AIMing big: why DekelOil chose IPO over PE

Cote d’Ivoire-based palm oil plantation and processing company DekelOil turned to the public markets to raise funds for the construction of its first mill, and later for a palm kernel crushing plant. Here, Lincoln Moore, executive director, tells Agri Investor why the company turned away from private equity and about the important role of smallholders in the operation.

Why did you decide to raise capital in 2013 through an AIM-listed initial public offering and not use the private equity markets?

Originally we partnered with a private equity investor in 2010 when we raised €8.3 million ($9.1 million) to establish the company, a nursery and do some initial planting. That private equity partner (Siva Group) now owns 49 percent of the business and already had a presence in Cote d’Ivoire, so the investment made sense.

But when we came to raising capital for our mill construction, we decided to raise £2.3 million ($3.5 million; €3.2 million) at IPO to contribute towards the $20 project. We were tossing up the two options and were talking to private equity groups initially but the deal size was too small for PE; they wanted to invest a minimum of $10 million, but we also didn’t want to give away so much equity when the funds were not needed.

Another issue we had with private equity was the various triggers and conditions to their investment. If you don’t reach a certain target, you have to hand over more equity and so on. In our view, if we missed targets by a month, it wouldn’t critically change anything over a 10-year period.

We got loans from two development banks totalling €14 million and financed the rest of the mill ourselves.

Why did you choose AIM over other stock exchanges?

In terms of development capital worldwide, and commodities and minerals, there are not many choices. You could look at Canada or Australia, but logistically and geographically, London is closer to West Africa and has a good history of listing African companies, so the investors are familiar with the region. There is also a good amount of risk appetite for early-stage deals.

What was demand like?

It was a tough market in 2013, but the money that came was mainly high net worth individuals and private client brokers. There were a couple of very small funds but because we were building this conceptual mill, we didn’t have any access to bigger funds.

Since then we have had two big African funds come onto the shareholder registry: Enko Capital and Nubuke – as we raised $1.5 million for a kernel crushing plant which has just been delivered.

Do you have plans to raise any more capital in the near future?

Now that the business is profitable – we expect to report €3 million in profit for the first half of this year – there is no reason to go back to the market unless something value-additive comes along. We still have another three years until the palm oil processing mill reaches capacity of 90,000 tonnes a year, and palm oil prices have some way to improve in the wake of crude oil price falls last year. We are making money in a bad pricing environment which is great but there’s also a lot more upside.

How much of the business is geared towards smallholder farmers?

A huge amount. We knew that there were several thousand smallholders farmers with about five hectares each but without a guaranteed market for their produce. So we decided to put in a mill early, even before our own palm tree production reached maturity, to provide a market for these smallholders, and also to help us produce income early on to expand our own estates. Other large palm oil companies in the country have limited capacity to process any palm other than that produced on their own estates, so farmers were struggling to sell their produce and were not improving their yields as a result.

So our whole operation is geared towards providing a market for these smallholders who in the medium0term will account for 70 percent of the mill’s capacity. Our early work to establish a nursery was also to sell plants to smallholders at reduced prices to encourage them to plant more for our mill. We aren’t making money out of this process, we just want them planting. We now have contracts with over 5,000 smallholders and have spent two years doing due diligence on them and the quality of their estates. We have signed legally-binding contracts although it’s all down to building relationships with them and making it as easy as possible for them to deposit their produce.

We have logistics hubs in various locations that saves them driving all the way to the mill, the mill has two entrances for trucks to come in and make deposits plus mechanical tipping systems, and we pay cash on delivery. This all sounds simple but it encourages them to use our mill.

We will eventually provide organic fertilisers from the palm by-products which the farmers can pick up on their way back from depositing product. And we have built a medical facility and a school in the local village which has improved dramatically since we arrived. We are also assisting with electricity as well as providing jobs at the mill and nursery.