Guest Commentary

Agribusiness Private Equity: The Fertile Sector

Dalberg Global Development Advisors’ Peter Tynan and Detelina Kalkandjieva contributed the following guest article,
the product of their firm’s advisory work on behalf of clients in the agribusiness sector.

Planting the Seed: The Case for
Agribusiness Investing
The agribusiness sector presents investment opportunities far
beyond farming—from crop and livestock production, through
processing, packaging, storage and distribution, to marketing
branded-food products.
The scale and diversity of the agribusiness opportunity in emerg-
ing markets cannot be overstated. “It is difficult to put together
a diversified portfolio that doesn’t touch the agribusiness sector
somehow, as developing countries have a large portion of their
economies and workforces in the sector,” says Mildred Cal-
lear, COO of Small Enterprise Assistance Fund (SEAF), a global
emerging markets fund manager that has made approximately
40% of its investments in the sector.
Good Growing Conditions: The Global
Demand and Supply Imbalance
Global population growth—estimated at 9 billion people by
2050—will test the limits of current food production capabilities,
already at a breaking point in markets such as China that depend
on food imports. Nearly all of this growth is expected in develop-
ing countries, where food demand will be greater in both quan-
tity and quality due to improvements in living standards and in-
comes. Not only is caloric intake per person increasing, but diets
will also continue to shift from predominantly cereals-based to
protein-based. For example, in China each person consumed an
average of 20kg of meat in 1980 compared with 50kg in 2007.
Additional protein production will tax existing water supplies and
crop yields, already straining to meet a surge in demand for bio-
fuels crops as renewable energy sources.

The drivers for agribusiness investing align very well with emerg- As with nearly all commodities, food prices have risen dramati-
ing market demographic and industrial characteristics: rising and cally during the last decade (See Exhibit 2). Even during the
urbanizing populations with growing consumer classes are not 2008–2009 downturn, food prices held at nearly double 2007
only creating more demand for food, but consumer tastes are levels, and in 2009, the FAO food price index increased 94%.
shifting towards higher quality foods and more protein-intensive According to the International Food Policy Research Institute,
diets. In addition, profound structural inefficiencies—low yields, population pressure alone is expected to drive prices for the
high spoilage and waste, fragmented production and distribu- most important global crops substantially higher by 2050: 62%
tion, and generally poor infrastructure—make for a robust set for rice, 63% for maize, 72% for soybeans and 34% for wheat.
of opportunities from production to food retailing. “The lack of With climate change effects factored in, prices for staples may
big integrated [food and agribusiness companies] in the emerg- rise by as much as 130 to 170% by mid-century.
ing markets creates many opportunities for private equity to in-
vest in a fragmented space with substantial growth potential,” The global supply-demand imbalance is only expected to inten-
observes Richard Gilmore, CEO of the GIC Group, an agribusi- sify, making for attractive economics over the long-term. Ravi
ness investment services firm. The agribusiness sector also of-Sood is Chairman of Feronia Inc, an agribusiness investor which
recently completed the purchase of a 76% ownership stake in
fers abundant portfolio diversification options across geography,
commodity cycles, and global economic conditions. Unilever’s 100,000 hectare palm oil plantation in the Democratic
Republic of the Congo. Sood summarizes the long-term case for
Exhibit 1: Agriculture Sector, Value Added as a % of GDP (2008)
the agribusiness sector, noting, “Agriculture provides an econom-
35% ically incentivized commodity: food. People will continue to eat.”
31%
30%
Improving the Yields: Strategies to Take
25%
Advantage of Inefficiencies
Agriculture / GDP, %

21%
20% 18%
14% Agribusiness investments span three often distinct strategies:
15%
11% production, value chain (including infrastructure and logistics),
10%
7%
and inputs/technology. Many investors also find vertically-inte-
grated or branded food companies attractive investments in or-
5%
der to capture additional margin and to assume greater control
0% over many of the risks specific to the sector.
ia
ria

ca

ina

il
ny

az
Ind

fri
ge

Ch
Ke

Br
nA

Production: “Private equity in production agriculture in emerging

Ni

ara

markets tends to be a combination of actual agriculture and real

ah
b-S
Su

Source: World Development Indicators database. Continued on page 7

6 EM PE Quarterly Review Vol V Issue 4, Q4 2009

 Agribusiness Private Equity, continued from page 6

Guest Commentary
Exhibit 2: FAO Food Price Index the fund buys underperforming property where it adds value by
220 land conversion or efficiency improvement,” he adds.
Food Price Index (2002-2004=100)

