Foods and agriculture – the next big theme?

"The theme actually started a number of years ago," Patrick Siewert, MD with the Carlyle Group, told AVCJ. "As soon as China and India in terms of demographics start to take off, it's the rebalancing of Asia, if not the world, relative to consumption."

China the major driver?

The rise of China is evidently one of the main drivers of the theme, largely by perpetuating "the demand and attractiveness of the sector," one leading private equity player in the space told AVCJ, while another noted that, in terms of the F&B opportunity, "the pie is growing." China Fishery, with its focus on Chinese consumers, despite its Singapore domicile and worldwide catchery range, is one obvious example, as is Carlyle's recent $175 million investment into CP Pokphand, a leading Thai-originated China-focused animal feed producer.

However, the region's other big continental market, India, may be an arena for an even larger agricultural opportunity, not least as agriculture and farming remains a far larger contributor to GDP proportionately than China. Recently, Rajiv Sabharwal, executive director at ICICI Bank, predicted a doubling of the country's foods and agricultural sector to $280 billion over the next decade, generating up to $50 billion of investment opportunities over that period.

The policies, ambitions and knock-on effects of the agricultural transformations do not stop at the borders of either country. To take one example, Malaysian and Indonesian palm oil and other plantations companies have become attractive targets for Chinese acquirers. "China has come to Malaysia in the past looking to buy plantation companies," noted an analyst source in Malaysia. "So far they haven't been successful in trying to acquire stakes, but they keep trying." And, the source adds, the Malaysian government is ready to support these moves, in the interests of cross-border economic cooperation.

Safety and consolidation

Food safety has become an inevitable priority in the wake of the melamine scandal in China, but simply mirrors an overall push across the PRC to consolidate and upgrade its existing industrial base in almost every sector. Private equity has been made welcome as a facilitator of this change.

"The government is also pushing in that direction, to have consolidation," AVCJ's source remarked. "Companies not performing in the right and legal way will be pushed out of the business." And fragmentation in the agricultural sector is a concern in India as in China, Sabharwal pointed out.

The ultimate issue to building out the agricultural value chain in China is, "how the company can integrate the farming model to have a sustainable platform in terms of quality and consistency," according to AVCJ's source. "The government is implementing systems, and a lot of companies are taking the leads by implementing changes by themselves."

This systemic focus correlates with the focus on food safety and food quality, and is one area where private equity, particularly foreign firms, has already played a role. According to one source, the long-running series of investments into China Mengiu Dairy Co. Ltd., culminating last year in Hopu Investment Management's $780 million co-investment with grains and foodstuffs trading SOE COFCO, is probably the most visible example. As another source adds, Chinese authorities have even got to the point of screening rival potential private equity investors in dairy and other related plays, as they bid to refinance and restructure the sector.

Upgrades and improvements

The food safety issue has helped bring the question of brands to the forefront in Chinese foods and agriculture. When it comes to private equity investors and strategics alike, AVCJ's source pointed out, "all of them are looking at brands, more obviously because of the foods scandal. In the foods and agro space, brands are the most important assets. Having the right brands is the key to quality."

Partly this focus on brands is the obvious consequence of the safety scandals, with a search for trusted status. But it also, once again, reflects the broader pattern as China's industrial, and consumer, base matures. Companies are seeking to move up the value chain and away from low-cost producer status, by accumulating more brand value as they diversify and improve their product offerings. "More and more successful companies are getting out of the commodity markets," the source continued. "You look at the largest companies like Yurun: they really concentrate on branding their products, but also offering more and more high-end products."

Product improvement and diversification is indeed becoming another major feature of the foods and agriculture story. As Chinese producers become more sophisticated and more aware of the benefits of value-adding inputs into their products, they are generating higher profit margins by enhancing the quality, diversity and pre-sale levels of processing of their wares. As consumer tastes mature and grow more sophisticated, so does the corresponding understanding among companies of how to really generate value and drive profits in the space.

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• Topics
• Greater China
• Consumer
• Industrials
• The Carlyle Group
• Patrick T. Siewert
• Warburg Pincus Asia
• Capital International