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Top Hedge Fund in Africa Launching Food-Focused PE Fund

March 6, 2017

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 continent.

The firm is targeting 1.5 billion rand (US$115 million) for the fund, through which it will acquire small farms and food processing operations in South Africa. The fund, which also may acquire grains, is planning to then raise its portfolio value through improved management and consolidation, to realize an expected internal rate of return of between 8 and 12 percent, Polar Star Director Murray Derksen told Bloomberg.

The Potential Therein

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.

Meanwhile, in “Ending Poverty and Hunger by 2030: An Agenda for the Global Food System” – another report issued in 2015, the World Bank states that food demand in sub-Saharan Africa is projected to climb by 60 percent over the next 15 years

These shifts in demographics, consumer tastes, and urbanization are resulting in a projected increase in food imports from a value of US$35 billion in 2015 to US$110 billion by 2025.

This growing volume of imports not only indicates a strong and growing demand, but is also indicative of the potential for agricultural and agribusiness investment to transform Africa’s supply chain into a business model offering value addition while also creating wealth and providing greater food security.

Tapping into this dynamic, in August 2016, a consortium of European investors including 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.

With a presence in more than 20 African countries and $660 million in initial assets, Arise was scheduled to begin operations starting January 2017, allocating new capital investments to strengthen FSPs serving rural SMEs and those with no previous access to financial services, eventual growing to a $1 billion institution.

“Rabobank’s activities in investing and building strong financial service providers in emerging economies, especially Sub-Saharan Africa, truly fit our Banking for Food strategy,” said Berry Marttin, Executive Board Member of Rabobank, who noted to FT the macro trends present in Africa that make it a compelling long-term investment space.

“The population growth projections mean there is upside potential,” he said. “We have a focus on food production and local banks provide access to finance for farmers which will support that development.”

Polar Star foresees growth originating from the same trends, stating that Africa’s population will see the fastest growth rate in the world for the next decade – necessitating an increase in food production of 60 percent, according to Washington-based Brookings Institution.

“We looked at the increase in corn demand globally, which is about twice South Africa’s annual production,” Derksen told Bloomberg. “That growth will need to access land and infrastructure in Africa.”

The advancement of Africa’s infrastructure will indeed need to play a vital role in the continent’s maturation of its agricultural production.

The support of the expansion of the agribusiness sector requires not only investment in agricultural assets but also in production efficiency. Within this need, 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). African countries are dedicating more resources to improving output within their agricultural supply chains through leveraging agricultural technologies, the development of irrigation schemes, storage infrastructure, transportation networks, and training programs.

Despite these advances, the African continent still spends $25 billion on food imports per year. However, given the continent’s projected population growth, calorie consumption gap, urbanization, vast arable land bank, available natural resources, remaining yield gap, and supply chain inefficiencies, there exists a significant but nascent potential for return on agricultural investment in the space.

 

-Lynda Kiernan

Lynda Kiernan is Editor with GAI Media and daily contributor to GAI News. If you would like to submit a contribution for consideration please contact Ms. Kiernan at lkiernan@globalaginvesting.com.

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