200 Specific risks related to a production strategy include land is-

180
160
140
120
100
J F M A M J J A
2005 2006 2007
Source: Food and Agriculture Organization of the United Nations.
estate play,” according to GIC’s Gilmore. Huge swaths of undevel-
oped arable land are being offered by governments in Africa and
Latin America, at as little as one-sixth of developed country pricing.
A number of private equity funds are pursuing a production
and land acquisition strategy, particularly in Africa and Latin
America. Recent additions include Emergent Asset Manage-
ment and Grainvest’s African Agricultural Land Fund. Altima
Partners has raised a US$675 million One World Agriculture
Fund, and recently partnered with the IFC to form a US$75
million fund targeting land and farm operators in developing
countries. Pergam Finance’s US$120M Campos Orientales
Fund was formed in 2006 to buy farmland in the Southern
Cone of Latin America, mostly in Uruguay, but also in Argen-
tina. “Our strategy is to acquire large-scale turnaround farm-
ing properties and transform them into a productive portfolio
of farms, growing a diversified mix of beef, milk and crops,”
remarks Olivier Combastet, Pergam’s Chairman.
A production strategy aims for returns based on increased
production through improved agronomic techniques and effi-
ciencies. “Our fund is targeting about a 15% return, a third of
which would come from improving the yield and two thirds from
capital appreciation,” explains Pergam’s Combastet. “We avoid
debt. You can’t leverage investment in farming as cash flow is
unpredictable and cash on cash return is not very high. Instead,
sues and jurisdiction-specific treatment of property rights, rang-
ing from ensuring proper title and transferability to securing
buy-in among the local community. Investments in land can be
inherently contentious, exemplified by Korean conglomerate
Daewoo’s failed 2008 bid for 3.2 million acres in Madagascar.
Daewoo sought a 99-year lease on one-third of the island’s ar-
able land to cultivate maize for export to Korea. Resulting public
outcry resulted in the Madagascar President’s removal and can-
cellation of the deal.
S O N D
Value Chain: Investing in extracting efficiencies from the agribusi-
2008 2009
ness value chain—processing, warehousing, cold storage, logistics
and transportation—are the strategic focus of many dedicated agri-
business funds. Value chain investments also appeal to generalist
private equity funds investing selectively in the agribusiness space.
These assets provide more stable and often higher returns, so long
as issues like the quality and stability of supply, price discovery, ef-
ficient distribution, and branding can be addressed.
Robert Peyton, President of Burlington Capital Group’s Emerg-
ing Markets Fund, explains the appeal of mid- and upstream
value chain investments: “Margin consistency is more reliable,
more controllable in terms of business model and there is more
control over production. One of our most successful invest-
ments was a broiler production company where we upgraded
facilities and efficiency, developed the brand, and made a 5–6
times return on its sale to a large Russian meat company.”
Alejandro Quentin, Founder and CEO of Pampa Capital, a Latin
American agribusiness fund manager, sees better upside in
value chain investments, saying “There is less upside today in
the purchase of farmland. The space is overcrowded as gov-
ernments look to secure food production. Farming is a very
stable business however the returns are very low. Land appre-
ciation and operating income aggregate returns are well below
10–15%. However, the risk-return profile changes when looking
upstream and downstream. Investing in agribusiness can bring
20–25% by professionalizing and consolidating industries which
are in the hands of mom and pop types of owners, expanding
capacity, and supplying growth capital.”

Exhibit 3: Agribusiness Value Chain

Farm Trade & Wholesale & Distribution & Consumers
Inputs Processing
Production Distribution Trade Retail
Seeds Staples Farm processing Cooperative Land trucking
Fertilizer Livestock Consolidated processing Aggregation Ocean freighting
Irrigation High-value (exports) Packaging Silos Air freighting
Pest mgmt. Horticulture Quality standards & certification Cold storage Ports/roads
Land Import subst. Warehousing Contract farming
Equipment Branded products

