Whether for profit or social motives - and often both - an increasing number of investors are targeting opportunities in African agriculture. At the same time innovative approaches for deploying aid to support farming businesses linked to smallholders are emerging. This blog provides a snapshot of who is doing what, where and how.

28 August 2010

Agricultural alchemy? How to attract more private investment for agriculture and turn it into aid

An article by Chris Isaac, Director of AgDevCo

With a global population expected to reach 9 billion by 2050, the FAO estimates that $83 billion of investment in agriculture is required every year in developing countries to assure global food security. Where is the money going to come from? Not from official development assistance (i.e. aid) which according to the OECD provided less than $2 billion to support agricultural production in 2008/09. In fact aid to agriculture has been declining for more than 20 years. So the hope must be that private investors will rush in to fill the gap. But is that going to happen in Africa where investment is most needed? If it does, will the benefits be widely shared with local communities?

Based on AgDevCo’s experience of developing agriculture projects across Africa, the answers to these questions are that investment in agriculture is unlikely to happen at anywhere near the scale required; and the benefits will reach local communities only if aid is used strategically to make that happen.

Why? Firstly, agriculture in Africa is essentially an infant industry and the business case for early-stage investment is often weak. A lack of infrastructure, uncertainty over land tenure, missing support services, and low levels of managerial skills make early stage investment costly and risky. Secondly, investors are often reluctant to incur the additional upfront costs of building links to smallholder farmers – for example by sharing irrigation infrastructure and developing outgrower schemes – even though experience shows these arrangements can be profitable in the long-term.

To assure global food security and reduce poverty, a way needs to be found to stimulate more investment in African agriculture in a manner that benefits local communities, by creating jobs in rural areas and allowing a new class of skilled farmers to emerge. In other words there needs to be a way of attracting more private investment and turning it into something resembling aid – a sort of agricultural alchemy.

There is a way. “Patient capital” is low-cost, long-term finance invested alongside African entrepreneurs and agribusinesses. It is used to part-finance the costs of agricultural infrastructure such as feeder roads, rural electrification and bulk water supply. It stimulates increased investment by overcoming barriers to entry which otherwise would have deterred investors. It comes with conditions attached which require the recipient to build strong and direct links to smallholder farmers and local communities.

The concept of patient capital is not new. It has been used in isolated cases over the past 40 years. There are commercial agriculture projects in Africa – for example in sugar, rice and cotton – which receive ad hoc grant funds from donor agencies and governments to build stronger links with smallholder farmers. AgDevCo has recently launched a fund in Mozambique to support early-stage farming businesses. But the amount of patient capital available is nowhere near high enough to induce the step change required to respond to the food crisis and reduce poverty in the poorest countries.

If the international community is serious about addressing global food security and reducing rural poverty in the world’s poorest countries, it needs to encourage the private sector to do more and to do it better in agriculture. It should commit to making patient capital available at a scale that will catalyse significantly increased investment into socially-responsible agriculture projects. Patient capital can help turn billions of private dollars into aid, providing jobs and income generation opportunities for large numbers of people in rural areas.

AgDevCo is actively involved in promoting agircultural growth corridors in Mozambique and Tanzania. Chris Isaac, Director of AgDevCo, will be speaking about patient capital at the African Green Revolution Forum in Accra, Ghana, on 2-4 September, 2010.

Funds raising capital for African agriculture

Funds that have recently raised or are raising capital for agriculture investment in Africa, or which have agriculture and agribusiness as focus sectors include:
-- SilverStreet Capital, the investment management firm that focuses on Africa and the agricultural sector, is raising capital for the Silverlands Fund, a private equity fund that will invest in African agricultural businesses across the value chain around a core of farmland businesses in Southern and Central Africa. The fund will be Luxembourg domiciled and have a life of 10 years, with an option to extend for a further two years. Targeted fund size is $350 million and target return is 20-25 percent per annum. Silver Street was set up in 2007 by Gary Vaughan-Smith, former head of alternative investments at ABN AMRO.

