November 27, 2017

The African Development Bank (AfDB) has approved a $10 million investment in the Phatisa Food Fund 2 (PFF2) to forward the mission of boosting agriculture and nutrition across Africa.

Phatisa announced the launch of the 10-year PFF2 earlier this year. The second generation fund was established with an initial commitment of $75 million from the Overseas Private Investment Corporation (OPIC), the development finance institution of the U.S. government, and a focus on investment opportunities along the food and consumer goods value chain in sub-Saharan Africa.

PFF2, which is aiming to raise $300 million, follows its predecessor, the $246 million African Agriculture Fund (AAF). Launched in 2009, AAF was designed through a coordinated effort by a consortium of European and African financial institutions to be a fund that would have a positive impact on agriculture and food production in Africa through a pan-African approach.

From its capital pool, AAF pursued management buy-outs and buy-ins, acquisitions, early stage minority and majority stake investments, expansions, and outgrower and smallholder scheme development investments of between US$5 million and US$24 million within three subsectors of the agriculture and food sectors:

Primary agriculture – including greenfield projects, dairy and livestock production, aquaculture, ranching, fruit and vegetable production, and edible oils.

Secondary agriculture – including wheat, corn and sugar milling and refining, soybean processing, production of animal feeds, branded foods and beverages, and packing.

Tertiary agriculture – including logistics, storage, seeds, subcontracting, inputs, crop protection, fertilizers, and finance.

Diverting away from AFF’s investment model, Phatisa’s strategy for PFF will not include investments in primary agriculture, but will rather focus on providing expansion capital for businesses in integrated food production, processing, services and inputs (seeds, fertilizers, and agrichemicals), distribution, logistics, infrastructure, packaging, foodservice and retail, and mechanization.

“PFF 2 will be a food fund, agriculture is an undercapitalised market segment, but the change is that the investment cycle of traditional PE does not suit primary agriculture, which requires a longer period of investment and more patient capital,” Stuart Bradley, founder partner of Phatisa, told Africa Global Funds in March of this year.

Advantage in Africa

A combination of macro factors are aligning in the sub-Saharan region indicating positive opportunities for investment along the agriculture and food value chains in the region, and across the African continent.

Africa is positioned to play a key role in increasing global agricultural output, according to the Africa Agribusiness Insights Survey 2016 released by Price Waterhouse Coopers (PwC). Agribusiness currently accounts for nearly half of sub-Saharan Africa’s GDP and is set to grow to a value of US$1 trillion by 2030, according to the World Bank.

Underlying this is a working age population between 15 and 64 that is on pace to outnumber the same age group for the rest of the world combined by 2035, according to the IMF.  Furthermore, income per capita within the sub-Saharan region is set to increase by 25 percent by 2050, and by 55 percent by 2100.

Additionally, as oil and commodity prices decline, oil-rich African nations, once dependent on capital resulting from high oil prices in recent years, are now looking for ways to diversify their economies, and are turning to agriculture as a reliable inflation hedge with a low correlation to traditional asset classes.

Evident trends such as these are attracting private equity into the region’s agriculture and food spaces in recent years.

In August 2016, Rabobank, Norway’s Norfund, and FMO partnered through the pooling of currently held stakes in several financial service providers (FSPs) in sub-Saharan Africa to create a new investment company called Arise.

Moreover, in March of this year, South Africa-based Pole Star Management Ltd. – the top-rated hedge fund in Africa/the Middle East over the past five years – announced it is launching a food-focused private equity fund that will capitalize on food demand through investments in agriculture on the African continent.

Within the next 25 years Africa will need to feed an additional 750 million people, according to the report, The Future of Food Demand: China, Africa and India, issued by CME Group. And together with the continent’s young average age, low per-capita calorie consumption rate, increasing urbanization, and rising standards of living, the continent poses a huge opportunity for investors engaged along the food chain.

-Lynda Kiernan