Who?

A second group of investors made up of private equity funds, and of both local and international commercial banks, was pursuing a more purely profit-driven vision for the future of protein in sub-Saharan Africa. These institutions tended to use one of two sets of financial instruments. Commercial banks typically extended loans to animal protein companies, while private equity firms purchased equity investments in them. As a result, while banks and private equity firms often invested in the same companies, they generally did so independently of one another.

Why?

This group of interviewees tended to invest in protein production in sub-Saharan Africa for entirely financial reasons and would therefore only finance companies which they expected would produce market-competitive returns on their investments and would not pose an unacceptable risk of capital loss. They had come to believe that some animal protein producers in sub-Saharan Africa could provide attractive investment opportunities based primarily on the forecasts of future population and economic growth discussed at the beginning of this chapter. They (like other investors) expected that this would ‘naturally’ cause markets for animal protein, and the revenues of companies producing and processing animal products, to grow rapidly.

“If you look to [growth in] the consumption of meat and poultry, it’s 85% emerging markets. And at the moment it’s a lot about Asia, so 65% is Asia. But if you look forward, longer term (...) Africa is actually the region where I think most focus will be because of the fast-growing population there, and that raises of course big opportunities (...) It’s urbanisation, it’s a big population. And then you need to create, in some way, a food value chain for these countries”

(Interview 14, commercial bank)

One interviewee placed particular importance on the growing presence of international restaurant chains and food retailers within many sub-Saharan African countries. They argued that this reflected the emergence of a middle class prosperous enough to consume more animal protein in the form of restaurant meals and packaged food products, and that these firms’ expansion across the region could therefore be expected to continue over time as economic growth proceeded. This made investment in companies supplying animal protein suitable for international restaurant and retail chains an attractive investment opportunity.

“Because of the rising middle class, you see that retail and (...) restaurant chains, they are developing quick in Africa. And these companies, they need more modern or more solid, homogenous supply (...) if you have more retailers, restaurant chains, that makes it also more interesting. That’s actually one of the main triggers when international investors get interested in investing in processing.”

(Interview 14, commercial bank)

However, interviewees also noted that most of the animal products consumed in sub-Saharan Africa were produced by smallholder farmers and pastoralists and distributed through informal markets. Some argued that this meant that successful commercial animal protein producers and processors might be able to gain a ‘first mover advantage’. This, they believed, would enable them to expand rapidly, capture a large share of the market both in their home nation and in neighbouring countries and out-compete or marginalise later entrants to these markets. These interviewees suggested that such firms therefore had the potential to produce a highly attractive financial return for their investors.

What and Where?

Despite these opportunities, these investors’ willingness to finance protein production in sub-Saharan Africa was limited sharply by the perceived financial risks associated with investing in the region. The uneven distribution of these perceived risks across different countries and value chains shaped the focus of their investment activities in several important ways. First, these investors regarded most sub-Saharan African countries as being more likely than many other locations to experience events – such as civil unrest, armed conflict, or state expropriations of private property – which might lead to the failure of investee companies and the loss of their capital (see also Ouma, 2020; Watts and Scales, 2020).

“So, for a pension fund to invest in Africa (...) they’ll be concerned about political risk (...) if there’s some sort of political event, like a war or an expropriation event. (...) So Zimbabwe, is uninvestable. [Also] The Congo, Central African Republic, etc. Chad. We tend to be [in] southern and eastern [Africa], which is okay (...) if you want to bring institutional money to Africa, you need to actually protect them from a risk point of view. There’s a certain – in our minds – a level of risk we can’t go beyond. If they have a good experience they will put in more money, perhaps with other fund managers, and in the long-run that’s what Africa needs.”

(Interview 16, private equity investor)

Such concerns led these investors to focus on those countries which they perceived to have the strongest legal protections for private investments and the most stable political systems. This often appeared to channel their investments towards Eastern and Southern African countries such as Kenya, Tanzania, and Zambia. This effect was reinforced by an expectation (apparently formed through analysis of past nutritional transitions in other countries) that markets for animal products would expand fastest in countries experiencing rapid economic growth where protein consumption per capita was currently low:

“If you look at the Asian experience (...) as per capita income rises, so does meat consumption per capita in kilos. But it’s particularly sharp under $5,000 income [per capita]. So at the very poorest, as you have a very small [income] increase, you get a very rapid increase in meat consumption. (...) In Tanzania, Uganda, Kenya, you’ve got a fast growing economy. Low incomes per capita. Very – unusually, I think – low consumption of chicken or eggs per capita and issues as a result. You’ve got protein deficits. Animal protein, certainly. So it’s both an opportunity for impact and return.”

