Long-term holding companies like Fairfax Africa, which just raised $500m through an IPO, offer a promising proposition for patient capital that is willing to grow with developing nations
All fledgling asset classes engage in intense debates over what the best structures to amass and deploy capital are, and agriculture is no exception. You’ve witnessed these discussions at our conferences; you’ve read about the different structures on our website; and you can expect this to be a talking point well into the future.
In agri, we know that PE funds, VC and growth capital have all successfully invested into the sector. But the typical 10-year unlisted fund with three- to five-year hold periods is not always the best fit.
Fairfax Financial Holdings, called by some the Canadian Berkshire Hathaway, has demonstrated the success of the holding company model for gathering patient capital seeking long-term capital appreciation.
So when new subsidiary Fairfax Africa announced last week it had raised $500 million through an IPO in order to invest in African businesses – including agri and food businesses – we sat up and took notice.
Following the IPO, we reported that about $72 million of the total raised was used to acquire AFGRI, a leading South African agriculture company, and we understand that Fairfax Africa plans to invest as much as one-third of the remaining $430 million or so into African agri and food businesses.
It’s not that a long-term holding company is the only way to raise significant sums of capital for agri investment in developing regions. For example, PE fund manager EXEO capital recently reached a $100 million first close on its food and agribusiness-focused Agri-Vie Fund II, which has a hard-cap of $200 million.
But Agri Investor understands that EXEO, like its peers, will continue to follow a more traditional PE strategy focused on shorter hold periods. Conversely, the likes of Fairfax and Berkshire are likely not as concerned with an exit as they are with the preservation and appreciation of capital over time.
The question is: which structures are more suitable for developing markets, which often require time to bloom?
Fairfax CFO Guy Bentinck told me he believes a longer-term strategy is better-suited for Africa, where the development need is still vast.
“There is huge growth potential, but these opportunities will take time,” he said. “The primary difference compared to PE funds is the permanency of our capital, and long-term capital is really what the continent needs.”
He pointed to Fairfax Africa’s AFGRI acquisition, which provides one-third of South Africa’s grain storage, as a good example, explaining that the long-term strategy is to expand the business throughout the continent, where farmers lack access to basic grain storage facilities.
“Most African countries are having to import because yields are so low, but there’s also no storage capacity for crops,” he said. “In Uganda, for example, you have a very humid climate, but there’s no storage capacity, so a farmer has no choice but to sell off his crop on the day he harvests.”
Bentinck noted that an acre of sub-Saharan African land yields just a half-ton of product, while that jumps to two tons in South Africa and 10 in Ohio – so most African countries are having to import. But as African farmers access both basic and more advanced methods and technologies, waste will be spared and money saved as imports decrease and the continent becomes more self-sufficient.
That is the hope, at least, but it will not happen overnight, nor in three to five years. In that sense, a longer-term strategy may be necessary for investors looking to cash in on the future of Africa and other developing nations.
As Warren Buffett once said: “Someone’s sitting in the shade today because someone planted a tree a long time ago.”
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