After years of neglect, banks, private equity funds and microfinance institutions are bringing capital to African agriculture.
Africa’s agriculture sector has struggled to access the financing it needs for sustained growth. In part, a perceived combination of high risk and modest returns – as well as the costs of extending traditional banking infrastructures in rural areas – has deterred many banks and financial institutions.
“There can be failures in critical infrastructure such as inadequate cold storage facilities, unexpected disruptions in commodities trading, lack of adequate feeder roads to production areas, inadequate dry storage facilities, and congested ports prohibiting the export or import of products on time,” says Chomba Sindazi, director of Standard Chartered’s solutions structuring team for Africa. “And there can also be delays in the supply of critical inputs such as fertilisers, seed and fuel because of difficulties in getting goods to market. This is a particular problem in landlocked countries where it can sometimes take as long as four months to get the inputs to the required areas.”
Without tackling these constraints, and their knock-on effect on lending, talk of Africa’s green revolution is premature. But solutions are emerging at last, as banks, NGOs, micro-lenders, governments and investment funds make inroads into the continent, bringing much-needed capital to bear.
For large banks, Africa’s rural sector was long seen as a problem. Just 10 percent of Africans with only primary-level education – which is the majority of those in rural agriculture – have a bank account, rising to 55 percent for those with a post-secondary qualification. But rather than writing off this population, forward-thinking banks have sought to find new vocabularies to speak to them. Togo-based Ecobank has proven popular for its simplified language and procedures, which are more accessible to a wider range of customers than global banks.
Standard Bank, which has operations in nearly 70 countries worldwide, has also reviewed processes to suit the kinds of financial information more commonly found in the informal and small-scale sector. It has also broadened its range of services to include technical expertise for lendees. The combination of lending and advisory services is critical, helping the bank protect its portfolio, and helping customers gain credit and repayment track records.
Standard Chartered shows the same trend. Instead of looking to traditional collateral, Standard Chartered uses the value of the commodity being financed as collateral for input financing – as opposed to conventional mechanisms where collateral is secured through physical assets and balance sheets. According to Mr Chomba: “Risks associated with the cultivation of a range of soft commodities are mitigated through a customised multi-peril insurance policy, and operational issues are addressed through physical inspection and regular reporting by a team of independent specialised contract managers and insurance companies.”
The arrival of major banks bodes well for the efficiency of the sector overall. “Banks are interested in investing in businesses and entrepreneurs that are going to make money and are going to pay them back – either interest or return on some form of an equity. As businesses that are profitable come into the agricultural value chains, that is going to bring in the financing that will support those businesses,” says Gary Toenniessen, managing director at The Rockefeller Foundation.
Equity financing provides an interesting – and fast-growing – source of capital. According to the Emerging Markets Private Equity Association, total private equity capital raised for sub-Saharan Africa in 2012 was $1.4bn. Agribusiness is proving one of the primary draws. The Carlyle Group, one of the world’s largest private equity firms, made its first Africa play late last year, as part of a consortium that included Pembani Remgro Infrastructure Fund and Standard Chartered Private Equity.
The fund invested $210m in the Export Trading Group (ETG), a Tanzanian agribusiness with interests in 29 African countries. ETG, which manages both intra-African and global supply chains and has more than 7,000 employees, says the investment will enhance its ability to connect African smallholder farmers with consumers around the world. The capital will expand the company’s geographical reach while adding to the quantity and variety of products – which currently includes commodities ranging from sesame seeds and cashews, to rice and fertiliser.
Private equity can bring broader structural changes too. A part of the Carlyle consortium investment will go towards building infrastructure to allow processing to take place in east Africa. “Typically the margins in processing are much greater than they are in pure acquisition and distribution, so part of the capital will be used to put up processing facilities around the continent,” says Marlon Chigwende, managing director and co-head of the sub-Saharan Africa buyout advisory team at Carlyle Africa.
Other PE funds and investment actors are also showing a strong interest in African agribusiness. Phatisa’s African Agriculture Fund, which focuses on small and medium-sized enterprises, signed its first deal in 2012, backing Cameroon’s West End Farms. The same year, Morgan Stanley Alternative Investment Partners and Capitalworks bought out South Africa’s Rhodes Food Group.
But growing the base of PE capital available to the region will take time, according to Mr Chigwende. “FDI remains a very important component of the LP structure base in a lot of the funds, they are the majority of the capital. And so I think as an industry what we need to do is attract more non-DFI international capital to the region,” he says. “I think that is a process of education. There are a lot of LPs that are increasingly looking at the region.”