Silk Invest, a specialist frontier market investment manager, recently announced it is planning to launch a private equity fund to invest in African food-related industries. Jaco Maritz interviews Silk Invest’s CEO Zin Bekkali about the new fund and the opportunities he sees in Africa

Why did Silk Invest decide to launch the Africa Food Fund?

The food industry is Africa’s most attractive investment area. Silk Invest estimates that there will be 500 million new consumers in Africa in the coming 15 years. Not all these consumers will be middle class but all of them should be able to afford buying biscuits or bottled drinks. In fact spending on food accounts for around 50% of Africa’s disposable income and the food sector will benefit the most from the rapidly decreasing levels of poverty that we are witnessing in Africa.

Moreover investing in food companies typically requires less capital than in other sectors and allows you to recuperate more quickly your investments. The best way to showcase our point is to look at our analysis of return on equity levels and revenue growth numbers which point out that the African food industry is more attractive than other sectors.

Give us an overview of the fund’s investment criteria; what kind of businesses will you be targeting?

Our sweet spot is to invest in mid-sized African consumer facing food companies which have delivered strong revenue numbers and need to be scaled up. We will not invest in start-ups or companies where we do not have confidence in existing management.

The best way to benefit from this opportunity is by partnering with good entrepreneurs and guide them to firstly scale up their business and to afterwards monetise their efforts by exiting their companies through an IPO or trade sale.

What sets us apart from other funds is our team which includes seven African nationals and our growth capital orientation. We are comfortable with being a minority investor and manage our risks by being selective in our investments and by structuring deals in the right way. This does not take all the risks of being a minority investor away but being a majority owner does not mean that you have no risks. Especially in Africa, it could mean more risks as you will end up with a smaller universe of potential investment opportunities and more room for alienating existing management.

Where are the biggest opportunities, in producing food products in Africa for export, or to cater for local demand?

The biggest opportunity today is within local or regional African markets. We will not invest in companies which are reliant on exports to the developed world. The starting point will be to first fully benefit from the local markets which are experiencing the fastest growth and where companies can have a competitive advantage in terms of costs, product and/or route to market.

Exporting to mature European markets typically means selling at nil margins and competing for market share in a declining market. The regional trade deals and the improving logistics coverage make the regional African opportunity interesting and we will help companies to develop regionally when possible.

There are currently a few other private equity funds also targeting Africa’s agribusiness sector. How competitive is this space?

Investors need to differentiate between agri/farming funds and food funds. Our fund does not invest in agriculture but in food and beverages companies. The African agriculture industry is receiving a lot of attention from investors and we hope that all the plans will be executed as it will further spurt African economic development. Agriculture is, however, not our area of expertise and we will stay out of it. The Silk African food fund is rather unique in its combination of a truly pan-African investment approach and sector focus on consumer facing food companies.

The African private equity space is developing but is still relatively small. In our universe of 80 companies that we have analysed over the last years, only six companies have been in contact with other private equity funds. US focused private equity funds have historically raised 50-100 times more money each year in comparison with African focused funds. It will take a long time before the industry will start to be “crowded” and in the mean time African private equity funds have the luxury to be able to differentiate themselves and avoid competing for deals.

Do you think it is good for Africa that foreign countries are currently buying/leasing large areas of arable land?

When implemented in the right way selling land to foreigners could be a catalyst for further developing agriculture in Africa. The right way means to attract investors who are able to develop the industry and who have a long term focus.

We do not, however, believe that farming is the biggest bottleneck in further improving the productivity of the agriculture industry. Countries will be able to achieve more progress in this area if they would be able to build up a deep local food and beverages industry. Essentially building local industrial demand for agriculture products is more effective than developing more supply which is sold against a price set on global markets.

Finally investors should not be naive about their ability to secure cheap access to food. Food security is an utopia but generating 25% returns by investing in African food companies is not.