Africa’s undercapitalised agri infra sector

Private equity investors in Africa should look at improving farming infrastructure.

African private equity is a hot topic lately. Fund raisings have already collected $2.45 billion this year, nearly at the $2.49 billion amassed during the whole in 2014, according to Private Equity International. 

And half the LPs surveyed by the African Private Equity and Venture Capital Association (AVCA) said they plan to increase their PE investment in Africa over the next three years.

As the least cultivated land mass in the world, private equity managers cannot ignore Africa’s agricultural potential – but many have focused on the consumer angle rather than improving the environment for producers and distribution, where there is a lot to be done and plenty of scope for investment into what I would define as agricultural infrastructure.

Some market professionals argue that any agricultural infrastructure investment needs to come from the agricultural producers themselves, and if we look at small scale projects like one backed by Phoenix Africa in Sierra Leone, where the firm has added a rice milling operation onto their primary rice production project Lion Mountains – those milling operations look likely to bring in as much cash, if not more, than the sale of its own rice.

The operation is also providing a market for local farmers to sell their produce into, a market that for many did not exist previously and a major reason why so much food in Africa is spoiled.

Some banking and private equity sources, however, think that infrastructure investment is needed on a much larger scale to boost African agriculture. And it needs to come from governments.

“We would love some more roads,” Avril Stassen, senior partner at Agri-Vie, a food- and agribusiness-focused African private equity fund, told me on the sidelines of AVCA’s conference in London last week.

Arnold Ekpe, chairman of Atlas Mara, the London-listed African bank, echoed the need for major investment in large-scale infrastructure. “You cannot talk about agriculture as an isolated sector,” Ekpe noted. “It needs infrastructure and power.”

Of course this is true, and the private sector is playing a role in these large projects such as road building, telecommunications expansion and renewable energy, according to my colleagues at Infrastructure Investor.

But there is still a huge need, and with it investment potential, to provide farmers with more basic, improved supply chain infrastructure.

Take India, where similar challenges surrounding roads and electricity supply remain, but where the private sector is increasingly engaging with farming infrastructure. We have recently reported on three post-harvest logistics, warehousing, cold storage and collateral management companies seeking private capital, two of which are already backed by private investors including Singaporean sovereign wealth fund Temasek.

“Basic infrastructure is not something we can ignore,” said Vasanata Madhavi, general manager at Origo India, a post-harvest solutions company that helps educate farmers about commodity pricing and markets. “But we have private players like Monsanto entering the agri sector and working on improving the sector’s infrastructure with services like crop and weather intelligence and so infrastructure, where the farmer is the end customer, is improving every day.”

In fact, many professionals from the private investment industry in India tell me about the huge potential for investment into this fragmented part of the value chain between farmer and market.

In Africa, some supermarket chains might have their own logistics operations, or outsource some transport to another firm, but any firm out there they will only service one part of the chain, sources tell me. Few of these firms, if any, have the complete chain covered from warehousing to cold storage to natural temperature transport and so on. Equally, outgrower schemes that effectively provide post-harvest solutions are few and far between as Tropical Farms’ MD Adrian Simpson told me last week.

So there must be huge potential to invest in these operations, fill gaps in the market and effectively improve post-harvest efficiency, at the same time as larger scale infrastructure improvements.

Yes, India is seen as a more appealing investment destination than many countries in Africa due to an easier investment framework and better regulations, but for investors already comfortable with the idea of Africa as a destination, as increasing numbers seems to be, there is a segment of the agricultural value chain ripe for investment.