(Interview 16, private equity investor)

Meanwhile, interviewees argued that a lack of high-quality locally produced agricultural inputs such as breeding stock and animal feed left producers in many sub-Saharan African countries dependent on imported agricultural inputs, which could change rapidly in price as currency exchange rates and the global supply of key goods fluctuated. These factors, combined with competition from imported animal products (including European dairy products in West Africa and Chinese tilapia in Zambia), were held to make both the size and the profitability of markets for animal products in many sub-Saharan countries highly unstable and unpredictable. These overlapping financial risks led commercial investors to invest almost exclusively in poultry and egg production. Due to the short lifespans of the animals involved, these value chains were deemed to be least exposed to the risk of unexpected political or economic events occurring during the animal production cycle and to require the smallest initial investments.

“Beef is a preferred product for sure, and there are some investors in Africa, international ones, but it’s more for export I think. And the problem is the long payback time, I would say (...) it’s quite risky, you know, if you have more than a year production cycle. The market can be changed completely in a year. And the chicken, you can fine tune that in a couple of weeks, you know, six weeks. If the market becomes worse, you can place less chickens in farms.”

(Interview 14, commercial bank)

This group of investors were also reluctant to finance smaller and newer African animal protein businesses. This partly reflected a mismatch in scale, with the loans and equity investments requested by newly established African food businesses often being too small for commercial banks or private equity funds to consider them an attractive investment opportunity. However, it also reflected a broader concern that newer and smaller businesses were more likely to fail and thus represented riskier investments. These investors therefore preferred to finance more established firms with strong track records of creditworthiness. They were especially attracted to multinational firms which could raise finance on international capital markets at a low cost and whose revenues from other regions could compensate for any losses incurred by their operations in sub-Saharan Africa.

As a result, commercial investors tended to finance only the largest companies operating in animal protein value chains. These included dairy processing companies, vertically integrated producers both of broiler chickens and of eggs, and established suppliers of agricultural inputs to poultry and egg producers. Several interviewees noted that this meant that few sources of finance were open to animal protein producers which had grown too large to rely upon the grants and micro-loans provided by NGOs and micro-finance institutions (MFIs) but remained too small to attract investment from commercial banks and private equity funds. These interviewees suggested that under- financing of this ‘missing middle’ of enterprises with financing needs of between roughly $50,000 and $1-2 million was constraining the development of domestic protein producers in a number of sub-Saharan African countries.

Commercial investment in protein production in sub-Saharan Africa therefore appears to be heavily focused on the production of broiler chickens and eggs – and especially of poultry feed – in Southern African countries which are perceived to be politically stable and possess established food retail and restaurant chains. In wealthier countries such as South Africa, and in countries such as Zambia where contracts are available to supply animal products to mining and oil production facilities (whose workforces often represent large concentrations of well remunerated consumers), these investors often finance vertically integrated broiler and layer chicken farms. However, some interviewees highlighted that they have recently also begun to invest in companies supplying feed and DOCs to smallholder farmers in countries such as Kenya, Uganda, Tanzania and Nigeria where demand for poultry meat and eggs is growing more rapidly. They suggested that such investments are attractive partly because these businesses have built up a proven track record of profitability. However, they are also perceived to provide a firm foundation for future expansion into vertically integrated broiler and egg production should poultry value chains begin to formalise in these countries as they have in Southern Africa.

In such settings the strategies of this group of investors resemble those of proponents of the smallholder intensification vision in viewing agricultural input suppliers as the foundation for the development of poultry and egg value chains. However, these investors differ from those adhering to the smallholder intensification vision because they do not view increasing the profitability and productivity of smallholders as the primary objective of their business. Instead, they are willing to replace the smallholder poultry producers operating within their value chains with vertically integrated production systems if this becomes commercially viable.

Some interviewees also identified dairy processing companies in East and West Africa as a secondary site of investment for this group of investors. Such firms are attractive to international investors because they may achieve considerable scale while continuing to purchase milk purchased by smallholder farmer cooperatives, and some are owned by international processors. Commercial investors largely appeared to avoid other forms of animal protein production – including aquaculture and the raising of beef cattle – on the grounds that they posed unacceptable financial risks.

How?

This group of investors’ theory of change can be summarised roughly as follows. As both populations and economies grow across sub-Saharan Africa, these investors expect its middle class – which can afford both to consume larger volumes of animal protein and to purchase food from more expensive sources such as supermarkets and restaurant chains – to expand rapidly. They believe that this will enable retail and restaurant chains to expand across sub-Saharan Africa. Such businesses will in turn create demand for high quality animal protein products which can be sold at higher and more stable prices than would be available in local informal markets and in sufficient quantities to enable producers to benefit from economies of scale.

Through investing in poultry, egg and animal feed production in sub-Saharan African countries which display rapid economic growth, high political stability, low exposure to animal protein imports and high availability of animal feed, these financial institutions aim both to enable and to profit from the expansion of the world’s fastest-growing markets for animal protein. Through investing in the expansion and formalisation of poultry, egg and animal feed production (and of dairy processing companies), they seek to increase the efficiency of these firms and the quality of their products. This, they believe, will enable their investee companies to secure a large market share, and specifically to secure contracts to supply retail and restaurant chains with animal products. In so doing, commercial investors seek both to achieve an attractive rate of return on their investments in the short term and to secure a dominant position in industries whose size and profitability is expected to grow rapidly over the coming decades.

