Keith Mullin, Editor-at-Large of Thomson Reuters IFR, writes on prospects for the flourishing investment in African agriculture.
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. Africa is benefiting not only from a resumption of international debt and equity flows; it is also a beneficiary of international efforts to maintain the flow of trade finance via multilateral guarantee programmes – 45 issuing banks from 27 countries in sub-Saharan Africa have joined the IFC’s trade finance programme, for example.
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.
Investors are focusing broadly on Africa’s relative political stability, improving governance, more conducive policy and regulatory environment, as well as more transparent foreign investment regimes. At the macroeconomic level, above-average growth and low levels of government and corporate indebtedness add to the appeal. What’s key to much of the capital flowing into Africa is that it is supplemented by a support network of capacity building, advisory services, training, technology transfer, and infrastructure benefits.
From a sector diversification perspective, the emergence of new technologies such as mobile telephony and Internet broadband are creating interest beyond the traditional natural resource plays; the telecoms and services sector was the dominant Africa FDI recipient in 2009.
In its World Investment Report 2010, UNCTAD noted that Africa still trails at the bottom of future investment destinations relative to the rest of the world. But that could be about to change as foreign governments and private investors reset their investment horizons and start to look at Africa from a different perspective. Plus: Africa has an abundance of one commodity that is becoming ever more fiercely fought over: agricultural land.
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.
The fact that more than 13 million Ethiopians need food aid at the same time as the Ethiopian government is offering around 3m hectares of its most fertile land for the production of food for export is perverse. African governments need to raise their level of accountability and ensure at the very least that they improve and protect their own food security through quid pro quo side-agreements negotiated when they lease or sell their arable land to foreign interests; agreements that offer them a share of production intended for export for their own consumption.
Private sector focus
The focus of much of the new inward investment into agriculture is rightly on the private sector and on small and medium-sized enterprises, which have previously had little access to external finance. This approach is supported by the African Union’s Comprehensive Africa Agriculture Development Program (CAADP), established under the AU’s New Partnership for Africa’s Development (NEPAD). One of CAADP’s aims is to raise the capacity of private entrepreneurs as a key plank in the quest to build dynamic agricultural markets. African leaders have set themselves a goal of turning the continent into a net exporter of agricultural products by 2015.
At the G20 Toronto summit in June, leaders committed to exploring “innovative, results-based mechanisms to harness the private sector for agricultural innovation”. The Global Agriculture and Food Security Program (GAFSP) has a private-sector window to channel private investment into small and medium-sized agribusinesses and farmers in poor countries.
To get banks lending to the agriculture sector, the IFC established the Africa Agriculture Finance Project (AAFP), an advisory and investment programme. AAFP kicked off last year in Zambia and plans are afoot to widen it with up to 15 projects in the Central African Republic, Democratic Republic of Congo, Ivory Coast, Malawi, and Nigeria among others.
Nigeria is pushing ahead with its own scheme. In August, the central bank (CBN) and Kofi Annan’s Alliance for a Green Revolution in Africa (AGRA) unveiled the Nigerian Incentive-based Risk Sharing System for Agricultural Lending (NIRSAL), a mechanism they say will help unlock billions of Naira of financing to serve the needs of farmers, especially smallholder farmers, agro-processors, agribusinesses and input suppliers in the agricultural value chain.
AGRA and CBN say they will work with commercial banks in Nigeria to develop innovative financing mechanisms aimed at providing farmers with affordable financial products, while reducing the risk of loans to farmers under other financing programmes offered by financial institutions. NIRSAL will build capacities of banks to expand lending to agriculture, deploy risk-sharing instruments to lower risks of lending and develop a bank rating scheme to rate banks based on their lending to the agricultural sector. Agriculture accounts for 40% of Nigerian GDP, yet the sector receives only 1% of commercial bank loans.
One of the problems is that African SMEs, particularly in the agricultural sector, are not yet on the radar screens of most foreign banks or capital markets investors, while domestic banks often lack the skills to nurture companies through the growth cycle. Risk-sharing via public-private partnerships, while not new, offers a way forward for SMEs and large companies.
