Tale of a hungry Nation and an Agric sector starved of funds
The tale of agriculture in Nigeria is sad, no doubt. The sector has been abandoned for decades in favour of oil dollars which has seen millions of small holder farmers grapple to survive, lacking access to funds and support to improve food production. At the same time, the entire country has become challenged in terms of food security. Even when considered to be a conservative estimate, Nigeria’s food import bill presently stands at $22.5 billion.
The country’s 2017 budget at N7.4 trillion, when converted at the Central Bank of Nigeria (CBN) exchange rate of N305 to $1, gives about $24 billion. By implication, if all the country were to do this year is feed the nation, it would have been unattainable with the budget, especially as the budget has a deficit of almost one-third.
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.
Inaccessible bank funds, what next, Private Equity?
It has become an anthem for many people in the agric sector to recite the challenge of funding when asked of the problems confronting them.
“I cannot approach banks for loan at 30 percent interest rate. The Agric intervention funds at single-digit interest rate are not accessible, they are mere political statements,” said Bode Adetoyi, chairman, Poultry Association of Nigeria (PAN), who also lamented that the “poultry industry and feed business is already collapsing and farms, feed mills are closing every day,”
Ada Osakwe, CEO, Agrolay Ventures, puts the financial logjam in perspective, explaining that “In Nigeria’s Agriculture sector, securing capital through commercial banks is typically hard to access and expensive. In spite of the large financing needs of agricultural actors, the public and private sector have not devoted sufficient financial resources for impact. Commercial banks lend only 5 to 10 percent of their loan portfolios to the sector, and focus more on sectors they perceive to be less risky, like the oil & gas and telecoms industries.”
As Osakwe, one of Nigeria’s leading agripreneurs observed, even with the introduction of risk sharing financing facilities (e.g. NIRSAL) to encourage increased agricultural lending by commercial banks, these have not been widespread enough to make a meaningful impact as there continues to be a general unwillingness of commercial banks to put their balance sheets to work in the agriculture sector.
Private Equity & Venture Capital to the Rescue or Still a Mirage?
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.
Getting bank loans for the agric sector is a challenge which has limited expansions and improvement of productivity. At the same time, it appears Nigeria is also 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.”
Ojielu had also said that “the current concept of agribusiness (science and business aspects of agriculture combined) and the development of corporate structures have positioned operators in the sector to access private equity and venture capital.”
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.”
Ada Osakwe, Agrolay’s CEO, also shared the view that “PE has not focused enough on financing the agriculture sector in Nigeria.”
“Agric is perceived to be unviable, as many agricultural enterprises are not considered ‘investable’ or mature enough for PE capital. Instead, like the commercial banks, most PE fund managers focus on the, telecoms, extractive and consumer sectors, which collectively received about 60 percent of Africa PE financing in 2016,” noted Osakwe, who was a Senior Advisor in government and participated in designing the Fund for Agricultural Financing in Nigeria (FAFIN), a PE fund entirely focused on investing in SME agribusinesses.
Osakwe offered more perspective, explaining that unfortunately, with FAFIN and other PE funds, their agriculture investments are still limited by the need to invest in deals with a minimum legitimate operating history. Most Nigerian agriculture enterprises have been unstructured, or are really only in their early-stages, and so do not meet this requirement. Furthermore, many PE funds have minimum investment sizes from between $10 million and $50 million, numbers that are far above what the majority of Nigerian agribusinesses can absorb.
As a result, PE activity is further constrained in deploying capital because they are unable to find the agribusiness transactions that fit their investment strategy.
“It is mainly for these reasons that I believe agriculture financing should move away from PE and bank credit, and instead, focus on venture capital, whereby investments are made in much earlier-stage businesses and for smaller ticket sizes. This way, available financing will be a lot more relevant for the thousands of Nigerian agripreneurs in desperate need of funding,” Osakwe said.
