Investing in real assets such as infrastructure and farming or agribusinesses is generally thought of as a long-term play. Investing in real assets in Africa is both a long-term and, potentially, very high-risk play. Africa needs infrastructure, so the opportunities for investors should be huge, but the political risks and commercial risks can also be considerable.
On the agribusiness front, with more than 60% of the world’s as yet uncultivated arable land, and with the pressure on global food production already ramping up enormously, Africa looks tremendously attractive, at least on paper.
Moreover, agribusinesses needs infrastructure if produce is going to move from the farm to ports and to global markets without spoiling along the way. So these two opportunities are inextricably linked – but that does mean that problems with the former inhibit development of the latter, keeping investors somewhat wary of investing in agribusinesses and agribusiness funds that have Africa as a target. This is eminently fixable, however, and major projects have taken place and are taking place, that have a massive local impact in speeding up time to market. Things are getting better, but agri-investment in Africa still requires deep local knowledge.
Both agribusiness and infrastructure projects in sub-Saharan Africa very often require initial funding from donor organisations like the EU or the World Bank to get projects into the kind of shape to enable institutional money to commit. Unsurprisingly, therefore, the bulk of the agribusiness investment in sub-Saharan Africa comes not from private investors but from donor organisations like the International Finance Corporation (IFC), an arm of the World Bank.
As the IFC notes, crop production in much of Africa comes from small farms, run without much mechanisation. Many of the major crops produced, such as maize, rice and palm oil, are not competitive globally and generate low profit margins. According to the IFC, this means that as things stand sub-Saharan Africa is poorly equipped to meet its present food requirements with the existing agricultural framework and much will have to be done if it is to cope with the expected doubling in demand for produce over the next 30 years or so – never mind producing sufficient excess to supply food-constrained emerging countries like China.
There are clear synergies between agri-related investment opportunities in Africa. These cover investments across the agriculture value chain, up to and including expansion of port facilities and rail links – and infrastructure opportunities.
Where infrastructure projects are tightly connected with the anticipated flow of agricultural produce to ports or major urban markets, for example, stable revenue flows can be very achievable, particularly where donor investors like IFC take on the early project risk. IFC investments in the agriculture value chain in Africa amounted to some $550m (€398.2m) in fiscal 2012 and the IFC says it has now embarked on a five-year programme to increase its investments in agribusinesses in Africa to $2bn.
“Rising incomes in emerging markets mean that the world is adding around 70m new middle-class consumers every year, creating massive demand for a more varied and protein-rich diet,” says David Creighton, CEO of Montreal-based Cordiant Capital, whose clients provide senior debt across a diversified range of projects and geographies, with Africa being a major part of its focus. “South America and parts of Africa are the best sources of as yet uncultivated arable land, which can be developed to meet this demand.”
Cordiant’s investors are paid a dividend on a quarterly basis from fees and interest on the debt. The company is now on its fourth fund and targets a 7% return to investors. Projects include investing across the agribusiness value chain and infrastructure investments. Creighton reckons that most of the projects will be led by developers, perhaps with some donor funding, but that only a relatively small number of projects have private equity backing. “When we do projects in the US or North America, probably 70% of them will have PE backing,” he says. “In Africa it is probably no more than 20%.”
Frontier Markets Fund Managers (FMFML) specialises in providing senior debt for infrastructure projects across Africa. CEO Nick Rouse says that while there is private equity money backing infrastructure projects in various parts of Africa there is no comparison with the volume of infrastructure funds available in developed markets.
“The big problem with PE is that there are not enough quality projects about and not enough transaction volume to be worth the major PE firms putting a lot of resources into Africa,” he says. “We are probably at least 10 years away from that level. This is very much frontier financing. Generally we’ll do the senior debt with perhaps 30% mezzanine funding. The EU puts in some project funding and equity and thereafter it will be a mix of donor funding organisations and commercial banks, with Barclays and Standard Bank being the leading players.”
FMFmL has around $440m in its fund, largely from donor funding organisations with an interest in getting Africa moving. It has leveraged this to $1bn and takes senior debt positions on projects that pass its selection criteria. “About 40% of our portfolio so far has been in energy generation projects, and the rest across a diverse range of infrastructure projects,” Rouse says.
Perhaps the least risky way to play both agribusiness opportunities and resource extraction projects across Africa today is the line taken by Nicolas Clavel, founder and CIO of Scipion Capital, which has built up a $400m fund specialising in trade finance based on extensive research and analysis of the logistics trail involved in any farm-to-market projects.
“When we launched, we aimed at a 10-12% return to investors with a low degree of volatility, and this is roughly what we have achieved since we launched in 2007,” he comments. Investors are largely institutions and they are attracted, he says, by the fact that they get quarterly dividends with relatively low risk.
All the fund managers that IPE spoke to were unanimous that Basel III is a huge constraint to African banks getting involved in the kind of long-term funding that both agribusiness and infrastructure development demands. Clavel specifically cites the regulation as the reason he founded Scipion Capital in the first place.
“Basel III has created a real space for us to work inside,” he says. “When it appeared, trade financing virtually dried up. Mines and farming concerns need trade financing to get their goods all the way through the logistics chain that leads to markets, particularly overseas markets.”
Scipion finances goods all the way from the farm or mine gate to their arrival in Europe, China, India and the rest of the world. Clavel points out that, unlike a private equity fund, where the investor’s money is locked in and, in his words, “the fund is a prisoner to any nationalisation or political risk that comes along”, Scipion is dealing in short-term finance and can simply pause its operations in a particular locality if a situation starts to create alarm.
Momentum Investments, a subsidiary of MMI Holdings, the third-largest insurance group listed on the Johannesburg Stock Exchange, has an established Africa equities fund, a fixed-income fund and is about to introduce a real estate fund focusing on shopping mall developments.
“The trend is that South African retailers are expanding rapidly into Africa,” says David Lashbrook, head of Africa investment strategies. “We have a property development and management company called Eris that has been in the business for 25 years and has very strong relationships with the retailers, so we speak to these retailers almost on a weekly basis.”
He adds that the firm is seeing the most investor interest around this new real-estate product, as it is – out of the three asset classes of fixed-income, listed equity and property – “the best way to play the big trends in Africa, the rising middle-class trend”. That interest is coming from institutions at home and abroad.
“For the Africa real estate fund we have seen significant appetite from South African institutions, which have had a significant change in their pension investment rules that allows them to allocate up to 5% to Africa outside of the domestic market,” he says.
However, despite its willingness to innovate, Momentum has stayed away from both infrastructure and agribusiness, except via listed equities. Lashbrook reckons that farm-related investments across Africa are going to be huge in the coming decade but, so far, Momentum views agribusiness opportunities as higher risk and less compelling than real estate and fixed income.
Even so, Lashbrook still emphasises that there are huge value-add opportunities in agribusiness. “Most exports of agricultural produce from Africa are unprocessed and, as the Nigerian minister of agriculture pointed out at a recent press conference, half the tomatoes produced in the country rot by the roadside,” Lashbrook observes. “Projects to cut back on waste and add value are desperately needed.”
When even the sceptics buy into the argument, it might be time to take a closer look at the investment theme in question.