The OPEC Fund for International Development (OFID) and the IFC are financing Export Trading Group (ETG), one of Africa’s largest integrated agricultural supply chain operators, through a risk-participation agreement. The funding will to help the Tanzania-based group to expand its trading and processing businesses and support development of agribusiness across the region.
IFC will assume the risk associated with US$40m of US$120m in syndicated loans from Standard Chartered Bank to ETG; OFID will assume risk for US$20m. ETG will use the proceeds to finance the trade of agricultural commodities in several African countries, including Tanzania, Zambia, Kenya, Malawi and Uganda, as well as in India. The increased purchases of commodities by ETG will also help increase economic activity and create employment in rural areas across the region.
OFID also signed two initiatives with Standard Bank. The first is a smallholder risk-sharing agreement to make agricultural finance more accessible to smallholder farmers and SME agricultural producers. The scheme is expected to assist up to 750 000 farmers and small business owners in Ghana, Mozambique, Uganda and Tanzania.
Under the three-year programme, a group of partners will provide the bank with a first-loss guarantee and assist with technical support. OFID is providing 50% risk participation on the remainder of the bank’s potential risk. The facility has made available up to US$50m in the first year, US$66m in the second year and US$100m in the third year. OFID is also sharing risk 50-50 with Standard Bank on a trade finance agreement on transactions of up to US$300m entered into with eligible banks in a number of African countries.
DFIs partner with private equity
If the provision of private African agricultural debt finance is increasing from a low base, the gap is being filled by multilateral and bilateral development agencies, increasingly working in partnership with private equity firms. The volume of cash being channelled into third-party Africa private equity funds is impressive.
The direct financial engagement of bilateral and multilateral development agencies with third-party privately-run financial vehicles that have an out-and-out mission to generate above-market returns certainly needs careful monitoring. The extent to which the development motive sits comfortably with the pure profit motive has long been a topic for debate.
MDBs and bilateral development agencies need to be transparent about this aspect of their business. They should publicise the returns they generate from investment in third-party vehicles, and be clear about what they do with those returns. Excess returns should either be re-invested back into the businesses they’re financing or be put into some form of profit-sharing with local stakeholders and communities.
Public money should only be invested in vehicles that sign up to rules of engagement around sustainability and other tenets of SRI, such as the UN’s Principles for Responsible Investing. When it comes to agricultural capital, LPs and fund investors should ensure investment vehicles support initiatives around responsible agricultural investment. The discussion note: “Thoughts on Principles for Responsible Agricultural Investment that Respects Rights, Livelihoods and Resources” enunciated by the FAO, the UN’s International Fund for Agricultural Development (IFAD), UNCTAD and the World Bank Group, was a good starting point. Responsible agro-enterprise investing is one of seven core principles laid out in the note.
The sponsors of the initiative say that investors should ensure that projects respect the rule of law, reflect industry best practice, are viable economically, and result in durable shared value. It adds that as key players in this sensitive arena, investors have a special responsibility to apply high standards in the design and execution of their projects.
At the very least, LPs have a responsibility to gain a detailed picture of how investment schemes are structured, what the investment style is, whose food security is being protected and how, and the extent to which investments have an SRI dimension or otherwise impact local communities, around issues such as contract farming, land expropriation, compensation and future employment prospects.
Multiple fund initiatives
In the meantime, the number of African agricultural private equity funds being raised continues apace. Easily the most ambitious private equity foray into African agriculture is the African Agricultural Land Fund (Agriland) raised by Susan Payne’s hedge fund Emergent Asset Management, in partnership with South African agricultural traders Grainvest.
The latest sub-fund launched in the second quarter of this year. From its initial launch in the fourth quarter of 2008, the fund is moving steadily towards its target of €3bn, having secured a large cornerstone early investment from a large European institution.
Agriland, which is SRI-compliant, will buy up agricultural land throughout Africa (its focus is sub-Saharan Africa south of Kenya) with the aim of increasing production yields through the introduction of progressive farming techniques, large-scale mechanisation and centralisation across the value chain. The fund will be diversified, with investment geared to crops, biofuels, livestock, game farming and timber.
