Q&A: Rabo Equity Advisors' Rajesh Srivastava

Q: Indian PE firms have struggled with exits and this has impacted investor confidence. How has your sector been affected?

A: If you look at India over last few years the general fundraising environment has not been very good. The country's macroeconomic indicators have lagged and a lot and investors have been reluctant to commit. But this is a function of the macro climate, not the performance of individual sectors. It is difficult to go wrong in a sector like food and agriculture sector, which has done well and will continue to do well.

Q: How has the change of government earlier this year impacted LP appetite?

A: I think LP appetite has improved considerably from 6-8 months ago - they have started looking at India very positively again. Furthermore, some of the country risk issues that LPs have struggled with in the past have been removed to a large extent.

Q: So what are the key trends in the food and agriculture sector?

A: In most sub-sectors within food and agriculture, companies are now scaling up. The sector is growing in tandem with India's population. It is also being driven by increased demand for quality food. So as the volume and quality of food needs have changed, we need larger producers. However, these producers cannot scale up through debt funding alone, which is why private equity investment is a must. In addition, GPs are benefiting from the fact that the promoters of these companies are opening up to private capital.

Q: How have recent government reforms benefited the sector?

A: First, it is important to note that food and agriculture is now open to 100% foreign direct investment. You still can't invest in farmland, but everything else is open. Second, for many years various pieces of complicated legislation at state and central level have been a barrier. Whether it is issues with food safety regulations, licensing approvals, or restrictions relating to food and agriculture commodities, a lot of them have now been removed. The business environment is improving.

Q: What other tailwinds are supporting the development of the sector?

A: On the consumption side there are three driving factors: we are the one of the youngest countries in the world and it will continue to be for the next 20 years; we are seeing a lot more people eating out now, and there is a greater emphasis on healthy foods; and income levels are rising, which means there is more value-added food consumption. Per capita income is approaching $15,000 and we are going to see a lot of changes, for example people eating more cheese, meat, and functional beverages.

Q: What are the biggest challenges facing food and agriculture in India?

A: If you go upstream, the amount of land is not increasing so productivity becomes a key question. Per hectare productivity of all crops in India is still very low even though we produce enough to feed our people in terms of food grain. This is why agricultural inputs are so very important; we need to have better seeds, better fertilizers, and better implementation and mechanization. Fragmented land holdings are also a critical issue but this will not change in the near term. New modes of farming are gradually emerging - cooperatives and quasi-cooperatives such as farmer-producer organizations where a number of farmers join forces to introduce more mechanization and engage in collective buying.

Q: How important is the technology factor in all this?

A: Technology is a very important weapon that all sectors have to utilize and agriculture is no exception. Particularly on the food processing side, technology is evolving rapidly. It is also important on the production side in terms of better farming equipment. However, I would say that innovation is most clearly needed in the improvement of agricultural inputs - the production of better seeds and bio fertilizers is very R&D-driven. This doesn't necessarily mean genetic modification, but also more basic technologies in areas such as greenhouse cultivation.

Q: Is your strategy for Fund II different from Fund I?

A: Our strategy is the same; we will continue to do growth investments in the 42-odd sub-sectors within food and agriculture. The ticket size will change; where we were investing $8-10 million in the first fund now we will do $15-20 million as companies have changed in scale and size. I can see LPs getting very keen on food and agriculture as an asset class in the future. As the world's population grows from six billion to nine billion by 2050, more food will be required, but the amount of arable land in countries like India is shrinking or at best remaining constant. We need better inputs, and this is an opportunity for private equity.

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