-- Phatisa Group, the South African private equity and corporate finance advisory firm, is managing the African Agriculture Fund (AAF), which held its first close in mid-July at 200 million euros and is targeting a final close of 500 million euros. Founder sponsors were IFAD, the African Development Bank (AfDB), Agence Française de Développement (the French development agency), AGRA and the West African Development Bank. AAF will back private-sector companies that implement strategies to increase and diversify food production and distribution in Africa. It will invest in agro-industrial companies, and agricultural co-operatives that support small-scale farmers and respect the environment.

-- South Africa's Sanlam Private Equity and SP Aktif raised $100 million for Agri-Vie Fund and are already planning a second $300 million fund, to be launched in a couple of years to feed investor demand. The first fund invests in agricultural projects in South Africa, Botswana, Kenya, Tanzania, Uganda, Ghana and Nigeria. Backed by Development Bank of Southern Africa, Industrial Development Corp (the South African DFI using money from the EU-funded Risk Capital Facility that is co-managed with the EIB), and the WK Kellogg Foundation, the fund will invest in entrepreneurs in the agribusiness value chain, rather than directly in the farming industry. Agri-vie plans to invest up to $25 million in five projects in 2010. The fund invests equity and quasi-equity with a preferred position of 25-75 percent. It can arrange debt funding and is open to syndication and co-investment.

-- Global Environment Fund (GEF), the U.S.-based private equity firm, raised an initial $84 million for the GEF Africa Sustainable Forestry Fund (GASFF) and is targeting $150 million. The fund is focused on sustainable forestry in sub-Saharan Africa and is the first of its kind. It is a 12-year closed-end private equity fund dedicated to investments in forestlands or forestry-related companies and projects in Eastern and Southern Africa, together with two countries in West Africa. The first close saw commitments principally from development finance institutions; CDC was a cornerstone investor, with $50 million; the IFC committed $20 million. Private investors are expected to invest alongside the DFIs to get the fund to its target size. GASFF will target commercial returns and is expected to invest in and develop between five and 10 forestry businesses across sub-Saharan Africa. The forestry businesses will grow process and market timber products to meet growing global demand from industries including construction, energy, furniture and biofuel. The fund will start to make investments immediately, with an investment size typically between $15 million and $30 million. Focus countries will include Mozambique, Tanzania, Swaziland, South Africa, Uganda, Ghana, Malawi and Zambia.

-- African Agricultural Capital (AAC) started raising capital earlier this year for the AAC Fund, an East African agricultural investment fund. The Uganda-based venture capital firm, set up by the Rockefeller Foundation, the Gatsby Charitable Foundation and Belgian investment company Volksvermogen sent out its private placement memorandum earlier this year. The $25 million Mauritius-domiciled closed-end fund is focused on providing capital to small growing businesses (SGBs) operating in the agriculture value chain in East Africa. The fund will invest between $200,000 and $2 million in each business, using a range of equity and quasi-equity instruments. AAC says its success criteria are to earn a minimum gross return of 12 percent per annum on funds invested, and to mobilise increased investment capital of at least an additional $5 million into the East African agricultural sector through partnerships with other investors.

-- Private equity funds Sierra Leone Investment Fund and ManoCap Soros Fund are raising capital to invest in small companies in Sierra Leone, primarily in agribusiness and related services. Both have signed contracts with MIGA.

-- Beltone Private Equity, a unit of the MENA-focused investment bank Beltone Financial, signed a partnership agreement with Kenana Sugar Company in Sudan with the aim of deploying up to $1 billion in large-scale agriculture projects across Egypt and Sudan. Beltone will provide investment management, corporate finance and strategic capabilities, while Kenana will add technical know-how and operational expertise.

-- Emerging Capital Partners, the Washington DC-based Africa-focused private equity firm, raised $613 million for ECP Africa Fund III at its final close in July. Over $450 million came from the AfDB, IFC, OPIC and CDC. The remainder came from new investors such as South Suez, the pan-African fund-of-funds manager. The fund's mission is to generate above-market returns by taking controlling stakes or influential minority positions in high-growth companies through equity and quasi-equity investments such as convertible debt. The fund will focus on companies pursuing regional strategies and will invest across various sectors, including agriculture, natural resources, telecoms, financial services, transportation, and utilities.

