Investment firm Pearl Capital Partners (PCP) has launched a Sh2.2 billion fund to finance small businesses in agriculture and agribusiness in East Africa, following research that shows record returns from the sector, over all others.
“I do not want to reveal the actual returns in the industry, but what we have seen in the past few years of investing in agribusiness in East Africa is mind blowing,” said Wanjohi Ndagu of Pearl Capital Partners (PCP).
Dubbed Africa Agricultural Capital Fund (AACF), the entire fund will be invested in small businesses in the agriculture value chain, including businesses engaged in seed development, irrigation systems, agro processing and packaging, among others.
Twenty start-ups businesses that have the potential to transform the lives of smallhold farmers will receive between $300,000 (Sh25.5m) and $2.5m (Sh212.5 m) in the form of equity, debt or a mix of the two, said Tom Adlam, PCP managing partner. Seventy-five per cent of the fund ($19 million) will be invested in the core East Africa countries; Kenya, Uganda and Tanzania.
“There is a mode of investment and investors who are not only interested in the financial returns of the fund, but also on the impact of the fund on development. AACF was therefore packaged with these socially conscious investors in mind,” said Tom.
AACF investors include the Bill and Melinda Gates Foundation, Gatsby Charitable Trust, Rockefeller Foundation and JP Morgan Chase Social Investment Fund. AACF is the third fund that PCP, whose operations office is based in Kampala, Uganda, will be managing since it was formed in 2005.
“Our first fund was the Africa Agriculture Capital, which was raised in 2005. At that time we were operating as Africa Agriculture Capital, which was an investment company. In 2009, we raised the Africa Seed Investment Fund. The principal investor in this fund was Alliance for Green Revolution in Africa (AGRA). This was a special fund targeted to businesses involved in seed propagation,” said Ndagu.
PCP's approach to agricultural financing is unique in many ways. PCP is the first Private Equity fund to invest in agriculture in East Africa. PE is anyway a relatively new industry in sub-Saharan Africa, around for only about the last 8 years. But, so far, most of PE funds in East Africa have been directed to low risk areas such as financial services, telecommunication and energy. Moreover, in most cases, it has been the big players in the economy that have benefited from PE support, not start-up or smaller ventures.
“In terms of financing agriculture through PE, there had been an attempt before 2006 when the precursor of Pearl Capital was born. But since 2006, PE has been the right fit for agriculture in East Africa particularly because this sector is associated with a lot of risks. One of the main strengths of PE is its flexibility and agriculture has many dynamics.
Unfortunately, the banks may not have the capacity to structure their loan facility to fit the dynamics of agriculture. PE therefore becomes a financier of such businesses to meet their goals despite their challenges because our main tool of investment is equity,” said Ndagu.
However, closing deals in agriculture has not been smooth sailing for PCP. Ndagu said the company has been on a learning journey since it was formed.
“A lot of the businesses we invest in are family businesses. In such businesses, it is not usually easy to accept outsiders as shareholders in the business. Sometimes we find businesses that are doing well, they have significant potential, but the kind of financing available from banks cannot push them to realise their potential. It is clear to us that such businesses would need our source of capital. But because of the conservativeness of the founders, they find it difficult to allow external shareholders and to work with the disclosure requirements of PE,” he said.
Pearl Capital was formed in 2009 after the restructuring of its mother company, Africa Agriculture Fund. Currently PCP has four partners – a Kenyan, two Ugandans and a Briton.
Originally, when Africa Agriculture Capital was formed, its operations were based in Kampala. Even today, PCP has most of its operations in Uganda.
“However, most of our investments, up to 50 per cent ,were based in Kenya. So naturally, we had to progress and move to where most of our market is and where we anticipate it to be going forward,” said Ndagu.
Written by Bob Koigi for African Laughter