Sahel Capital Agribusiness Managers Ltd is a Nigeria-based personal fairness agency, which manages the Fund for Agricultural Finance in Nigeria (FAFIN). Betsy G. Henderson speaks with Mezuo Nwuneli, managing associate and co-founder of Sahel Capital, about agribusiness traits and alternatives in Nigeria and the broader West African area.
What are a few of the prime agribusiness alternatives you see in Nigeria right this moment?
Proper now, now we have seven investments in our portfolio: every thing from dairy to cassava starch, rice, packaging supplies, shea, edible oils and animal proteins. Wanting ahead, there are three totally different funding areas we discover thrilling and the place we’re focusing our consideration.
The primary is logistics and distribution: from plain logistics to last-mile distribution and cold-chain. There are a lot of bottlenecks in getting meals merchandise to finish markets and we’ve discovered capital investments on this sector assist enhance the effectivity of transferring items round. Addressing and allocating capital to this sector is prime of our agenda for the following couple of years.
The following space of specific curiosity to us – and the place we’ve already invested – is rice. We’ve an funding in Coscharis Farms, a large-scale built-in rice firm with 2,500 hectares of economic rice farmland. It additionally sources rice from farmers all through the neighborhood. That is thrilling as a result of, if you happen to take a look at consumption dynamics in Nigeria, it’s successfully gone from minimal consumption of rice within the early 1980s to roughly seven million tonnes yearly right this moment. That is enormous and indicators that rice is turning into a staple meals along with a few of the extra conventional tuber crops like yam or cassava. Additionally, if you take a look at Nigeria’s present inhabitants and its projected development (Nigeria is predicted so as to add one other 70 million folks to its inhabitants over the following 10 years), we see rising future demand for rice.
Moreover, there’s a 2.5 million tonne shortfall between provide and demand of rice proper now; Nigeria is a serious rice grower however doesn’t develop sufficient to fulfill home consumption and has to import a good quantity. With our investments in rice, we concentrate on constructing home rice yields alongside the worth chain on our personal farm and for the farmers with whom we work. Given the rising meals consumption demand, I believe this is a vital place to allocate capital not solely in Nigeria, but in addition in key international locations throughout West Africa.
The third funding space we concentrate on is packaged meals and snacks for lots of the similar demographic causes. Roughly 51% of Nigeria’s inhabitants is city and with one of many highest urbanisation charges on this planet, consumption patterns listed here are quickly altering. Folks now search for extra comfort and hunt down packaged meals, which is totally different from what they might eat in rural areas. There’s an enormous alternative to spend money on firms capable of produce a packaged meals product on the proper value level, which is vital as a result of many shoppers within the area are price-sensitive. We’re eager on firms producing meals merchandise focusing on this mass market of a quickly urbanising inhabitants. It will be important that we discover packaged meals producers which have an area provide chain for his or her uncooked supplies as this helps guarantee resiliency towards forex fluctuations and different market dynamics.
In the case of this chance in packaged meals, I imply every thing from staple meals to breakfast cereals and snacks. Consider your common client, somebody sitting in site visitors on the best way dwelling; what are they snacking on throughout the automotive or bus journey? When you’ve got youngsters going to highschool, what sorts of meals are handy, packaged and ready-to-eat that the youngsters can take to highschool? Or middle-class households – the place each the husband and the spouse work and are available dwelling on the finish of a protracted day – which meals is extra handy to organize versus attempting to make that meals from scratch? Packaged meals can cowl the entire gambit however it is very important get the correct value level for that client. Additionally, the extra nutritious a meals product is, the extra you attraction to a broader family-oriented client base.
Nevertheless, even if in case you have the correct packaged meals product on the proper value level, you continue to have to resolve the distribution and logistics problem of getting the product to finish shoppers which hyperlinks again to the primary alternative I discussed.
Are there any agribusiness sub-sectors in Nigeria you’ll be hesitant to spend money on?
Sure, we wouldn’t do major manufacturing or industrial farming as a stand-alone enterprise as there are too many dangers to handle and restricted upside potential. That mentioned, we do spend money on major manufacturing as a part of an built-in agro-processing enterprise; we do that to successfully allow the corporate to safe uncooked supplies for its provide chain. We’ve discovered there may be higher margin seize on the processing facet and what we’ve executed in two instances – with our rice and cassava starch operations – is we’ve constructed a industrial farming operation that may provide roughly 20-25% of our necessities; the remainder we combination from the market and small farmers. On this means, major manufacturing funding helps safe the minimal requirement for our processing vegetation, which provides us a strategic benefit particularly in instances when there may be restricted provide available in the market.
For instance, proper now – on account of Covid-19 – persons are beginning to retain crops for their very own consumption, versus promoting to 3rd events. Rice paddy costs coming from small farmers have lately spiked as a result of there may be restricted provide and it’s the similar on the cassava starch facet, the place all cassava has gone to staple consumption. Having our personal farms imply we’ve been capable of partially mitigate this surprising drop in provide.
We might even be hesitant to spend money on commodity-focused export sectors, equivalent to cocoa or cashew. It is because there may be restricted room for worth creation and worth is usually pushed by worldwide commodity costs. For instance, with cocoa, a giant chunk of the worth seize in making chocolate will not be on the export of the cocoa. For those who’re offering debt amenities it could actually make sense however if you happen to’re an fairness investor trying to seize upside, there may be restricted capability there.
