Black Soil postpones China agri fund set-up – updated

Warburg Pincus Asia-Pacific’s former chairman Chang Sun has temporarily postponed plans for a $1 billion China agribusiness fund to focus instead on his agriculture and investment operating company, Black Soil.

Black Soil finance manager Andy Cheng told Agri Investor that as most potential limited partners want to see “proof of concept”, Black Soil decided to postpone fundraising for a closed-ended fund and instead focus on completing the first two investments.

Sun clarified in an email that “we postponed the blind pool fund to allow time to prove our concept, while keeping the fund raising open and continuing to talk to investors”.

“Some investors like this type of direct investment, which would give them a first-hand look at agriculture investment opportunities in China,” Cheng said.

The company has raised about 80 to 90 percent of its 500 million yuan ($76 million; €70 million) target, he added.

Sun, who has been worked in private equity for more than 20 years, decided to set up Black Soil in July 2015 saying he wanted to do something that “made an impact”.

“I researched different industries and found that agriculture in China is the most backward and needs the most help – not just financially but also in terms of management, resources and innovative business models,” Sun told Agri Investor.

Sun was initially looking to raise $1 billion for Black Soil’s debut China agriculture-focused fund, which would have comprised two vehicles – a US dollar-denominated fund and renminbi fund – each with a target of $500 million.

Since the company was founded in mid-2015, Black Soil has bought almost 8,000 acres of rice farming land in Heilongjiang province, an area in northern China known for its nutrient-rich black soil.

““I’ve put about $20 million dollars of my own money into our first deal. I’ve assembled an experienced management team, built new distribution channels and signed agreements to lease about 67,000 hectares of arable land for 30 years. We have harvested about 15,000 tonnes of our own rice and trying to innovative direct sales models,” Sun said.

“The other deal is to invest about $60 million in a state-owned company [Beidaihuang], which is the largest potato starch processor in China. They have a capacity of about 100,000 tonnes, but utilised only 30 percent of the processing capacity due to insufficient potato supply. Through our transaction we secured land lease for 60,000 hectares which guarantees raw material supply for the factory and allows us to rotate crop cultivation and profit from it.”

He added that the company has attracted commitments from domestic and foreign investors and is looking forward to proving its business model, which will be crucial for future investment opportunities.

Beidaihuang Group, the state company with which Black Soil is working to build up its crop and potato farming operation in Heilongjiang, has 5.439 million hectares of land. Sun says working with the company will soon allow Black Soil to aggregate about 700 square kilometres, an area of land slightly larger than Singapore.

Aggregating land in Heilongjiang, a province on the border with Russia where land squabbles and militarisation have been a feature since the 1969 border conflict, can be easier than in the rest of China.

“The land arrangements in Heilongjiang are a little bit different from the rest of China,” Fred Gale, senior economist and China researcher at the United States Department of Agriculture told Agri Investor. “The Chinese stationed the military there to build farms – the history behind these agricultural state-owned companies there. [Heilongjiang] is unique in terms of scale in China. The Chinese government is supporting investment partnerships like this with state-owned farms private investment, something they set out in the No1 Central Document published this year.”

In China, agricultural land can only be contracted and leased for a maximum of 30 years, despite land reforms last year that enforced 2008 plans to divide up agricultural land use contracts and leases. This means that small parcels of land are owned by owned collectively by villages, then leased and contracted to individuals. Villagers can vote collectively to hand contracts back to the village, which in turn can issue a new contract to private companies, for example. Chang used this method to aggregate his rice-producing fields, getting a new contract to farm the land until 2044.

Gale said that since the government was still looking at land reform, it was still unclear whether contract and leasing rules would change in the near future.

He also said that investment in Chinese commodity crop production would face specific challenges: “The government sets the price for grain this year. They have been liberalising the price for crops, except rice and wheat. In this case, the government has set the price for rice too high, so it is bound to fall. It is going to take years to sort this out, so it is generally being done with the government on an experimental basis.”

Beijing has been working toward building up larger scale farming projects for several years, encouraging state-owned enterprises such as Cofco to form consortiums with private equity in the process.

Additional reporting: Clare Pennington.

This article has been corrected: it previously read that Black Soil had abandoned its $1 billion fund set-up. Black Soil have postponed the blind pool fund to allow time to prove the concept, while keeping the fund raising open and continuing to talk to investors, Chang Sun clarified in an email.