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December 30, 2010

Social responsibility a growing feature of investment in African agriculture

by Carey Gillam

Africa as has long been a target for wealthy philanthropists who donate money in a fight against the continent's poverty, disease epidemics and food shortages. Now, taking a cue from the nonprofit world, profit-hungry investors are eying Africa in a new way, putting a charitable spin on their pursuit of double-digit returns.

Whether it's making loans for refrigeration trucks serving a fishery in Sierra Leone, or financing an organic cotton undertaking in Uganda, more investment groups are following in the footsteps of grant-making philanthropists as they put their money to work on projects in some of the world's poorest countries.

"It is the decade of agriculture in Africa. Food security will become the next tradable commodity," said Soros Economic Development Fund President Stewart Paperin. "You don't have to swoop in and say I'm going to take all of your crops. You can operate in a responsible way and still make money," he said. "This is just basic blocking and tackling - how you build an economy."

A number of charitable foundations, including the Rockefeller Foundation and the Bill & Melinda Gates Foundation, have targeted the continent for years with programs to help improve food production through agricultural upgrades.

As profit-seeking investors grow more interested in Africa, the two sides are starting to team up.
One of the newest such efforts is the "TransFarm Africa Transformation Fund (TFA Fund)," a private equity investment vehicle aiming for 15 percent returns by investing in "growth-oriented, mid-scale commercial farms and agri-businesses whose business models incorporate small farmers and small and medium-sized agricultural enterprises."

The fund, managed by Lion's Head Global Partners, a London investment bank, was the brainchild of the Menlo Park, California-based William and Flora Hewlett Foundation. The foundation has $6.7 billion in assets and a long history of funding anti-poverty programs around the world.

"Basically, millions of small holder farmers have to go through a transformation from being subsistence to commercial producers,,, and by doing so, help maintain Africa's march toward economic growth," said TransFarm Africa Director Kurt Hoffman in an interview from Johannesburg where he was meeting with investors.

Hoffman said the TFA investment fund has commitments of nearly $20 million so far. It is focused on aiding mid-sized commercial farmers and agribusinesses in processing and distribution that include small farmers in their operations. One of the first such investments was made in southern Tanzania.

The investments are generally seen having a life of seven to 10 years, ranging in equity stakes from $2 million to $5 million.

In addition to the fund, TransFarm backers have established a public policy program working with African governments and regional economic officials to promote more investments.

Smita Singh, the Hewlett Foundation's global development program director, said she hoped TransFarm Africa would demonstrate to investors around the world that money could be made outside the large-scale plantations that attract the most capital.

Some investors as well as foreign government entities have been criticized for "land grabbing" -- buying up large swaths of African farmland. Critics say this practice does little to alleviate poverty or empower farmers, and sometimes creates strife as Africans lose control of key resources.

"With the land grabs, the motivation is to push people off the land. What we're talking about is how you incorporate small holder farms into the commercial food chain," Singh said. "The challenge has been to demonstrate to capital markets that this is worth the risk. We're hoping to demonstrate there is both social impact as well as commercial viability."

TransFarm is only one example of many "impact investing" groups targeting Africa now. The new breed hopes to avoid the stigma and opposition associated with land grabbing by partnering with local business development groups. The aim is to boost production and trade for Africans while producing profits for investors.

"There is an increased recognition that good governance, respect for indigenous/worker rights, education, social services, environment, etc., are good business sense... providing the foundation for high rates of return," said Diana Glassman, a partner in EBG

African agriculture has long been plagued by low productivity and poor market access for small, subsistence farmers, a failure of commercial agriculture to find a critical mass that meets domestic needs, poor infrastructure, trade barriers and a lack of supportive government policies.

But with world population rising substantially and incomes in Asia and elsewhere also up, demand has grown for food, especially more sophisticated and higher-priced food products.

Investors say Africa offers an expanse of low-cost agricultural land with the potential for big gains in production and profitability. These can be achieved through use of new agricultural practices, including improved seeds, fertilizers, and modern machinery.

Among some recent deals, investors led by Boston-based Root Capital recently approved a $700,000 loan to back the launch of organic cotton production operations in Uganda's northern district of Gulu, a center of such violence less than a decade ago that many farmers are only now back from refugee camps.
Also, in Burkina Faso, $300,000 in trade finance funds from Root helped prop up a mango exporting group that represents more than 1,800 African farmers.

For Soros Economic Development Funds, investments include refrigerated transportation that supports local fisheries, milling operations, and investments in projects that support rice production and improved use of soil nutrients to increase crop production.

Ann Tutwiler, coordinator for global food security at the United States Department of Agriculture, calls Africa an "emerging priority," and said the U.S. government wants to encourage private investment into food and agriculture projects there.

The U.S. government and wealthy foundations have numerous programs underway to help African farmers, boost food production and trade, and improve infrastructure. Still, Tutwiler said, private investors are critical.

"Even with the amount of money the U.S. government and the other donors are putting in... it is small potatoes compared to the level of investment we need," she said.

"That investment has to come from the private sector."


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