Interview: Sahel Capital on investing in African agriculture
This article is a shortened version of an interview produced and published by the African Private Equity and Venture Capital Association (AVCA). See the original here.
Sahel Capital is a private investment firm focused on the food and agriculture sector in West Africa. Sahel has a depth of experience across a broad range of crop and livestock value chains; integrated processing operations; branded packaged foods; and related services. Sahel is launching a successor fund, Sahel Capital Food and Agribusiness Fund II, at the end of 2021. The fund will be focused on selected West African countries with a targeted fund size of $100 million.
AVCA speaks with Sahel managing partner Mezuo Nwuneli about emerging opportunities in the agriculture sector and the firm’s exits and fundraising plans.
Tell us about the history of Sahel Capital and how the firm has evolved over the years.
Sahel Capital was established in 2010, initiated by a passion to unlock the potential of the food and agriculture landscape in West Africa and to create strong agricultural sector-led economic growth within the region. In 2010, we invested personal capital to set up AACE Foods, a seasonings and packaged food company.
Temi Jebutu, the managing director, has done an incredible job in scaling AACE Foods over the past seven years. The company today has over 120 employees, has products in more than 180 retail supermarket outlets, provides seasoning ingredients to key FMCG companies, and exports to Europe and South Africa.
In 2011, we onboarded a small team to focus on specialised management and technical consulting services within the food and agricultural sector, capitalising on the experience of one of Sahel’s partners who had been active in the sector since 2008. Small initial consulting projects gradually grew to much larger strategic, policy, and implementation projects; and to clarify to clients the focus of the firm’s activities, this arm of the firm was rebranded Sahel Consulting in 2017. Sahel Consulting is led by Ndidi Nwuneli (managing partner), and Temi Adegoroye (associate partner) manages the Abuja office. Sahel Consulting currently has 65 team members and works across sub-Saharan Africa.
In 2013, the Nigerian government, through the Federal Ministry of Agriculture, the German government via KfW Development Bank, and the Nigeria Sovereign Investment Authority (NSIA), decided to anchor an agricultural focused private equity fund. Sahel Capital was selected to manage this fund. We had a first close in 2014 of $33 million with these sponsors, and then raised additional capital from investors, leading to a final close in 2017 of $66 million. We are thankful for the support of the African Development Bank (AfDB), CDC Group, and the Dutch Good Growth Fund during this entire process. Sahel will have nine companies within its portfolio when fully invested later this year. Sahel Capital is run by Olumide Lawson and me, alongside an incredible team of 10 investment professionals.
We are focused on the next phase of our journey, which will involve expansion of our investment activities into targeted countries in sub-Saharan Africa. Central to our ethos is our mission to: provide capital, leverage knowledge, build companies, generate returns and impact lives.
What distinguishes Sahel Capital from other private equity firms in the industry?
There are two key differentiating factors. The first is the significant breadth and depth of in-house food and agriculture experience within the team, which is unparalleled on the continent. We have individuals on our team who not only have substantive investment experience but have also worked in operational roles across a diverse range of agricultural value chains. The second is derived from the partnership we have with our associated companies, which provides significant market intelligence on sector trends and dynamics, especially in a region where there is limited data.
What are some of the opportunities you are seeing in the agriculture sector, and why do you think it is an attractive sector for private investment?
There are three different investment areas we find exciting and where we are focusing our attention. The first is logistics and distribution – from plain logistics to last-mile distribution and cold-chain. There are many bottlenecks in getting food products to end markets, and capital investments in this sector can help increase the efficiency of moving goods around. Addressing and allocating capital to this sector is top of our agenda for the next couple of years.
The next area of particular interest to us is import substitution – investing in sectors with significant import activity, even though the items can be produced competitively domestically. One example of this is our investment in Coscharis Farms, a large-scale integrated rice company with 2,500 hectares of commercial rice farmland and a 36,000 MTPA rice mill. Coscharis also sources rice from farmers throughout the community.
Nigeria currently consumes 7 million tonnes annually of which one third of the volume is imported, and there is significant potential to ensure self-sufficiency.
The third investment area we are focused on is packaged foods and snacks for many of the same demographic reasons. Around half of Africa’s population is already urban and with one of the highest projected urbanisation rates in the world, consumption patterns are rapidly changing. People now look for more convenience and seek out packaged foods, which is different from what they would eat in rural areas.
There is a huge opportunity to invest in companies able to produce a packaged food product at the right price point, which is key because many consumers in the region are price sensitive. We invested in Polyfilm Packaging in 2019, which produces the packaging material that wraps food and consumer products, to capture value from the growth of companies within this sector. The company has exceeded its business plan in the two years since we invested.
What is your outlook for the agriculture industry and what are your plans for Sahel Capital over the next 10 years?
The value of the global food industry is estimated to be $8 trillion. In 2016, over $420 billion of capital was invested in the food and agricultural sector worldwide, of which only approximately $23 billion was invested in Africa. This worldwide capital was invested in everything from real asset farmland in the U.S., to large scale beef and dairy production in Australia and New Zealand, to innovative agrotechnology in Europe and cropping of maize in Brazil.
Worldwide food demand is expected to increase by 15% over the next nine years driven by global population growth, with half of that population growth coming from Africa.
Although new investment in technology, big data, and biochemistry will definitely drive incremental farming efficiencies in developed markets, increased food demand will also need to be met by yield improvements in developing economies, and in particular in India, China, and the countries in Africa. Food consumption is increasingly becoming localised, with consumers choosing healthier and fresher foods, with a premium placed on traceability. Covid-19 induced concerns about food supply chain disruptions will likely accelerate this trend as policymakers in Africa (and around the world) rethink food security.
This anticipated food demand is expected to be further driven by three key demographic trends. First, Africa’s population is projected to grow from 1.2 billion in 2019 (17% of world total) to 2.5 billion in 2050 (26% of world total) driving food requirements. Second, East and West Africa have some of the fastest urbanising rates in the world – higher than or at par with many countries in Asia – and urbanisation is changing food consumption habits. And finally, more than 50% of the continent’s population is less than 20 years old, and these young urbanising aspirational consumers are demanding innovative, convenient food at the right price point.
Over the next 10 years, Sahel Capital intends to increase its footprint in sub-Saharan Africa, providing a range of capital solutions and technical support to agribusiness entrepreneurs focused on enabling them to scale. We will also serve as catalysts for the sector, attracting more like-minded companies and partners to enter the sector and collaborate to transform the ecosystem.
Is Sahel preparing for exits this year, and do you have any plans to raise another fund?
We are in the middle of an exit from our very first investment – L&Z Integrated Farms – a yoghurt producing integrated dairy company in Kano State in northern Nigeria. We invested in 2015 and although it was one of our smallest investments, it is also one of our most exciting and rewarding. We have a 25% stake in this family-owned business and have helped build its dairy business over the past six years. Revenues have grown 3.7x in naira (1.7x in USD), and EBITDA has grown 3.4x in naira (1.6x in USD) since we invested.
We strongly believe that in addition to our planned Sahel Capital Food and Agribusiness Fund II (SCFAF II), which we plan to kick off fundraising for later in 2021, there is also an opportunity for an earlier stage agricultural social enterprise debt fund.
SCFAF II will be the successor to our current fund, and will invest in selected countries across West Africa providing equity and quasi-equity capital to agribusiness SMEs. Our planned social enterprise debt fund which will be managed by a distinct Sahel Capital team, will be focused on capital preservation, and is intended to also act as a feeder pipeline for SCFAF II.
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