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Opinion

Approaching agriculture in Africa

James Rae
June 24, 2021, 10:40 p.m.
369

Word count: 783

Agriculture is known to be a large contributor to the African economy, employing half of its population. That is why it is one of the key focus areas of the African Development Bank. Agriculture also ignites the imagination of financial institutions around the world. Very importantly, in this neo-SFDR world, farmers also have “green fingers”, and to twist this analogy, much of the industry falls into the remit of impact investing and/or green financing.

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Agriculture is known to be a large contributor to the African economy, employing half of its population. That is why it is one of the key focus areas of the African Development Bank. Agriculture also ignites the imagination of financial institutions around the world. Very importantly, in this neo-SFDR world, farmers also have “green fingers”, and to twist this analogy, much of the industry falls into the remit of impact investing and/or green financing.

So, how should private equity approach agriculture in Africa, structurally? At least for venture capital, agritech start-ups have the look and feel of, well, start-ups. Therefore, not a lot of ingenuity is needed for the legal structures. In 2019, I wrote on the benefits of buying into African agritech and it would appear that despite the pandemic, 2020 showed continuing growth.

Much of the start-up target market are small-scale farmers, e.g. AgroCenta (with a total of $2.2m fundraising secured). However, are small scale-farmers the only targetable group? Is that truly where value creation lies?

It is hardly arguable that agricultural projects benefit from scale, and yet the vast majority of agriculture in Africa is uniquely small-scale. One only has to look at Madagascar’s vanilla, Ivory Coast’s cocoa and Ethiopia’s coffee to understand that small-scale is a cause for concern. Niche crops should benefit from their uniquely localised supply. However, unsophisticated farmers are vulnerable to large corporatised entities further up the food chain.

Industry players and governments are already aware of this. The Ghanaian government introduced a price floor. However, price floors garner economic losses and at times hurt the vulnerable farmer in the short to medium term (mostly regarding their liquidity). The approach is also not urbane enough, Ghanaian cocoa needs a marketing push and localisation protections (akin to those sought by the Champagne region). South Africa’s rooibos is perhaps the hopeful African example. Its success is somewhat attributable to regulatory protection (a joint initiative between industry players and legislators).

This is perhaps where larger private equity houses could play a unique role. Private equity investment would assist with stabilising liquidity, improving market sophistication (for e.g., contract negotiation and marketing), technological advancement, accounting and other administrative services. What is more, investing in and collectivising several small-scale farmers would assist with best practice uniformisation and cost reduction (on input orders and logistics). As for an exit, government pension schemes may present a strong target, especially if a strong business model and benefits to the community are coupled. The rooibos industry took some criticism in this regard.

Structuring

However, this perhaps be a structuring nightmare – how do you group these farming operations, while maintaining community engagement and (reduced) ownership? The Guernsey protected cell company (PCC) comes to mind. This would allow for various “business units” to be walled-off from each other. Flow-through would not be a concern here because the corporate tax in Guernsey is ordinarily 0%, and even if CGT did arise, there is an exemption for collective investment schemes. The great thing about a PCC is that it allows for assets to be siloed and therefore to restrict liability to non-performing assets. This concept is alien to most jurisdictions and may require litigation to enforce.

Offshore structuring can also be done closer to home, with Mauritius hosting a typical offshore setup, however, not with a vehicle as gimmicky as the PCC. A limited liability partnership vehicle is the most common vehicle but it is likely that a layer of structuring will be required below that in order to accord for the various small entities likely to be involved.

If wanting to structure onshore, when considering suitable legal structures in Africa, the bewind trust (South African vehicle) would be a useful vehicle. The bewind trust vests the assets in the beneficiaries (this is important, considering the sensitivity around ownership in Africa), while the trustees handle the administration of the assets to the benefit of the beneficiaries.

As for the economics, there is much flexibility over how to manage the assets, and so long as distributions of any capital gains or other income are made before year-end, the trust will not be taxable in South Africa. Should the bewind trust be the main fund vehicle, a more American-style approach to distribution is required and clawback mechanisms will be useful for investor comfort.

There is much potential in agricultural production, as well as a need for institutionalism. However, investment requires intense co-ordination, and socio-economic factors (both in Africa and in the rise of ESG-focused private equity) require proper engagement with stakeholders. Fortunately, legal structuring can be done in a tailored, international manner, which helps private equity firms to create a dynamic structure that embraces efficient structural solutions without increasing risk-exposure significantly.

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