Finding the exit

To start a new venture in a nascent market, local partners are often essential. But it also helps to have good friends back home.

Proterra knew as much when AustAsia, its dairy business focused on China, began operations on the back of the investment it had made in 2012. And once again, the firm turned to Cargill, from which its leadership had spun out in 2016 after spearheading the Black River hedge fund.

Friends in the right places played a key role in growing AustAsia into a company Proterra exited to joint-venture partner Japfa, an Indonesian dairy group, for $263 million in January, says Rich Gammill, Proterra’s managing director.

Cargill’s input

In addition to its role as a customer and inputs provider to the company, Cargill provided nutritionists that worked with AustAsia to formulate the optimal combination of silage, protein and fiber in feed to meet the company’s production objectives.

While Japfa’s relationship to Cargill as a customer predated their investment, Gammill notes that the “arm’s-length commercial relationship” between Proterra and the Minnesota-headquartered agricultural powerhouse brought subtle benefits.

“If you are just some outside financial investor, and you call up Cargill and say: ‘Hey, I want to buy stuff from you,’ that’s a little different,” he says. “I’m calling the head of Asia for Cargill and saying ‘Hey, we made this new investment, let’s put the team together and figure out how help them be world class!'”

Not just milk and honey

As AustAsia was adding dairy farms to its portfolio in China, Gammill says that the Chinese dairy industry itself was going through significant changes.

While China remained in deficit in terms of overall milk supply, government steps to open it up to the importation of milk powder and manage prices had the effect of suppressing prices further than Proterra had expected.

Another challenge came in the pace of overall construction of dairy farms, which Gammill describes as an “astounding” reflection of how quickly the government can mobilize resources that nonetheless helped limit growth of the industry.

In addition, he says, the country’s two main milk processors, Mengniu and Neeley, had invested heavily in high-tech elements, such as robotic milking parlors.

Out through the in-door

Gammill says that when Proterra assessed options for an exit from AustAsia, two emerged: a sale back to Japfa or an IPO. However, during the seven years after Proterra’s initial investment, a safety scandal that closed one domestic competitor and disappointing results from a merger between another two had weighed on investor sentiment, eliminating public markets as an option.

“The Chinese dairy sector has a little bit of a cloud over it, and from a public-market standpoint the comps weren’t very good. If we were going to take the company pubic, we were going to have to wait a couple of years,” says Gammill, who added that he expects AustAsia to go public at some point in the future.

He declines to provide further detail on the size of the initial investment beyond saying that the $263 million sale provided a “substantial” return on Proterra’s initial bet. In addition to having receiving an offer from Japfa that Gammill describes as being “very fair, frankly”, the fact that part of the acquisition was in stock means that Proterra can continue to play a role with AustAsia as the company turns its sights to the Indonesian market.

“Indonesia is kind of where China was probably 10 years ago, in terms of its dairy industry,” Gammill says.