Miro Forestry, a West Africa-focused investment company, has secured a $10 million commitment from a Nordic development finance institution and is now talking to other institutional investors about a further $10 million investment to match.
The company has drawn down some of this new equity capital but the availability of the remainder will depend on other factors including whether the firm is able to attract another institutional investor – it is currently talking to Africa-focused private equity funds and DFIs, according to Andrew Collins, the company’s chief executive.
“We don’t need the whole $10 million today but the remaining will be conditional on various specific factors including FSC certification, recruitment and planting targets,” Collins told Agri Investor.
Miro has now raised $20 million of a $50 million total capital raising target after getting commitments from a variety of private capital sources. And after securing the extra $10 million of institutional capital, the firm will not look to raise the remaining $20 million until 2017, according to Collins, who added that at that stage it could raise the equity at a premium.
“At the early stage of a business it is usually appropriate to raise capital in [amounts] that cover a year’s operations. In this way early investors are not overly diluted and there is a clear annual use of funds against which to monitor performance and hence reduce risk,” he said, adding that institutional investors do not like investee companies to be continuously on the road as it can be distracting from the project at hand.
“Tight annual budgets also focus management to maximise the value from every dollar invested and helps to breed thrift within the organisation, which is particularly important at an early stage. As the business develops and a track record is built it then becomes more sensible to raise capital to cover a few years’ operations so that management are less distracted by fundraisings”.
Miro started operations in 2010 with $25,000 in order to “start digging”. Launching operations, however small, made a huge difference not least in the perception of the project by prospective investors, according to Collins.
“When you manage to hit your annual targets on that small initial investment, larger investors can see your track record and are more likely to come in on following rounds,” he said.
A lot of agri investment managers have tried to go out and raise the whole amount first time but this is extremely difficult, according to Collins. Securing investment from private capital sources that predominantly work on a basis of trust is a better way to launch a project, especially as DFIs and other institutions want to invest in far larger sizes and committing to a start-up is not always appropriate for them, he added.
Miro now has 30,000 hectares of land in Sierra Leone and Ghana and a team of 400 people. It first harvested in 2003 and expects an investment term of up-to-seven years, after which it could list on a public market or consolidate with a strategic industry player as forestry investing continues to gather pace, said Collins. It targets an internal rate of return of 25 percent per year.
“Global supply of timber is decreasing while the global population continues to increase and become more wealthy thus consuming greater quantities of commodities. In West Africa this supply and demand imbalance in the timber market is particularly wide and growing,” he said. “In addition, demand from Europe is continuing to increase driven largely by pulp and wood biomass requirements, the historic fibre sources having increasingly been stretched by growing Asian demand. Despite our modest size, we have attracted significant interest for long-term timber supply and fibre offtake into Europe given our Atlantic location, with our Sierra Leone operation being one of the closest tropical countries to Europe.”