When Two Visions Become One?

While this report presents the Smallholder Intensification and Protein for Profit visions as animating separate investor networks, the animal protein value chains associated with them do sometimes overlap. As noted above, milk processing companies financed by commercial banks are often the main customers of producer cooperatives funded by DFIs, philanthropic organisations and impact funds. Meanwhile, both groups of investors appear to be increasingly involved in financing companies which supply feed and DOCs to smallholder poultry producers (with private equity funds showing growing interest in acquiring larger firms employing this model). This raises questions about whether these investors really hold two distinct visions, or whether they simply represent different facets or stages of a single process of value chain development.

Importantly, impact funds with investments in companies supplying agricultural inputs to smallholder farmers often aimed explicitly to ‘exit’ from successful investments through selling these companies to purely commercial private equity funds. To this extent, the intended ‘end point’ of many investments made by proponents of the smallholder intensification vision appears to be the establishment of profitable companies which can be transferred to the ownership of more commercially minded investors (as suggested by Watts and Scales, 2020). A partner in one impact fund highlighted that an important element of his firm’s mission was to enable emerging local businesses to grow large enough to access commercial sources of finance:

“I think the key role is, we fund projects that are not commercially bankable. So they can’t go to the banks. They have no securities and things (...) when we make investments and it comes to time for us to exit, we are also a source of investments for the larger private equity funds.”

(Interview 17, impact investor)

However, another interviewee noted that relatively few private equity firms were actually willing to invest in agricultural and food businesses in most sub-Saharan African countries (as noted in Ouma, 2020; Watts and Scales, 2020). It was therefore somewhat unclear how common it was for these investment visions and value chains to converge in practice:

“Africa will raise or do deals of a value equal to 4% of the entire private equity commercial business that’s out there. Of that, what comes to East Africa is maybe 10% or maybe 15%. The rest will go to South Africa, Nigeria (...) There is no sufficient pipeline [of investable businesses] to really attract, you know, people writing cheques of forty million US dollars, twenty million, to agriculture in this market. So we’re still writing cheques below that, maybe ten, fifteen [million dollars], which doesn’t attract big funds to set up operations here.”

(Interview 18, impact investor)

Even when private equity firms did acquire businesses established by the Smallholder Intensification network, it was often unclear whether these investors expected their new owners to maintain their focus on serving small producers and on increasing productivity without expanding animal populations over the medium to long term. However, some such interviewees appeared to assume that increased private sector investment into African animal protein supply chains would eventually facilitate the further commercialisation and intensification of protein production. Thus, one interviewee employed by a philanthropic organisation suggested that:

“Our goals are, you know, agricultural development goals. It’s driving inclusive agricultural transformation (...) if you drive productivity and create economic growth, the farm labour will transfer from farm primary production to off- farm labour and then outside. And the agricultural labour will also transfer to a higher value in a service, or manufacturing, or something like that.”

(Interview 07, philanthropic organisation)

This suggests that although this organisation’s investments in increasing agricultural productivity might be intended initially to increase the household incomes and nutritional health of small producers while maintaining their place within African food systems, these processes might eventually lead to the consolidation of livestock production in the hands of larger farmers and processing companies. If so then the future envisioned by proponents of the smallholder intensification vision might be expected to merge over time into that articulated by adherents of the protein for profit vision. This would represent a significant change in the purpose of investment in these firms, since it might be expected to entail both a shift away from the smallholder intensification vision’s focus on supporting small producers and an abandonment of its commitment to raising animal protein production through increases in productivity rather than growth in livestock populations. This was the expectation of one interviewee employed by an agricultural research organisation:

“Despite the movement to have modern poultry industries in these countries, the backyard system is still dominant (...) and the productivity of these can be enhanced by better selection amongst the indigenous breeds (...) this is seen as an intermediate avenue of getting more poultry into consumption. It is likely that the industrial poultry system will overtake this, maybe in twenty or thirty years’ time. But in that period of time, there is a great opportunity to improve those [backyard] systems three-, or four-, or five-fold.”

(Interview 15, agricultural research organisation)

It was not always clear whether proponents of the Smallholder Intensification vision shared this set of expectations about the long-term outcomes of their investment strategies. As a result, questions remain about whether the growing involvement of commercial banks and private equity funds in supplying agricultural inputs to small livestock producers represents a convergence between the smallholder intensification and protein for profit visions or a more opportunistic accommodation in which their differences are temporarily put aside. Moreover, while these initiatives appear to have had some success in attracting commercial investment into agricultural input suppliers and processing companies, especially in larger and more economically stable countries in Eastern and Southern Africa, it remains unclear how widely or rapidly this will be replicated elsewhere. While addressing this empirical question was beyond the scope of this report, it should be considered a priority for future research due to the far-reaching implications of any such shift both for the position of small producers in African food systems and for the likely future trajectory of livestock populations.

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