Foraging for Opportunities in the Food Production Sector
From farm to fork, private equity players are increasingly aiming to make their mark on a food production and agriculture sector under rising pressure. Amedeo Goria reports.
The food production and agriculture segment has not been a particularly active playground for private equity. However, a syndicate of venture capital firms selling San Francisco- based startup The Climate Corp for $930M in a 2013 trade sale was something of a turning point.
Since then, GPs have been taking a deeper look at opportunities in the space, and the number of sector-specialized vehicles has increased notably in the past five years. In late 2014, the food and agriculture sector saw its first large dedicated buyout vehicle, as Paine Schwartz Partners held an $893M final close for its Fund IV. The event marked a tipping point that paved the way for private equity's increased involvement in the sector.
In March 2016, Dutch growth capital house Anterra held a second close for its food and agriculture technology fund on $125M, while French investment firm Cerea Partenaire held a 268M Euro final for its private debt vehicle Cerea Dette I in April 2016, and subsequently a 225M Euro final close for its second private equity fund Cerea Capital II and 200M Euro final close for Cerea Mezzanine III, both in January 2017.
More recently still, May 2017 saw ADM Capital Europe hold a $100M first close for its agriculture focused vehicle Cibus Fund and Rabo Private Equity launch a fund dedicated to early stage companies in the space. Moreover, at the time of publication, growth capital investor Pontifax Agtech is understood to be on the market raising a $150M vehicle.
"From farm to fork, the food and agriculture segment covers the whole value-creation chain and represents a large market share globally," says Kevin Schwartz, CEO and founding partner of Paine Schwartz Partners.
"There is value of $11tn of total economic output in the segment, which represents almost 9% of total global economic output. However, it is dramatically underrepresented from a private equity perspective. A 1-2% margin of private equity deal volume touches the food and agriculture segment and much of it is downstream, closer to the consumer."
"The main reason is that closer to the farm the sector is subjected to seasonal factors and volatility of the soft commodities market, which make it less compatible with private equity investing," says Michel Chabanel, president of Cerea.
But, according to Ben Belldegrun, managing partner and co-founder at Pontifax, moving down the value chain the segment has "a massive economic, social and environmental footprint, which holds many opportunities for fund managers keen on diversifying their investors' portfolios. It represents 10% of global consumer spending, 40% of employment and 30% of greenhouse gas emission."
The fact that the sector is undergoing significant change is not lost on investors and is a major factor behind the surge in interest. In 2012, the United Nations' Food and Agriculture Organisation forecast the global population would rise to 9.6 billion by 2050, which would require a 70% increase in food production to supply global demand. Against this backdrop, climate change and a stricter regulatory environment add long-term challenges to the sector's productivity.
Beside the direct impact of climate change on production, the sector is under stronger regulatory pressure to reduce its influence on global warming.
"Across agriculture in general there is a vast release of methane gas from cows and farms," says Belldegrun. "Furthermore, the sector has an impact on the release of nitrous oxide from fertilised fields, as well as carbon dioxide from cutting down rainforest. Therefore, national and international authorities are introducing limits on the use of fertilisers and chemicals. In Europe, some chemicals that historically boosted productivity are now taken off the market for crop protection. This makes it more difficult to reach production targets."
In addition, distributors and consumers themselves are reshaping the landscape and forcing businesses to adapt, says Belldegrun: "New dietary trends, including calorie intake, increasing protein consumption and the rising demand for organic and non-GMO produce, influence consumers' behavior and distributors' internal policies, affecting the whole production chain."
Turn adversities into opportunities
Faced with the conundrum of meeting higher targets with restricted resources, the sector is going through a strong consolidation trend, which sees several larger players focusing on size expansion and efficiency implementation.
"This process is pricing out the profitability of smaller actors," says Luigi Consiglio, chairperson at Milan-based management consulting from GEA. "Kraft's recent attempt to acquire Unilever, as well as Asahi's acquisition of Peroni, are examples of large corporates driving consolidation with the aim of acquiring market share," says Consiglio.
Nonetheless, "across Europe and the US consumers tend to focus on organic products rather than established brands. Therefore, even the largest players currently face the increasing competition of those businesss that are able to add value to the segment.
"Nowadays, investors need to increase value within the production chain to address the current challenges, rather than simply focus on market size and efficiency. Particularly in Europe, there are many SMEs with high capital and managerial needs that represent an opportunity for financial investors."
Chabanel says that "particularly in France, Italy and Spain, there were many businesses created in the 1970s within the sector that now have succession issues and represent an interesting opportunity for private equity investors."
However, the sector requires specific knowledge for first-time investors, and fund managers have started looking for different strategies to reap the highest returns.
"The whole focus on impact and sustainability has driven agriculture into a new level of needs," says Schwartz. "There are limited resources to grow the food we are going to need and there is an obvious link between sustainability and producing more with less." Innovation has therefore become a key element to boost performance.
"However, innovation does not happen inside large corporates but in small entrepreneurial startups," says Belldegrun. "As was the case for the biotech industry 20 years ago, corporates within the food and agriculture space are under pressure today to acquire technologies that provide solutions to their problems. This creates interesting exit opportunities for investors in these technologies," he says.
Additionally, biologicals currently represent one of the fastest growing niches in the sector, according to Belldegrun: "One of the fastest growing areas in agriculture today is the replacement of chemicals in farming across crop protection, Following the need to reduce the use of chemicals in farming, herbicides, fungicides, pesticides that helped boost production are now replaced by biologicals. These are microbial organisms that are processed into products and become natural protection for plants. Farmers can now combine biologicals with chemicals to reduce the amount of chemicals used and still maintain high crop protection level."
Overall, the increasing proessure across the sector is openinig opportunities for investors willing to explore new niches with significant potential. But investing in the food proudction and agricutlure segment still represents a very speicfic challenge for fund managers. Says Schwartz: "It will take time for larger financial investors to enter the market, because this sector requires a deep expertise and is partly cyclical. Investors need to understand where in the value chain one can be least exposed to those cyclical elements