African agriculture focused asset manager Phatisa has teamed with a group of co-inventors to acquire Farming and Engineering Services, a Malawi-headquartered agricultural equipment and services company.
Financial details were undisclosed for the deal, which saw Mauritius-headquartered Phatisa draw from its Food Fund 2 to acquire FES alongside Norwegian DFI Norfund, German DFI DEG and Mbuyu Capital, which manages segregated accounts of Africa-focused co-investments and fund investments for institutional investors.
The consortium acquired a stake in FES held in the first iteration of Phatisa’s Food Fund, which closed on $246 million in 2013. Food Fund 2 reached a close on $121.5 million in late 2018 and has a target of $300 million.
Established in 1967, FES has licenses to sell brand-name agricultural and other industrial equipment in Malawi, where agriculture accounts for approximately 30 percent of GDP. It also offers agricultural contracting services including land leveling, irrigation equipment installation and crop analysis and plans to expand both businesses into neighboring Zambia.
FES caters to smallholders in Malawi’s tea and macadamia industries, Mbuyu co-founder and managing director Michiel Timmerman told Agri Investor, and also services large commercial growers in the country, such as Associated British Foods subsidiary Illovo Sugar.
“It makes sense for large commercial farms to outsource to an agricultural contractor like FES because it means the utilization of that capital equipment is much better and can be provided as a service on a long-term contract,” he explained.
An ‘almost universal’ preference
Mbuyu focuses on co-investments in Africa’s non-bank financial services in manufacturing, logistics and distribution and agribusiness sectors.
The firm pursues co-investments ranging between $5 million and $10 million on behalf of public and private European pensions and a few US endowments targeting 12-14 percent annual internal rates of return, said Timmerman. It also makes investments of up to $15 million in specialist funds and maintains offices in London and Kenya.
Whereas co-investments in the US and Europe are often only available to existing LPs and can come with a fee rivaling that of a fund commitment, Timmerman said fees on co-investments in Africa are either zero or much lower than fund investments, which fuels demand for such deals among investors.
“Almost universally, investors these days prefer direct investments to fund investments,” Timmerman said. “Our advice is: do a significant proportion in co-investments but if you do want a more diversified portfolio in Africa, you should also consider making some fund investments.”
Phatisa’s is among the funds Mbuyu has invested in. The firm was also a co-investor in Meridan, a fertilizer distributor in Malawi that Phatisa sold to Saudi Arabian natural resources company Ma’aden last year.
Because Africa is a core focus of virtually any development finance institution’s overall strategy, Timmerman said, such investors play a prominent role in African agriculture markets and there have been instances when DFIs have competed with private equity funds for deals.
Though Mbuyu has not encountered such competition in any of its own investments, Timmerman said, the long-term nature of their capital dictates it would be better for DFIs to focus on primary agriculture rather than agribusiness.
“On balance, there is a lack of capital and DFIs play a useful role in providing that,” said Timmerman. “While they are generally lumped into one bucket, if you deal with them on individual transactions, you do notice quite a range of capabilities and abilities to execute.”