The African Agriculture Fund (AAF), managed by private equity fund manager Phatisa, provides equity funding to companies operating in the food production value chain in sub-Saharan Africa. It has recently concluded an agreement to invest up to US$10.5 million in the DRC’s Feronia, an agricultural company that specialises in palm oil production with three plantations and commercial arable land under their management.
Anders Einarsson, a deal partner at Phatisa and the team leader responsible for the investment agreement with Feronia, answered a few of How we made it in Africa’s questions.
Why are Africa’s agriculture and food industries attractive for private equity investment?
Improvements to the wider macro-economic fundamentals support our investment story for agriculture and food production in Africa.
The continent’s GDP is on course to expand by 4.8% in 2012 and the acceleration in Africa’s growth over the past 10 years reflects material improvements in political stability and the business environment. Moreover, Africa is the world‘s fastest urbanising region and its population is forecast to increase by 60% over the next four decades. The immediate benefits of the improved macro-economic environment is far reaching with falling poverty rates being one of many positive outcomes and the wider demographic trends represent a huge market opportunity.
More specifically, the availability of large domestic consumer markets, fertile land, abundant water supply and a relatively inexpensive labour force will enable African farmers/food producers to benefit from these wider macro themes. Today, Africa is a net importer of food, but has the huge potential to resolve food security issues for the future.
Drawing from your experience, what are some of the main challenges facing African agribusinesses?
There are numerous challenges that require careful assessment; ranging from lack of capital and skilled labour, the non-availability of high-yielding seeds suited for the African climate, non-supportive government policies and sub-optimal farming practices.
Various stakeholders are currently actively addressing many of these challenges and governments across the African landscape are increasingly pushing incentives and regulatory change to support growth in the agricultural sector.
Describe your investment criteria; what kind of companies does AAF invest in?
The type of companies that AAF invests in is driven by our investment strategy which is to build regional platform businesses that increase capacity through commercial and smallholder schemes, seeking to reintegrate the food production value chain to enhance domestic and regional food security. Investments that have the potential to provide follow-on opportunities in the form of bolt-on acquisitions that create vertically integrated platforms.
Typical criteria for AAF to invest are:
- equity investment requirement of US$5 million to $30 million;
- experienced management team with a compelling vision for the business and a willingness to collaborate with a financial investor;
- proven financial, operational track record;
- potential for future growth and vertical integration;
- commitment to transparency;
- realistic entry valuation; and
- ability to achieve a profitable liquidity event in the medium term.
We consider financing for management buy-outs and buy-ins, expansions, acquisitions and refinancing ventures with proven sponsors.
Are there certain African countries that the fund prefers to invest in?
AAF considers investments across the sub-Saharan region. Access to a large (preferably domestic) catchment populations, potential for building of platform assets, right arable conditions (farming assets) and supportive regulatory environment are some of the considerations for making investment decisions on a geographical landscape. Today we have investments covering a wide geographical base, ranging from Zambia, Sierra Leone, DRC and Cameroon.
How would you describe the interest from international investors to put money into Africa’s agriculture and food industries?
Given the current austerity measures across the Euro region and the fiscal difficulties in the US, growth opportunities look bleak in these regions, effectively driving funds to regions where growth is present. Africa paints the right picture, offering growth opportunities today in sectors previously not witnessed, agriculture being core. Recent food security crises, as witnessed on a global level, further reinforce the investment opportunity coupled with the emerging middle class – all making investors look more closely at the sector.
What is one of the main reasons why proposals for funding from AAF fail?
As with all private equity investments, a significant reliance is placed on the management’s ability to execute on business plans. The deepening of the management talent base is ongoing, largely supported by returning diaspora. That said, we still have some way to go in this area.
Phatisa recognises this and has amassed a multi-disciplinary team that comprises of industry specialists, agronomists, corporate finance specialists and private equity professionals who bring extensive experience to drive the team’s pipeline development and investment management. In addition Phatisa looks to back local entrepreneurs with the vision, passion and necessary skills to grow their business.
What are the main challenges that Phatisa faces in its operations on the continent?
Africa is a vast continent and infrastructural problems are still there; ranging from poor infrastructure and telecom, limiting communication opportunities. Massive change is underway but further improvements are required.