EA agrobusinesses next stop for private equity

African Agricultural Capital (AAC), is seeking to consolidate its capital base with a $25 million funding from international investors interested in both financial and social returns from Africa’s budding agricultural sector.

AAC, which is among the pioneer private equity firms targeting agricultural enterprises in East Africa, has in the past five years invested $10 million in 17 enterprises.

Tom Adlam, AAC’s managing director says a rise in the demand for food in the region makes investments in agrobusinesses a worthwhile venture.

“The agricultural sector is constantly growing and creating opportunities for entrepreneurs to develop successful businesses,” says Mr Adlam.

He adds that the region’s agricultural potential is reflected largely in big gaps within the value addition chain, triggered by a population surge especially in urban centres, which translates to competitive long term returns on investment.

Unstable weather conditions leading to drought in various parts of East Africa in recent months have added to the rising demand for food especially cereals such as maize.

This demand has also triggered new prospects for higher production, post harvest distribution activities and agro processing for household products such as maize flour, milk, rice and eggs.

Inefficient production methods by many small holder farmers have created significant opportunities in farming inputs like seeds, mechanisation, upgraded infrastructure such as roads and bridges that are bound to increase productivity and farmers’ incomes when implemented.

Emerging improvements in policies that guide the agricultural sector, including tax relief on interest earned on agricultural loans and equipment will also boost returns on investments.

Long standing financing gaps in the agricultural sector, particularly for affordable long term debt and equity capital have also provided huge entry opportunities for specialised private equity players.

AAC empowers small holder farmers in East Africa through strategic investments in local seed companies and export enterprises.

Its investment vehicles are African Seed Investment Fund and African Agricultural Capital fund.

Mr Adlam blames the limited presence of African private equity firms in the region on long turnaround time on investments particularly those related to infrastructure, and relatively few investment professionals.

The former scenario is referred to as the “J-curve” effect which provides for three years before an equity investment realises profit.

Most investors find this unattractive unless they have different funds in varying life cycles of progress.