-- Advanced Finance and Investment Group, the private equity group based in Senegal, held the first closes of the Atlantic Coast Regional Fund (ACRF) at $84 million last year and is building towards its $150 million target. ACRF is focusing on mid-size, strong growth companies with a regional scope. Core investment countries will be Nigeria, Senegal, Côte d'Ivoire, Ghana, Cameroon, Gabon, DRC and Angola, but the scope of the fund's investments will cover the Economic Community of West African States (ECOWAS), the Economic Community of Central African States (ECCAS), as well as Morocco, Mauritania, Uganda and Rwanda. Main investors in the fund are AfDB, CDC, EIB, FinnFund, and IFC as well as international investors such as Africa Re. The fund will make investments ranging between $3 million and $15 million. The sector focus will be agribusiness, transportation and logistics, financial services, telecoms, mining and natural resources and manufacturing companies.

-- Nairobi-based venture capital firm Amani Capital hooked up with the Norwegian Investment Fund for Developing Countries (Norfund) to establish the Luxembourg-based Fanisi Venture Capital Fund. The fund will target high growth start-up and established small and medium enterprises (SMEs). Fanisi expects to close at $55 million and will invest in high-growth businesses in Kenya, Rwanda, Tanzania and Uganda. The fund will invest widely across a range of sectors, including agribusiness, ICT, retail, financial services, real estate, health and tourism. The fund's first close investors were Proparco (the DFI majority owned by the French government) and Finnfund, the Finnish government's development finance agency. Other investors were the IFC, the Soros Economic Development Fund and the Barry Segal Foundation.

-- Africinvest Capital Partners reached the fourth close of Africinvest II with commitments of 137 million euros, and is planning for a final close of 150 million euros. The Mauritius-based pan-African SME fund has the backing of a whole host of European DFIs as well as the IFC, AfDB and EIB.

25 August 2010

African agricultural finance under the spotlight

Africa is turning into a fashionable post-crisis investment destination as investors regain their confidence and start to focus on the continent’s lack of direct involvement with the global market’s volatility drivers and trouble hotspots.

At the same time, bilateral and multilateral development agencies are actively investing via an assortment of public and private-sector channels; the international capital markets pipeline is building – sovereign debt offerings on the docket for Nigeria, Senegal, Tanzania, and Zambia with Libya believed to be looking – while the slew of private equity and hedge funds being raised this year for Africa are seeing healthy interest from public-sector and private LPs.

Rising levels of international investment capital in African agriculture and agribusiness have taken the investment thesis directly into the intensely political arena of global food security and land rights. It will remain there as long as food security remains a top agenda item for the likes of China, India, Saudi Arabia, UAE, South Korea and many others.

The notion of foreign investment in agriculture as a key to Africa’s food security, particularly when it is aimed at supporting smallholder agriculture and sustainable farming, is a relatively straightforward one. The acquisition of huge tracts of African agricultural land by foreign governments (directly or through sovereign wealth funds), and by multinationals, investment banks, hedge funds, private equity firms and speculators creates a slightly more convoluted picture.

The debate about large-scale African land acquisition by purchasers from all over the developed and developing world is well documented, and the pros and cons continue to be the subject of fierce debate. It’s either a cynical land grab that amounts to a new wave of exploitational colonialism or it’s the best opportunity Africa has had in decades to generate investment inflows that will fund lasting economic benefits.

The facts might help: Africa has about 12% of the world’s arable land but 80% of it is uncultivated, only 7% is irrigated (compared to 40% in Asia) and production yields are low. For all of the protestations of exploitation, the opportunity to develop and commercialise Africa’s abundant agricultural land offers a range of hugely compelling economic opportunities for Africa as well as for international investors. The issue is ensuring deals are structured properly. At the same time as international buyers need to respect principles of responsible investing, governments need to be more accountable, transparent and strategic in how they structure deals.

Full Reuters article here