Not too long ago, Jerry Parkes, CEO of the west Africa-focused fund manager Injaro Investments, attended a conference in Burkina Faso. He was hoping to meet with the country’s minister of agriculture and, when he told another attendee this, was quickly provided with his mobile phone number. So Parkes sent the minister a text message introducing himself and asked if it was possible to meet with him over the next few days.
“I got a text back in 10 minutes and had a meeting with him that same day,” recalled Parkes. “That was a pleasant surprise because in Ghana, my own country, I would not be able to get the same result.”
This is just one of the benefits of investing in a market that has generally been overlooked by investors.
Injaro Investments – which manages the agricultural impact fund, Injaro Agricultural Capital Holdings – recently sold its 30% shareholding in a Burkina Faso seed producer, Nafaso. This remains the fund’s only investment in the west African country, although it is looking for additional deals. However, Parkes believes Burkina Faso, with a population of about 18 million, is often overlooked by investors because of its small market, which makes it difficult for fund managers to motivate setting up offices or regional bases in the country – especially when there are larger economies to choose from. For example, Injaro elected to have its regional offices based in Accra (Ghana) and Abidjan (Côte d’Ivoire) – much larger markets in west Africa.
“And we could make more investments in Burkina Faso but then the cost of monitoring those investments from Accra or Abidjan is definitely higher than monitoring investments closer to home,” says Parkes.
“One solution to this challenge is to have more private equity firms based in Burkina Faso… But I don’t know any private equity firm with its offices in Burkina Faso. It is a smaller economy, smaller population, and most private equity investors will make the sensible decision of basing themselves in a location where they can get a lot more deals. This is why you have a lot of private equity firms headquartered in Johannesburg. In South Africa you have a lot of investments you can make, and you are in good striking distance of other high-potential markets.
“In west Africa, Burkina Faso is not the biggest market and, therefore, has a lot of untapped opportunities.”
Yet Parkes adds that the country offers slightly better returns for private equity investors – precisely because their is less competition.
“Because there is such a low supply of equity capital, you are likely to get better terms when you are making the investment.”
“And secondly, the company you support is likely to then have a competitive advantage because it has capital which most other competitors do not. As a result, you are able to get better market penetration, gain market leadership positions, which will lead to better margins and returns.”
Opportunities in early-stage businesses
Parkes says most investment opportunities in Burkina Faso are in SMEs (like Nafaso) as there are a limited number of large companies ready for major deals.
“At Injaro we invest in small business and are comfortable with relatively early-stage businesses where corporate governance has not yet been properly set up yet… We are willing to roll up our sleeves and do a good deal of work. So there are some opportunities that are ready for us, but not ready for much larger private equity funds that are looking to deploy US$50m per investment and expecting a company that is already running to international standards,” he explains.
“You have to be willing to do a bit of work to get those companies up to scratch. But once you get engaged, in general, they tend to perform quite well. They do have quite a vibrant agricultural production environment and export relationships with a lot of surrounding countries.”
Nafaso, for instance, primarily focuses on producing high-yield seeds for food staple crops – like maize, sorghum, potato and black-eyed peas – and exports to regional markets, including Mali, Sierra Leone, Liberia and Nigeria.
Parkes says the company faces surprisingly limited competition from international seed giants, mainly because they often focus on cash crops, like cotton, and generally don’t offer seeds suited for west African conditions.
“Seeds have to adapt to local environments… Even the best international seed companies cannot just take its best seed from the US or Brazil and plant it in any part of Africa and expect to get the same result they get in their home country… and it can take a long time to actually discover which of their seeds actually works well in Africa,” he adds.
“The advantage that local seed companies have is they get to work with local genetic material that has already adapted to local conditions.”
In smaller, untapped markets like Burkina Faso, local seed producers have the potential to become key players. However, Parkes says this opportunity will not last long as a number of international companies are now investing in developing high-quality African seeds.
“So in the next three or four or five years I expect that there will be more competition from international seed companies.”