Private equity holds ace for rapid agribusiness development

by | January 6, 2018 3:16 pm

Funding agriculture in Nigeria remains a limiting factor for growth in the sector as it is nearly impossible to significantly expand operations.

Getting bank loans for the agric sector is a challenge which has limited expansion and improvement of productivity. At the same time, it appears Nigeria is faltering in adequately tapping from private equity investments in Africa.

Ade Adefeko, Vice President, Corporate and Government Relations at Olam Nigeria, remarked that “it is becoming increasingly difficult for individuals and even government to fund agricultural ventures, particularly processing and production plants. Therefore, Private Equity/Venture Capital firms put in equity after proper evaluation and sell after a while, or hold on depending on their risk appetite.”

The African Private Equity and Venture Capital Association (AVCA) in its Annual African Private Equity (PE) report for 2016, noted that “Overall, there were 145 PE deals reported in Africa over the course of the year, amounting to US$3.8bn – versus US$2.5bn in 2015 – highlighting the robust nature of Africa’s investment landscape amidst global headwinds and worldwide political shifts.”

However, from 2011 to 2016, West Africa (including Nigeria) has attracted only 27 percent of private equity deals in the continent. South Africa alone (as a country), attracted 22 percent. Out of what comes to Nigeria, even less goes to agriculture.

In spite of continuous diversification rhetoric, unavailability of adequate funds is often blamed for the inability to scale agribusiness in Nigeria to match these aspirations.

Frans Ojielu, Global Financial Advisor, ICMG Nigeria, expressed the view that “attaining food sufficiency and security in Nigeria and indeed Africa, requires access to financing for agricultural development. The traditional commercial banking facilities are not well suited due to many reasons including extensive monitoring and evaluation processes required by banks for funds deployed.  Development finance and innovative financing in terms of private equity and venture capital are required.

As Ojielu observed, though the role of private equity and venture capital is well known in Nigeria, not much has happened except in the technological space where venture capitalists have assisted tech start-ups with promising returns.

Even though the possibilities for PE/VC firms to invest in Nigerian agriculture are considered to be improving, the prevailing reality at the moment is that Nigeria’s agricultural sector is yet to attract as much private equity activity which would be significant enough to match the country’s potentials and national aspirations.

“For a market as big as Nigeria, we have not had as much Private equity activity as we should,” said Kazim Yusuf, CEO, Kord capital, an investment advisory firm in Lagos.

As Yusuf observed, inadequate private equity activity is a problem with Nigeria generally, but “when you now move into a sector like agriculture, it becomes even more problematic, because even people with experience investing in the Nigerian economy have challenges with agriculture. The agricultural sector has even peculiar challenges.”

One of the characteristics of Private Equity that will suit agriculture includes being a long-term form of investment; willing to commit resources and expertise to develop a business over several years. They are also targeted at businesses with high growth potentials, a value also provided by agriculture, especially in Nigeria.

However, data and the lack of it, is a problem in Nigeria. Often overlooked and the lack of it accepted as the norm, data is important for investors in decision making. But in Nigeria, many businesses, particularly in the agric sector, are unable to meet the due diligence requirements to be found attractive by PE investors, added to this, poor governance structures by many agribusinesses.

“Private equity operates in a terrain where there is structure and process. And that is partly why private equity hasn’t grown in Nigeria and other unstructured markets in Africa,” noted Yusuf, Kord capital’s CEO.

“Private equity functions where there is enough data to work on because private equity operators typically require data in order to deploy resources to invest in or manage businesses. They will look at credit ratings, audited accounts, corporate governance structure, among other criteria and all these will influence the investment decision,” Yusuf said.

Mezuo Nwuneli, managing partner, Sahel Capital Agribusiness Managers Ltd.,  also corroborates some of the criteria identified by Yusuf, saying “If a company is interested in raising private equity capital, it is paramount for it to ensure it actively works to strengthen its corporate governance. A robust governance structure could even enable it to secure better valuation pricing during investment negotiations.”

Timilehin Olaiwola, a business analyst at Investment One Vencap also identified challenges of PE in gaining traction in Nigeria as “Poor information aggregation and dissemination about agric business.”

According to Olaiwola, “The International Institute for tropical Agriculture (IITA) cannot do all the work, we need more IITA’s. As investors we need to see how profitable the business will be but if there is a great deal of information gap, then it is tough for investors to predict or model future performance.”

Other factors include; price instability which at times affects the quality of output when producers try to save costs; storage capacity, considered to be at a nascent stage, hence post-harvest losses remain huge and make the industry unattractive to investors.