The African agriculture investment paradox

African agriculture is an investment paradox. The world needs more food. Africa has the potential to boost agricultural productivity to feed itself and become a major exporter. There is plenty of private investment capital – domestic and international – looking for opportunities in the sector. So why is so little capital actually hitting the ground?

An article in this month's AgProfessional magazine provides an answer: most farms and companies are simply too small to absorb the cash or provide attractive returns. The USD 5 million plus-sized deals that investment funds and commercial banks are seeking are rare. AgProfessional quotes Peter Baird, Standard Chartered's head of private equity for Africa:

"The targets are either too small or too early in their development, and are grappling with price and weather risks, making deals scarce. It's hard to either acquire existing assets or to cobble together investible opportunities."

That rings true with AgDevCo's experience. In places like Mozambique, Ghana and Tanzania most commercial farming and agri-processing enterprises are at an early stage. As a result they typically lack the three key attributes investors look for:

i) a management team with a track record;
ii) a reasonably healthy balance sheet to provide collateral; and
iii) some certainty over future cash flows (e.g. off-take agreements from large buyers).

The investment paradox means that billions of dollars of potential investment in African agriculture remain idle because of a shortage of investment-ready projects. That is a major missed opportunity to improve food security and boost the continent’s economic growth.

Are there ways to solve the problem? Two important steps can be taken. Firstly, incubation of SMEs. By providing a combination of equity finance and hands-on business development support, a professionally-managed incubator can help new agriculture businesses get through the risky early years. That is the role played by the Catalytic Fund in Mozambique.

Secondly, development finance institutions should make available a lot more patient capital (i.e. low-cost, long-term debt) to part-fund investments in ‘last mile’ agricultural infrastructure such as feeder roads, power connections and irrigation. AgDevCo is raising a patient capital fund to support socially responsible farming investments.

Together, incubation facilities and patient capital offer a way of building a pipeline of investment-ready deals which can attract private capital. That will help with the USD83 billion a year agricultural funding which, according to the Food and Agriculture Organisation (FAO), is needed if there is to be enough food to feed a world population of 9 billion in 2050.