By 2009, when the team now at Proterra Investment Partners set out to make the first investment from its food-focused private equity strategy, many other investors had already noted growing protein demand in China. They had also noted many reasons to stay away.
“A lot of people asked the question: ‘How do you know that the Chinese government is not going to just come in and steal your farms?” recalls Rich Gammill, Proterra’s managing director.
Many investors had also assumed there was not a dairy market in China. “When we talked about dairy, everybody said: ‘Aren’t the Chinese intolerant to lactose? They don’t drink milk.’ Well, milk goes into a lot of things, especially infant nutrition in baby formula, cheese and other products,” he tells Agri Investor.
Fast-forward nine years and the firm stands happy with $263 million in pocket, having sold its remaining stake in AustAsia, an Indonesian dairy company focused on China, for $263 million. How did it pull it off?
Having identified dairy as a sector bound to benefit from China’s growing urbanization, protein demand and food safety concerns, Proterra first set about finding local partners. An initial survey proved disappointing: that while there were a few processing companies already present in China, none combined that capability with dairy farming in the way Proterra envisioned.
It was at this point that Proterra’s relationship with Cargill first came to play a role in its AustAsia investment. In 2007, Gammill and other Cargill employees had joined Black River Asset Management, a Cargill-sponsored hedge fund, to spearhead its creation of a private equity capability. AustAsia was the first investment from the resulting food fund, which is now managed by Proterra after the firm spun out from Black River in 2016.
“The challenge is, in China, a lot of times, people just rely on the government’s word”
Cargill had been working with Japfa, an Indonesian dairy company headquartered in Singapore that had already built China’s first large-scale dairy farm in Inner Mongolia. It made the introduction to the Proterra team.
“They had built one farm already, they knew what they were doing and had been through the process of figuring out the challenges of building a modern dairy farm in China,” Gammill says.
After enlisting the help of Edgar Collins, an Australian who was to serve as chief executive, providing the “Aust” component of the company’s name, they decided to build a greenfield dairy operation in which Japfa would hold a two-thirds ownership position.
Boots on the ground
The next challenge had to do with securing necessary government approvals.
Securing land rights is the most difficult aspect of food and agriculture investing in China, according to Gammil. Because it is technically impossible to own land directly, parcels are consolidated with long-term leases with local villagers, some of whom still refuse to rent, he says. That makes it essential to work together with the government.
“The challenge is, in China, a lot of times, people just rely on the government’s word. So a local official, the mayor of that local town, says: ‘Yup, I’ve got all of the signatures I need, I’ve got it all organized’ and that may not be true. You have to look through the local government and check the individual leases and go verify that’s actually happening.”
Making sure that local villagers benefited from the investment was an important ESG consideration of the AustAsia investment, according to Gammill, and helping manage those local government relations was a key part of the support the firm was able to offer. In addition to regional outposts in Sydney and Mumbai, Proterra runs offices in Singapore and a 10-person operation in Shanghai, where Gammill says the first hire was someone who had grown up in a village 60 kilometers from the location of the first farm AustAsia built in Shandong Province.
“It’s no different from in the US,” Gammill says. “If you’re from New York City and you go down to Louisiana to go build a hog farm: good luck! If you’re not from Louisiana and don’t know the people in the local parish and how the council approves things, it’s going to be very difficult.”
‘Not the smartest operators’
Overall, Gammill says, the local government was supportive of the dairy industry in Shandong, where Proterra eventually went on to build five large-scale dairy farms at a cost of about $75 million each. It also developed three hog farms and one duck farm associated with other strategies.
One factor that did color Proterra’s government relations was an anti-corruption campaign launched by President Xi Jinping after assuming power in 2012.
“If we start thinking we know how to run farms on our own, that’s the day we’re in trouble.”
“It used to be that the government would always have these lavish banquets. The way business got done was oftentimes through these very social, kind of formal banquets, and that got stopped. Now, when you meet with the local government officials, it tends to be much more simple and basic,” says Gammill. “They all stopped driving Audis and started driving Toyotas or Chinese brands instead.”
With government approvals in place, Proterra could move on to actually building and operating dairy farms in China.
Given Japfa’s experience, Gammill says Proterra was happy to have the team from Japfa run day-to-day operations. His firm’s role concentrated largely on board-level strategic items, recruiting executives and navigating government relations.
“We don’t purport to be the smartest operators. If we start thinking we know how to run farms on our own, that’s the day we’re in trouble. Still, the core part of private equity is that you have to pick good partners,” Gammill says.
And by good partners, he also means friends in the right places.
– Read the second part of our interview with Rich Gammill tomorrow on agriinvestor.com