The fund’s targeted return is 25% per annum, generated from a combination of soft commodity production yields and land price appreciation. The initial focus has been South Africa, but the fund has now acquired land in Botswana, Zambia, Mozambique and Swaziland.
Chayton Capital, the UK private equity firm founded by Neil Crowder and other former Goldman Sachs executives, is taking a similar approach. Chayton has embarked on building what it hopes will become one of the largest agricultural companies in Africa. Chayton Atlas Agricultural Company, operating through Chobe Agrivision, is initially investing US$50m in Zambia, and has an additional US$200m earmarked for investment over the next five years.
Chayton, a returns-driven financial investor, is targeting an investment horizon of up to 10 years, at the end of which it will exit via trade sale or IPO. To underpin its initial investment, Chayton signed a US$50m deal with the Multilateral Investment Guarantee Agency. MIGA’s conditional guarantee will enable the fund over time to acquire and develop up to 10,000 hectares of annual crop production, equal to around 120,000 tonnes of wheat, maize and soya beans. Production will be earmarked for domestic consumption rather than export.
Chayton will acquire five primary production farms, plus related businesses (a silo and elevator business, a milling operation, a soya extruding operation, and fertiliser blending). The fund will source ‘brownfield’ sites, i.e. farms that are under-managed, under-capitalised or in receivership and will increase capacity through better techniques, modernisation and mechanisation. The business will achieve economies of scale through vertical integration across the value chain. The project will employ around 1,650 Zambians.
As the project evolves, Chayton will look to expand its investment parameters into Botswana (which the MIGA guarantee also covers) and from there into Mozambique, Namibia, Tanzania and potentially South Africa.
Other Africa funds that have recently raised or are raising capital 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 US$350m and target return is 20%-25% 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 €200m and is targeting a final close of €500m. 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 US$100m for Agri-Vie Fund and are already planning a second US$300m 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 US$25m in five projects in 2010. The fund invests equity and quasi-equity with a preferred position of 25% to 75%. It can arrange debt funding and is open to syndication and co-investment.
· Global Environment Fund (GEF), the US-based private equity firm, raised an initial US$84m for the GEF Africa Sustainable Forestry Fund (GASFF) and is targeting US$150m. 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 US$50m; the IFC committed US$20m. 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 US$15m and US$30m. 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 US$25m 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 US$200K and US$2m 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% per annum on funds invested, and to mobilise increased investment capital of at least an additional US$5m 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 US$1bn in large-scale agriculture projects across Egypt and Sudan. Beltone will provide investment management, corporate finance and strategic capabilities, while Kenana will add through technical know-how and operational expertise.
· Emerging Capital Partners, the Washington DC-based Africa-focused private equity firm, raised US$613m for ECP Africa Fund III at its final close in July. Over US$450m 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 close of the Atlantic Coast Regional Fund (ACRF) at US$84m last year and is building towards its US$150m 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 US$3m and US$15m and the sector focus will be agribusiness, transportation and logistics, financial institutions, telecommunications, 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-basedFanisi Venture Capital Fund. The fund will target high growth start-up and established small and medium enterprises (SMEs). Fanisi expects to close at US$55m 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.
· The IFC Asset Management Company, set up last year by the IFC to manage third-party capital for development and run by former Goldman Sachs investment banker Gavin Wilson, launched a US$600m private equity fund called the African Capitalization Fund, with .support from the AfDB, EIB, the OPEC Investment and Development Fund, and the Abu Dhabi Development Fund. The fund will invest in the continent’s banking system, providing the resources it needs to continue financing the private sector.
· OPIC committed US$100m in co-financing to Cairo-based Citadel Capital. The funds will be co-invested with Citadel and its targeted US$500m MENA and Africa Joint Investment Funds in deals ranging from traditional buyouts to turnarounds, greenfields and growth capital opportunities throughout the Middle East, North Africa, and East Africa. Sectors of interest to Citadel Capital and its funds include waste management, transportation and logistics, manufacturing, and alternative energy. The firm will invest a significant amount of capital in Egyptian companies, which will be used as platform investments to expand throughout the region.
· Africinvest Capital Partners reached the fourth close of Africinvest II with commitments of €137m, and is planning for a final close of €150m. 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.
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