Source: Rabo Equity Advisors, Dalberg. Continued on page 8

EM PE Quarterly Review Vol V Issue 4, Q4 2009 7

 Agribusiness Private Equity, continued from page 7
Guest Commentary
Exhibit 4: Sampling of Emerging Market Agribusiness Funds
Fund Manager Fund Name Geographic Focus
AC Capitales SAFI Agribusiness and Forestry Fund (2008, $50m) Peru
Actis Actis Africa Agribusiness (2006, $92.7m) Sub-Saharan Africa
Altima Partners Altima One World Agriculture Development Fund (2009, $75m) Africa, Central Asia, CIS
Chayton Capital Chayton Atlas Agriculture Fund (raising) Zambia
EFG-Hermes Private Equity Horus AgriBusiness Fund (2006, $46m) Egypt
Emergent Asset Management/Grainvest African Land Fund (2008, raising) Sub-Saharan Africa
GIC Group/Latin America Enterprise Fund 21st Century Latin America Fund (raising, $100m) Latin America
Louis Dreyfus Commodities Calyx Agro (2008, $65m) Latin America
Mellon Global Investments Brasil Rio Agribusiness FIP (2007, $13m) Brazil
Pampa Capital Management Pampa Agribusiness Fund (2007, $150m) South America
Pergam Finance Campos Orientales Fund (2006, $75m) Latin America
Pharos Financial Advisors Pharos Miro Agriculture Fund (2009, $350m) Eastern Europe, Africa
Phatisa Fund Managers African Agriculture Fund (raising, $300m) Africa
Rabo Equity Management Company India Agribusiness Fund (2008, $110m) India
Resource Partners Resource Eastern European Equity Partners I (2009, $200m) Central & Eastern Europe, CIS
Sanlam Private Equity Agri-Vie Agribusiness Investment Fund (2008, $100m) Sub-Saharan Africa
Small Enterprise Assistance Funds (SEAF) East Africa Agribusiness Fund (raising), India Agribusiness Fund (raising) East Africa, India
Vision Brazil Vision Agro Fundo de Investimento em Participacoes I (2007, $78m) Brazil
Source: EMPEA, Dalberg research

China represents one market with abundant value chain opportu-
nities around food processing and distribution. In 2009, interest
in China’s dairy sector in particular surged, due in part to attrac-
tive valuations given recent controversies around infant formula
manufacturing. Deals have included Sequoia Capital’s US$63 mil-
lion investment for a 10% stake in Feihe Dairy, and The Car-
lyle Group’s investment in Guangdong Yashili Group, one of
China’s largest infant formula manufacturers. In June 2009,
SAIF Partners injected US$15 million into Yayi International, a
Chinese goat milk formula production and retail brand. In late
2008, Kohlberg Kravis Roberts & Co. invested in Ma Anshan
Modern Farming Company for US$150 million in large scale
dairy operations. In the summer of 2009, Chinese state-owned
firm Cofco and private equity firm Hopu Investment Manage-
ment Co. jointly acquired a 20% stake in market leader Meng-
niu Dairy for roughly US$780 million.
SEAF is among the firms that recognize the opportunities in
agriculture-related logistics. “Great investment opportunities
are available in transportation and preventing distribution losses,
prevalent in the larger markets like India,” SEAF’s Callear noted.
“You need to invest in transport that can handle the frozen prod-
uct to get it to market without spoilage. Another investment that
can make a big difference is portable cool storage brought close
to the farms—early refrigeration or temperature controlled stor-
age can extend the shelf life of produce for weeks.” Global in-
frastructure funds and sovereign wealth funds are looking more
seriously at the logistics and transportation needs of the agribusi-
ness sector, searching for opportunities to support large scale
agriculture development. Vertically integrated production regions
are also being seeded, including the Beira Corridor Project in Mo-
zambique, which combines production, processing and transpor-
tation assets along a fertile growing region. The Transfarm Africa
Fund, currently in formation and sponsored by the Hewlett Foun-
dation, has committed to investing up to US$5 million in com-
mercial agriculture projects along the Beira Corridor.
Inputs/Technology: Another dimension of the agribusiness op-
portunity is in inputs and services, including technology related to
yield improvements. Some examples of the latter include Rabo
India Agribusiness Fund’s March 2009 investment in Sri Biotech
Laboratories India, a Hyderabad-based producer of pesticides and
herbicides. In July 2008, Origo-Sino-India PLC alongside Unilever
Technology Ventures invested US$12 million in Halosource, a wa-
ter purification technology company based in India. Other inves-
tors see opportunities in seed production and other inputs, such
as chemicals, fertilizers, feed and fodder. Examples include Mor-
gan Stanley Private Equity Asia’s US$39 million investment in Bio-
tor Industries, an agro-chemicals manufacturer in India, and The
Carlyle Group’s investment of US$15 million in China Agritech, an
organic fertilizer manufacturer and distributor. Over time, inves-
tors expect additional opportunities could emerge in agribusiness
services, including breeding and genetics, farming equipment,
leasing, irrigation, satellite farming services, quality testing and
veterinary services.
Beware the Locusts: Sector-Specific Risks
Agribusiness investment comes with a host of sector-specific
risks affecting all parts of the value chain. These risks are most
acute at the production end due to vulnerability to crop diseases
and weather, particularly storms and drought. “Monsoons are es-