Opportunities abound, but uncertainties make investors wary
Nigeria, with a $22.5 billion food import bill, representing potential for revenue if local solutions are developed to retain this sum, also has over 80 million hectares of arable land with less than half of it under cultivation. The potential for growth and steady flow of revenue in a consumer driven nation of 180 million people, with broad influence over the rest of the sub-region has been underutilised. Nigeria still holds very good prospects for investments given its large untapped resources, growth potential and substantial infrastructure requirements.
Mezuo Nwuneli, Managing Partner, Sahel Capital Agribusiness Managers Ltd, whose company recently closed $65.9 million funding for agriculture in Nigeria, identified the potentials for PE in Nigeria, saying “it has the ability to provide growth capital to selected high-performing companies to enable them rapidly scale-up. Even more important than the funding is the technical and operational support that private equity firms can provide companies.”
Osakwe also noted that “Private Equity (PE) serves as a credible alternative to credit from banks, providing an alternative source of financing that is particularly important for companies that seek to thrive in markets like Nigeria, where access to credit is limited.”
“The PE investments, apart from being a good source of financing, also provide capital leverage that is especially important for agricultural companies constrained by limited access to credit. The equity serves as an essential layer in the capital structure that then attracts credit for further growth,” she said.
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.
Nwuneli 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.
Agribusinesses advocate “Patient Capital”, Investors require standards: An impasse?
At the risk of appearing to want an easy way out, funding agriculture through private equity does not appear to be straight forward for agribusinesses. The rules which apply in structured markets are considered unrealistic in Nigeria, thereby discouraging potential investors, as many local businesses find change hard to accomplish in meeting required standards. An impasse it seems.
Rotimi Williams, an agripreneur in his 30s, owns the 45,000 hectare Kereksuk Rice farm, presently, the second largest commercial rice farm in Nigeria, he said “there is a need to have funds that are dedicated to the development of Nigeria and Africa, and understand the challenges in developing countries, so that their criteria are better tailored to those issues. Not coming with generic funds from Kenya or South Africa where the agricultural sector is already relatively developed, and expecting that model will be adaptable here. It’s not going to happen.
“They need to create funds that speak to the issues in developing countries like Nigeria,” Williams said.
The view is shared by Agrolay’s Osakwe, who also remarked that what agriculture in Nigeria needs is “patient capital”. Whether or not potential investors will share these views, is yet to be seen.
Williams described conditions by PE investors as tough, saying they often “request two year audited financials, and want the company to be setup in a certain way. We are talking about farms, and they are not going to get that. So, limitations are already within the criteria and also the fact that they are coming into an industry where agriculture itself has been neglected and suddenly you are looking more at Brownfield than Greenfield operations.”
Adefeko, Olam’s Vice President, described agriculture as a very risky sector particularly in the area of crop production and the sector needs to be de risked. According to him, investors need to deploy patient capital and have a long term view. In addition, they need to understand the economics and cycles.
“I often tell investors they need to understand the economics of every sector; Aviation economics, Telecoms economics, and Agricultural economics is no different,” said Adefeko.
The limitations in business structures, as Nwuneli and Yusuf earlier identified, will perpetually deny the Nigerian agric sector of adequate private sector funding, regardless of its excuses in terms of neglect over the years.
All hope in securing funds may not be lost.
Ojielu, ICMG’s Global Financial Advisor, opined that, “with the approval given to Pension funds to invest in private equity, we envisage a future where there will be huge flows to private equity that will dovetail to agricultural development projects especially in the areas of processing and scientific application.”
The securities & exchange commission in a report on trends in private equity market, described PE as an added form of diversification for PFAs as the Nigerian stock market does not adequately reflect the economy with the absence of sectors such as oil and gas (upstream), power, telecoms, and Agriculture.
The Nigerian market is considered big enough to attract more investments, as it has the capacity for multi-billion dollar internal growth, added to this; it also feeds into the West African/Sub-Saharan Africa market, a further demonstration of its enormous potentials.
Big Read |