Sub-Saharan ag needs to move beyond DFI reliance, says PE boss

The growth of Africa's middle class is 'over-hyped,' says EXEO Capital's Herman Marais as he details his firm's efforts to boost the private sector's role in its second vehicle.

Decreasing reliance on development finance institutions will be an important step in the growth of sub-Saharan Africa’s agriculture sector, according to the co-founder and managing partner of EXEO Capital.

Speaking to Agri Investor after the pan-African private equity firm made the first investment from its second vehicle, Herman Marais said EXEO set out to increase the portion of private investors in the fund. The firm’s first vehicle, which closed on $70 million in 2010, drew about 35 percent of its capital from private investors.

These account for about 50 percent of its successor, which held a $100 million first close in early 2017 and is now nearing its $175 million target, according to Marais. The firm is soliciting investments from institutions in North America, Africa and Europe. The most relevant private investor types for EXEO, Marais said, have been financial services firms, funds of funds, family offices and the investment arms of food and ag companies.

“For this asset class to become more mainstream, it’s important that more private sector investors participate. Investment programs in the sector would then be able to lean less on the DFI community that have traditionally anchored most of the PE-investment programs in the sector.”

The middling middle class

Another important factor in Africa’s ag outlook, according to Marais, is to keep expectations realistic regarding the pace and scale of demand growth among the region’s middle class. While expectations of continued growth in consumption among sub-Saharan Africa’s urbanized middle class prevailed in the early and mid-2000s, according to Marais, since 2014 it has been tempered by a “more sober” assessment following the dip in commodities prices.

“Investors and businesses need to make sure their business models are sufficiently aimed at the bottom of the pyramid”
Herman Marais

“It’s ultimately a matter of balance,” he said. “The tempo of expansion of the African middle class was a bit over-hyped, so both investors and business operators were over-expectant. That doesn’t mean there are not strong growth prospects and valid growth expectations in the markets of sub-Saharan Africa. It does mean that both investors and businesses need to be aware of that recalibration and make sure that their business models are sufficiently aimed at the bottom of the pyramid part of their markets.”

That recalibration has already played a role in EXEO’s interactions with its existing portfolio companies, according to Marais, who said the firm has helped some of its previous investments to lessen their dependency on the more affluent segments of their markets. In addition, he said, the recalibration has influenced EXEO’s approach to new investments from the second fund. These include, for example, an investment in a low-cost cold chain servicing traders and consumers at the lower-end of the market.