Dansong looked out over the sun setting on the rice paddies of South China and shook his head – he was a tired farmer. Over the last year, Tang had hopped from province to province looking at hundreds of agriculture investments, leaving a host of private equity funds in his wake. Under the moniker of the Agriculture Fund of China (AFC), in cooperation with the all-powerful Chinese Academy of Agriculture Sciences (CAAS), Tang raised a quarter of a billion dollars from China’s foremost institutions for a series of funds.
Perhaps this tireless dedication to the agriculture sector is one reason Tang has won so many awards. As the winner of the China Modern Agriculture Industry Investment Seminar (CMAIIS) award as the “Most Active Investor in Modern Agriculture in 2013”, Tang’s AFC initiative has won a spate of accolades, including the most recent from China Venture as an “Innovative Investor in Modern Agriculture 2014”. Having staked his claim in the China market, Tang is now heading overseas to raise another quarter of a billion under Silk Road Agricultural Fund of China Ltd, a private equity fund focused on investing in food production, processing and distribution projects and related technologies.
“The economic miracle that witnessed China’s global emergence is well documented,” remarks Tang, whose AFC team has participated in over 70 projects worth USD1.3 billion and exited 30 companies via IPOs. “The ongoing evolution of the largest agriculture economy is no less impressive, impacting the lives of hundreds of millions of farmers and 1.3 billion consumers. Employing 300 million farmers, the sector must continue to rank first to feed 20 per cent of the world’s population on only 8 per cent of the earth’s arable land. The trend to more investment, particularly to serve the needs of wealthier consumers, and the outward reach to buy agribusiness overseas, will continue at a strong pace,” he adds.
Flow to Grow
In these days of dropping commodities prices and massive currency fluctuation it is not surprising that the interest of China’s biggest private equity investors is being drawn to the relatively staid sector of agriculture.
The flow of money in and out of China in the agriculture sector is accumulating at a rapid rate. At September 2014, China M&A agriculture deals reached a record USD9.8 billion (compared to USD3.5 billion by US companies), a seven-fold jump from 2013, according to financial researcher Dealogic Plc. China enterprises made 27 transactions with major overseas forays, compared with total global acquisitions of USD16.7 billion during the period.
Tang is not surprised to see the likes Jack Ma at the vanguard of this trend. Yunfeng Capital, established by the Alibaba founder with CITIC Private Equity, one of China’s largest financial institutions, spent USD320 million last year acquiring a 60 per cent stake in dairy giant Yili Industrial Group. Alibaba has established an agriculture platform on Taobao.com through which farmers can enjoy such services as marketing and logistic support. Meanwhile, NetEase purchased a Zhejiang Province pig farm as Lenovo set up Joyvio to invest up to USD300 million in agriculture, including an opening salvo in blueberry and kiwi farms.
“One would expect the M&A numbers will remain dominated by Chinese firms eager to expand, with billions flowing to markets like Australia, Canada, the US, and regions such as Central Asia,” remarks Doug Betts, Managing Director of Silk Road AFC Management Ltd, the investment manager of the Silk Road Agriculture Fund of China. “However, the real investment play is in China itself, where the giants of the agriculture industry are now being formed. The key to attracting foreign investment is to provide sophisticated investors with a platform based on Western due diligence and transparency practices.”
Betts points to China M&A leader COFCO, China’s largest supplier of diversified products and services in the food sector, which is now being positioned to rival the global merchants of grain, such as Cargill and Continental. Just over a year ago, a consortium led by COFCO paid USD1.4 billion for 51 per cent of Dutch grain trader Nidera BV, and in April 2014, COFCO invested another USD1.5 billion for 51 per cent of Hong Kong-based Noble Agri Ltd. In addition, COFCO, China Jianyin Investment Co., Ltd. and Louis Dreyfus (Beijing) Trading Co., Ltd. have jointly established COFCO Agricultural Industry Fund Management Co. Ltd.
But even this is small potatoes when one considers last year’s announcement by real estate conglomerate Hengda Group to invest USD16 billion in agriculture, of which USD1.2 billion has been placed already. Then there was the creation of an offshore platform by government-owned Beijing Agricultural Investment Fund, which committed USD3 billion to Australian dairy, beef, lamb and aquaculture. Not to mention the 2013 deal in which US pork producer Smithfield Foods was acquired by Shuanghui International in a USD7 billion deal that remains the largest ever outbound acquisition of a US company by a Chinese company.
Global private equity leaders are eager not to be left out of the bonanza. KKR & Co. continued to place money in China’s food sector in 2014 when it agreed to invest USD400 million in chicken meat producer Fujian Sunner Development Co. Ltd. KKR has been followed by private equity initiatives from the largest commercial agricultures companies and the likes of the World Bank.
The statistics are staggering by any measure. China produces 70 per cent more than the entire agricultural output of the European Union, 150 per cent more than India and 205 per cent more than the US. As such, China produces close to 20 per cent of the world’s cereal grains, almost 30 per cent of its meat, and 50 per cent of its vegetables and ranks as the largest global producer of pork, wheat, rice, tea, cotton and fish.
The Organization for Economic Co-operation and Development (OECD) and the Food and Agriculture Organization (FAO) state that the historic economic and social transformation of China evidenced in the past four decades will continue to have major implication for international agricultural markets. OECD/FAO indicators point to continued robust growth in domestic demand for agricultural products and challenges on the supply side. China has undertaken significant reforms and depending on future policy options may engage world markets more or seek its own means to meet increasing domestic demand.
“China GDP growth is forecast to gradually slow over the next decade from the current 8 per cent average range to 6 per cent,” adds Steven Fong Sze Chun, Managing Director of Agriculture Fund of China (Hong Kong) Ltd., the Hong Kong operating company for AFC. “Still, at this level, per capita income will more than double over the next decade, positively affecting domestic demand for food, particularly for foods with higher income sensitivity.”
Fong adds that the central government will not let up its guard on increasing rural incomes and will make sure that staple crops remain in good supply. Increased availability of food and higher incomes has witnessed the number of undernourished falling by almost 100 million since 1990, despite adding 200 million people to the population. However, reducing the number of persons undernourished remains a challenge and China is hoping that its government initiative can be supplemented by the private equity world.
If you ask Tang whether that is possible, he will tell you that he strongly believes that the key to success in China is the ability of private equity to work in close cooperation with the leading government bodies – that is the major reason why he has joined the resources of CAAS, the largest national agricultural research institution in terms of researchers, facilities and reputation, with the world’s leading private equity players. “There is no one that understands the sector better than CAAS,” concludes Tang. “The issue is how to commercialise this extensive knowledge with private investment.”