Within these sub-sectors, we see potential to invest patient capital for the long-term growth of businesses that support agricultural production – infrastructure, cold chain, post-harvest crop handling, crop insurance, etc – and agri-processing. In Uganda specifically, there are many opportunities in value addition and processing. Uganda has two growing seasons, so the supply of raw materials is not a problem. The labour is also relatively cheap – much cheaper than nearby Kenya or Tanzania. As long as there’s a reliable consistent market, production should not be a challenge.
There are not many organic-certified producers here at the moment despite Uganda being among the top three organic producers worldwide (many farmers still use chemicals to spray weeds or control pests). There is a lot of opportunity for such products as well as in the organic product certification arena.
Agtech is also an exciting space. To give an example, there are currently tech platforms that Ugandan smallholder farmers use to upload a picture of a leaf, and the application will say what disease is affecting that crop. I think this is where the future is going.
Are there agribusiness sub-sectors you would not invest in?
Forestry is very long-term and not exciting to us because of the time you need to realise an investment. You need 20, 30 or even 40 years, and it really requires a different type of investment approach.
Pearl Capital Partners has worked with agribusiness entrepreneurs across East and Southern Africa for the past 15 years; what are the factors that determine an agribusiness company’s success?
It’s a combination of factors. One is that investors and entrepreneurs must be aligned in their interests and approach to an investment. There are many decisions to make when running a business – what people to recruit, succession planning, internal controls/systems, how to set up boards – and it is important that investors and entrepreneurs are on the same page. Our experience is that misalignment of business objectives and expectations can create very difficult situations before, during or towards the end of investments.
Good management and team capacity is another important factor. Experienced and knowledgeable agriculture professionals are expensive, and so many SMEs and agribusinesses take shortcuts and hire people who don’t have the necessary management skills and experience. Having a degree in agriculture economics from a reputable university doesn’t necessarily make someone a good agribusiness manager.
Setting up the right corporate governance structure is also key. We encourage entrepreneurs to create boards with a diverse knowledge mix and people who add value to the growth of the SME, rather than simply appointing relatives. There is a big difference between having a board for the sake of having a board, versus having a corporate governance structure that adds value to the business operations and growth prospects.
Perhaps the most critical element, however, is market access. Even with the best product and entrepreneurial team, if you can’t get things to market at the right price and time, then you have a problem. We’ve seen several companies fail because they had a good product but no way to get it to the right market. You have to solve the market access problem first before doing anything else with your business. This also applies to startups dealing with new markets; we’ve found it can be very challenging for a new company to offer a new product in a new market, and therefore we prefer to focus on existing markets.
Private equity exits can be difficult in Africa; tell us about your approach.
Exits can be a nightmare in general, but I think they are particularly tough in agribusiness. We’ve used many different exit mechanisms over the past 15 years, and while not every company we exited is necessarily a success story, several companies still exist today and are now multi-million-dollar agribusinesses.
When dealing with exits in this sector, the first thing to keep in mind is that approximately 85% of African agribusinesses are family-owned enterprises. This means their natural exit mechanism is often hereditary succession planning, where their children or grandchildren would take over their business.
We’ve learnt to take this into account and at the start of an engagement let entrepreneurs know that our first priority is to sell back to the family using the same formula of valuation that we bought into the company. If the family cannot buy us out at the end of the investment holding period, we’ll then go out to the market or explore other options. But we try to start off by saying, “Look, I really want to sell back to you,” because that’s what most agribusiness owners want and are keen to implement.
Another approach is to co-invest with other larger private equity investment firms which can later buy us out as our portfolio companies grow. We usually invest between $500,000 to $3 million, and so it helps to work with or keep relations with co-investors who can offer the $5 to $15 million level deals that our growing companies require in the future.
Ultimately, the worst-case scenario is liquidation. We’ve been in two scenarios where you have no choice but to liquidate the business and call it a day. It’s not ideal, but it happens.
Name an African country which offers exploited opportunities.
We’ve only invested in East and Southern Africa, but we believe Uganda offers many untapped opportunities for agriculture. Cheaper labour costs, a fast-growing population, increasing urbanisation and large areas of available virgin land (where fertilisers and pesticides have not been used in great quantities) are just a few of the factors that make Uganda attractive to us.
Describe some of the investment lessons you have learnt over the years.
For one, fund life is key. Many agriculture funds are set up with lifespan that don’t align with the time these investments require to really capture their full value. For example, one of our most successful investments from the African Agricultural Capital fund, which just closed, took 12 years before it was maturely profitable, although the fund life was technically 10 years. We didn’t want to leave value on the table and worked with the fund’s investors to let us remain invested for another two years. This approach paid off and we were able to exit when the business was profitable.
When it comes to fund life, it doesn’t so much matter what crop you have – whether a plantation crop that takes three to seven years to produce a first harvest, or a faster crop like moringa that yields in a year or less – but rather how long it takes to successfully bring that crop to market once it has been grown. Getting certifications, determining packaging, routing products, and securing buyers and long-term contracts can sometimes take another four to six years, all during which time you’ll be accumulating costs. Ideally, you want a sensible agribusiness project that can become profitable in less than seven years.
To meaningfully invest in agriculture, you really need to invest for 15 to 20 years. This allows you to capture the full value of that investment and provide some protection against the bad seasons that inevitably arise along the way. We know every three to four years there is a bad season, so you need to build flexibility into your fund lifespans to accommodate for this. In some ways, we’ve been a victim of trying to imitate the standard private equity fund life of about seven years, which simply doesn’t make sense for agriculture.
The other key lesson is to include business development and technical support facilities in our funds. We didn’t have this in our first two funds, and that hit us hard. You need a way to transfer knowledge and expand your management’s capacity; it was quite a strain on our team to provide all the training our entrepreneurs needed.
To address this, we received a grant from USAID to provide these business development services facilities in our third fund, and have a facility from the EU and IFAD through a €3 million grant for our current Yield Uganda Fund. These facilities train our portfolio companies’ teams on strengthening corporate governance; setting up boards; structuring internal controls and systems; working with outgrowers; implementing environmental, social and corporate governance (ESG), and things like that.
We’ve also learnt it’s important to spread out investments across milestones. There was a time that we did due diligence for two years, invested capital of about a million dollars, and lost it in the first six months. These days we spread out our investment disbursements over time and never invest the full amount upfront.
Lastly, we’ve learnt to take into account how our entrepreneurs’ cultural dynamics may impact their approach to business dealings. For example, in some cultures you can only talk about business with the husband but never in front of the wife. These may seem like small details, but they can make a big difference in how you build relationships and trust with your investees and entrepreneurs.