Agribusiness (food and agriculture) as an asset class has grown in prominence in recent years, particularly in private markets given the largely unlisted nature of companies in the food and agricultural sectors.
This growth has largely been driven by the growing realisation that real assets in the agribusiness sector (including food processors, permanent crops producers and agricultural land) provide balanced risk-adjusted returns that are able to counteract the effects of low-return asset classes, such as infrastructure, and the high-risk asset classes, such as traditional venture capital and listed equities.
Globally, between 2005 and 2017, the number of investment funds specialising in food and agriculture investments jumped from 38 to 446, with assets under management of more than $73bn excluding forestry funds, according to Valoral Advisors.
In SA, a similar yet more muted trend can be observed. While the proliferation of specialist agribusiness asset managers has been slower than in the rest of the developing world, the number of generalist asset managers with exposure to the broader food and agricultural sectors has increased.
This has added to the universe of traditional asset allocators in the sector, including the general farming community, large agribusinesses, development finance institutions and some pension funds.
All these players are banking on the long-term growth of the agribusiness sector, primarily driven by three fundamentals: the demonstrated ability of businesses in this sector to generate stable cash flows (even in economic downturns); the growing and inelastic demand for food; and widespread sector undercapitalisation, a situation Land Bank’s challenges have exacerbated.
The broadness of the agribusiness sector has also galvanised investors across the spectrum that had historically excluded investments in agriculture from their investment mandates. These players have entered the fray, recognising that SA’s agribusiness value chain is diverse and spans beyond farming to include thousands of enterprises operating in the primary, secondary and tertiary agri-food industries.
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While this is nothing new, there appears to be growing awareness of the diversity of enterprises that constitute agribusiness and the depth of the deal universe in the local agribusiness asset class. This diversity creates scope for a range of capital allocators and financiers spanning short-term debt providers to long-term investors targeting high-yielding investments in real assets.
Increased focus
Though the fundamentals that have buoyed investment in food and agriculture remain strong, one cannot overlook the biological and regulatory complexities associated with agribusiness investments, particularly in the SA context. These complexities necessitate an increased focus on sector portfolio construction, the deployment of appropriate funding instruments and investment strategies that can mitigate climate, market, production and legislative risk.
This formula of investing is critical and has proven successful even in the most volatile of macro-economic environments. Investors’ failure to adequately equip themselves with the specialist capacity to navigate these complexities can often result in some costly lessons and the reports we often read about “failed agriculture projects”.
This is not to imply that there exist ways to achieve foolproof returns in agribusiness investments. Indeed, even with the best investment strategy and enviable capacity, room for underperformance remains. That is the nature of the investment game, in any sector. Instead, the argument here is that agribusiness’s reputation as the bogeyman of asset classes is undeserved and inhibits the meaningful flow of capital to businesses that have immense potential to contribute to the growth of the SA economy.
Few sectors enjoy the defensiveness, depth and broadness of the agribusiness sector. This appears to be well understood by global investors and international development finance institutions as they continue to ramp up their exposures in various private agribusinesses in developing countries.
On the other hand, far too many local investors, despite being tasked with searching for yield in unfavourable terrain and poor macro-economic conditions, remain overly cautious where agribusiness is concerned.
As these conditions continue and the investment climate remains challenging, perhaps it is time for local investors to re-evaluate their stance on agribusiness as an investible asset class. Many can little afford not to get on the high-speed agribusiness tractor.
• Nkosi is an agricultural economist and managing partner of African Green Alpha.
