As Private Equity continues to regard African agribusinesses with caution, it is clear that a different investment model is needed to cater for this high-impact yet oft-ignored sector that has the potential to transform the face of the continent by ensuring food security for a sizeable population of 1.4 billion, while saving African economies precious foreign exchange spent on mounting food imports each year.
Agribusiness is the most important economic activity on the African continent with a contribution of almost 25% of the GDP and a staggering 70% of employment, providing a livelihood to hundreds of millions of people. Even by global standards, the agri-food industry in Africa is a force to reckon with, as the continent boasts 60% of the world’s unexploited arable land and is home to abundant water resources as well as a variety of fertile soils and conducive climates that support the growth of the world’s most important and nutritious crops.
Yet, despite the considerable human labour working on some of the most extensive tracts of arable land left in the world, the continent is still not growing enough food to feed its population. The low agricultural yields are largely due to the lack of investment into basic efficiency raising measures such as irrigation systems, mechanisation, and adequate storage facilities. Up to 70% of farmers cultivate parcels of less than two hectares manually. No wonder then that Africa imports most of its food, with the continent’s food bill increasing year-on-year and expected to hit $110 bn by 2025.
Even with such a sizeable food import bill, Africa continues to face a mounting food crisis. Over 224 million people on the continent live in households where at least one person during the year has been forced to reduce their food intake, skipped meals, gone hungry, or gone a whole day without eating. As many as 610 million people live in households where at least one person was forced at times during the year to eat low-quality diets or reduce the quantity of food they would normally eat. And Africa is the only region in the world where the number of stunted children has risen in the past twenty years.
It then appears paradoxical, that, despite global investors actively funding other crucial industries in Africa such as financial services, telecommunications, infrastructure and technology, African agribusinesses, with all their potential to create significant impact, are not an area of focus. Indeed, Africa as a whole has been attracting significant interest from the private equity industry with investments having increased by 80% over the past 6 years. However, despite a clear upward trend in private funds invested in Africa over the past years, agribusiness on the continent remains the stepchild of private funding.
Digging deeper into why African agriculture sees tepid interest from PE investors
Private investors have historically overlooked Africa’s agribusiness industry for the following reasons:
Search for quick gains vs real impact
Typically, a private equity fund has a life span of no more than 10 years and an average investment holding period of 4-5 years, meaning that all the investments made by the fund must be liquidated (i.e. exited) in that time, either by selling out of the companies and assets the fund has acquired or taking the companies public by listing them on a stock exchange. At that point, the investors will recuperate the capital invested plus their share of any profits, minus the fees paid to the fund managers.
Insufficient understanding of risks in the real economy
The risks associated with disruptive exogeneous factors such as climate change are significantly higher in agribusiness than in other industries. This is compounded by the fact that there are not enough agribusiness experts on hand to enlighten investors and help them mitigate risks with the right structuring of investment vehicles.
Unrealistic return expectations vs holistic return measurement
The financial returns in the agribusiness industry usually do not match the high expectations of PE investors who attempt to benchmark tangible returns with other sectors such as FinTech. In doing so, they fail to factor in the real economy’s potential for far greater impact on livelihoods and economic sustainability on the back of its employment intensive nature and ability to offer food security.
Smaller size of investments means fewer investors, less risk sharing
African farming means smaller investment tickets as 70% of the cultivation is done by smallholder farmers. In contrast, other long-gestation projects such as infrastructure, for example, require large, often multi-hundred-million-dollar investments supported by large sponsors. Such infrastructure project finance can then be tightly structured and risks can be shifted to various parties—again, this is generally not the case with agribusiness.
Where AlphaTalents Africa comes in
AlphaTalents Africa is a purpose-driven investment company supporting the creation and growth of profitable, sustainable and impact-centric agribusiness ecosystems in Africa. Our primary goal is to invest patient capital in companies that will help advance the pan-African agribusiness industry to the next level.
As a core value proposition, AlphaTalents Africa’s investment vehicle has a 20 years lifetime, matching the long-term funding needs of the agribusiness industry. Whereas most investment vehicles are tailor-made/designed specifically to attract funds from a pre-targeted population of investors, our investment model is built to address a systemic pain-point in the African agribusiness industry: The gap between the long-term funding needs of agri-food businesses and the short-term investment horizon of traditional actors of the private equity industry.
The raison d’être of AlphaTalents Africa then is to offer a much-needed alternative to the traditional equity investment model that is clearly not working as far as the African agribusiness sector is concerned.
“By bringing patient capital to the table, we seek to unlock the potential of this strategic sector with a holistic approach to agri-stakeholders that creates measurable and sustainable value across the human, social, environmental, and financial pillars of our investment model. Those four core pillars of value creation are the basis of AlphaTalents Africa’s performance measurement.” – Roland Decorvet, Founder, AlphaTalents Africa
Moreover, AlphaTalents Africa invests through a multi-dimensional lens straddling early to growth stage businesses across a network of interconnected industries. True to our firmly rooted conviction that agribusiness cannot thrive in a vacuum, we allocate up to 25% of the capital we invest towards such ancillary industries as education, energy, healthcare, logistics, technology and financial services that, in varying degrees, affect the agribusiness value chain.
Finally, we have a supporting yet pro-active approach with our investee companies, with senior food industry and investment experts at management, investment committee, and advisory levels bringing to the table an in-depth understanding of the long investment lifecycle needed to realise the sector’s true potential.
Growing investments to yield the right impact
According to a study by McKinsey & Company, Sub-Saharan Africa requires an investment of $8 bn for improved storage and $65 bn for irrigation to achieve its agricultural potential. In terms of inputs, farmers across the region need eight times more fertilizer and six times more quality seeds to reap the most from their soil.
Against this sobering backdrop, Russia’s invasion of Ukraine and the attendant complications in the supply chain have exacerbated the problem of food security in Africa. Indeed, the World Food Programme estimates that an additional 30 million people in Africa are facing a crisis due to the war. It is clear then that the African agribusiness sector needs support more than ever before, as more and more livelihoods depend on its ability to feed a population facing growing threats to food security.
At AlphaTalents Africa, we are ready to support African agribusinesses as they gear up to face this mounting challenge. Are you an investor looking to make an impact in Africa and help resolve such pressing food security threats? Talk to us, and let’s figure out how we can fight this scourge together!