That mentioned, we did spend money on a shea-processing operation in Nigeria that’s export-orientated as a result of we imagine there may be the flexibility to seize extra worth in the long run. Proper now, we course of the nuts to shea butter however it’s also possible to additional refine it into different oils which is further worth creation. Additionally, a whole lot of the manufacturing unit processes and tools are comparable for processing different edible oils (equivalent to soy). So, for us, the preliminary entry into the edible oils house is thru shea butter however we’re wanting on the total alternative throughout totally different edible oils.
At any time when we think about new alternatives, we glance to spend money on staple meals merchandise that meet the necessities of a giant and rising inhabitants, then we attempt to see the place we will make strategic investments to deal with future meals shortage points. We additionally look at import substitution and think about investments in sectors the place there may be confirmed demand for imports however there may be potential to construct native capability – no matter tariffs – to successfully swap out these imports. One instance of that is starch; many Nigerian multinationals import maize starch for his or her operations however a very good substitute is cassava starch. Nigeria is likely one of the largest producers of cassava on this planet, so we’ve been capable of course of cassava into starch and swap out that imported maize starch, which is a large alternative.
Lastly, one other issue we think about when investing is the rising center class. Though incomes have been squeezed over the previous few years, I believe from a long-term perspective, the center class will proceed to develop and other people will devour extra proteins, extra packaged meals merchandise and can extra probably be based mostly in city centres. We glance to spend money on firms producing merchandise and meals objects that can meet this rising demand.
What agribusiness traits are you seeing in West Africa?
I’ve already touched on demographics however it is a key development for this area. For context, the median age of Nigeria is 18 years and greater than half of the nation’s inhabitants is below the age of 19; it is a enormous phase. Information projections present meals demand throughout all classes – animal proteins, vegetable oils, pulses and crops – rising over 50% between 2015 and 2030. For those who evaluate that globally, it’s increased than the meals demand in Southeast Asia and roughly twice the expansion of world meals demand. With a big, rising inhabitants, the query turns into: will this elevated demand for meals be met by home meals firms or by imports and worldwide firms?
The opposite factor we’re seeing in Nigeria, though undoubtedly relevant to the entire of West Africa, is elevated consciousness of meals safety. There’s a rising recognition of the necessity for elevated funding and help of the home meals and agriculture sector. The Nigerian authorities has put in insurance policies that, whereas barely protectionist, are designed to encourage and drive personal capital into this house.
On account of Covid-19, a whole lot of international locations are realising how vital it’s for his or her meals provide chains to be resilient. Earlier this 12 months when international locations shut down, container ships acquired caught at sea and international locations blocked key strategic crops from being exported. It grew to become clear that any hitch in meals commerce or manufacturing can influence nationwide meals safety. Moreover having ample meals shares, you even have to consider how one can get meals to the tip client. This was notably pertinent in Nigeria, the place states ‘import’ meals from different states. When these provide chains have been disrupted by regional lockdowns, questions arose as to how one can get meals to shoppers.
There may be at the moment a robust curiosity in agtech, with some ‘conventional’ agriculture traders now backing these firms. How do you view the agtech sector from an funding perspective?
We’re fairly excited in regards to the potential of agtech however it’s been troublesome for us to do early-stage agtech investments with our present fund, which focuses on development capital for established SMEs. We proceed to look at agtech alternatives and really feel there’s loads potential.
After we do come throughout an agtech agency of curiosity, we attempt to keep shut and use the companies they supply inside our portfolio firms. This enables us to guage their companies, have interaction with them and think about the scalability of their options. If we get enthusiastic about their work and skill so as to add worth, we’d make an funding down the highway.
Elaborate in your most profitable funding up to now.
I’ll concentrate on our first funding at Sahel Capital, which is an funding in L&Z Built-in Farms Ltd, a yoghurt-producing dairy farm in Kano State in northern Nigeria. We initially invested in 2015 and though it was certainly one of our smallest investments, it’s additionally certainly one of our most fun and rewarding. We’ve a 25% stake on this family-owned enterprise and have helped construct its dairy enterprise over the previous 5 years.
For those who take a look at the place issues have been in 2015 and the place it’s right this moment, there have been many adjustments; for instance, we helped put in a middle-management degree so there are correct processes, controls and institutional buildings throughout the firm. The amount of milk it aggregates by means of milk centres and pastoralists has quadrupled over the previous 5 years and revenues have tripled.
We additionally helped L&Z construct its cold-chain distribution throughout the nation as a result of they’ve a perishable product that has a restricted shelf life; they’ve to keep up a chilly chain from manufacturing unit to grocery store. In a rustic that doesn’t have good energy infrastructure, this isn’t straightforward however we efficiently labored collectively to construct that distribution facet to supermarkets throughout the nation.
Along with Nigeria, which international locations in West Africa are you most enthusiastic about?
The 2 most fascinating international locations are Côte d’Ivoire and Ghana. They’re each key meals and agriculture gamers in West Africa and, from a GDP and inhabitants perspective, there may be substantial exercise inside these two international locations. They’ve barely totally different demographic and financial points to Nigeria however on the similar time, we really feel there are a whole lot of alternatives there, crossing totally different worth chains.
These international locations even have related client dynamics: quickly urbanising populations and rising center lessons consuming extra packaged meals. Ghana and Côte d’Ivoire import fairly a bit however export a good quantity as effectively and want investments that allow extra home worth seize. There are alternatives in processing totally different meals merchandise to fulfill extra home and regional meals necessities as a result of you possibly can produce inside these two international locations and simply export throughout the sub-region to different neighbouring international locations.