Continued on page 10

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 Agribusiness Private Equity, continued from page 8
Guest Commentary
pecially problematic in India, as the country uses primarily rain-fed
agriculture,” says Rajesh Srivastava, Chairman of Rabo Equity
Advisors, an Indian private equity group focused on the agri-
business sector.
To mitigate production risks such as weather, investors seek
geographic and crop diversification, and to structure invest-
ments to minimize dependence on the production cycle.
SEAF’s Mildred Callear notes that approaches to managing
against production cycles and attendant price risks include
“quick-freezing to sell out of season to take advantage of
higher-prices, or building long-term storage facilities in areas
where they have not existed.”
Agribusiness also tends to be a heavily protected and reg-
ulated sector, which adds an additional layer of transaction
cost and unpredictability. “Superimposed on local production
variables are regional and country-wide regulatory interven-
tions that invariably impact on the return on agricultural in-
vestments, resulting perhaps in greater uncertainty than in
other private equity sectors,” says GIC’s Gilmore.
Investors in upstream processing and logistics stress the im-
portance of securing long-term supply contracts for inputs,
and diversification across production regions. Mitigating com-
modity cycle pricing risk is also important. Many investors
look for strong price discovery through long-term contracts
with traders, or supermarket, hotel, and other food retail buy-
ers. Vertical integration is another risk mitigation strategy
common among investors in agribusiness, not only to capture
margin but also to increase direct control over multiple risks
and inefficiencies along the value chain. Foreign exchange
risk, while an additional source of exposure for export-orient-
ed businesses, can alternatively offset exposure to local price
volatility. “We look for very high export ratios in our deals,
which helps create a natural hedge in currency positions,”
explains GIC’s Gilmore.
Harvest Time: Exit Opportunities
One challenge for investors is aligning the stage of the invest-
ment, particularly on the production end, with the life of a fund
and investor expectations. Greenfield land development or re-
development, e.g., plantation revitalizations, has large upfront
capital costs difficult to recover within the 5 to 6 year invest-
ment horizon typical of many private equity funds. The most like-
ly paths to exit are operating partner buy-backs, strategic trade
sales, and IPOs in certain markets, in addition to cash dividends
over the life of the investment.
Consolidation plays lend well to exit, as vertically integrated en-
terprises are particularly appealing to potential strategic buyers.
“The most appropriate way to exit is a strategic sale. There are
large international companies who wish to tap into the market
and are interested in homegrown companies,” says Rabo Eq-
uity’s Srivastava.
As the IPO window appears to be re-opening once more in
emerging markets, agriculture companies could prove attractive
candidates for listing. According to Joachim Schumacher and
Karl Weinfurtner of DEG, the German development finance in-
stitution with over €1.5 billion in agribusiness investments over
the last two decades, “In China the IPO exit is promising, par-
ticularly for branded food product companies.” Pampa’s Quen-
tin sees room for greater appetite for exposure to agricultural
companies, which account for 25% of GDP or more in some
markets. “We will see more and more IPOs as the demand
from investors for liquid investment vehicles in the agribusiness
space increases,” says Quentin. ■
About the authors: Peter Tynan is Partner and Head of Global
Access to Finance, and Detelina Kalkandjieva is a Consultant
with Dalberg Global Development Advisors, a global strategy
and financial advisory firm which focuses on emerging and
frontier markets.

Exhibit 5: Sampling of Agribusiness Deals in 2009

Total Investments Total Investment Investment
Fund Manager Company Company Type to Date (USDM) Equity Stake Date Destination
Hopu Inv. Mgmt./COFCO China Mengniu Dairy 785 20% Jul-09 China
Dairy
IGNIA Partners Pro-Organico S.A.P.I. Produce 3 N/A July-09 Mexico
Jiuding Capital Baiyang Haiwei Seafood 12 N/A Sep-09 China
Seafood
NBK Capital Kilic Denez Aquaculture 15 N/A Jun-09 Turkey
Rabobank International Sri Biotech Fertilizer 9 N/A Mar-09 India
SAIF Partners Yayi International Infant formula 15 N/A Jun-09 China
Sequoia Capital China Feihe Dairy Infant formula, nuts 63 9% Aug-09 China
The Carlyle Group China Agritech Fertilizer 15 17% Oct-09 China
TriNorth Capital / Feronia Inc. Plantations et Palm oil N/A 76% Sep-09 DRC (Congo)
Huileries du Congo

Source: EMPEA, Dalberg research.

10 EM PE Quarterly Review Vol V Issue 4, Q4 2009