China’s CIC to focus on food

Writing in the Financial Times, Xuedong Ding, CIC's chairman and CEO, said that the private sector and institutional investors have a significant role to play in providing an ample supply of food at affordable prices to a growing and increasingly prosperous global population. Agriculture is also an inflation hedge for long-term investors.

Ding noted that private capital has entered areas such as agricultural supply-chain management, processing and distribution, but it has avoided assets most closely involved in increasing the food supply. He identified volatile crop prices, difficulties disposing of assets and onerous regulation as the major factors that dissuade shorter-term investors.

"The drought of capital afflicts the entire industry, from infrastructure, such as irrigation, to grain and animal protein production, to support services such as transport, storage and processing. This is a serious misallocation of funds. All these areas require investment if adequate supply is to be produced," Ding wrote.

Much of the additional demand for cleaner and higher quality produce comes from emerging markets and strategic and state-linked investors from Asia to the Middle East have been seeking to lock up supplies.

China is no exception. According to the UN Food & Agriculture Organization, the country's per capita daily calorie availability relative to that of the Organization for Economic Cooperation and Development average increased from 66% in 1978 to 89% in 2008; protein intake jumped from 53% to 90%. Per capita pork consumption is expected to be nearly 4 kilograms between now and 2022; poultry will jump by 2 kg, and beef and veal and whole milk powder by 0.4 kg and 0.3 kg.

Private equity investors have sought to capitalize on the trend, but in terms of acquisitions overseas, they tend to focus on downstream assets.

For example, following its acquisition of Tegal Foods and Primo Smallgoods in Australia, Affinity Equity Partners is said to be developing distribution channels in other parts of Asia. Hong Kong-listed Chevalier Holdings assumed control of vegetable wholesaler Moraitis Group from Catalyst Investment Managers with a similar strategy in mind.

Upstream agricultural assets are far less well-penetrated, largely for the reasons Ding cited. One of the more successful investments in the space in Australia, the acquisition of cattle enterprise Stanbroke Pastoral Company by AMP's life insurance unit, delivered an IRR of 24%. But the holding period was 39 years, long enough to ride out the volatility that comes with soft commodity and seasonal exposure.

Industry participants told AVCJ last month that they are looking at infrastructure-style structures with a more consistent returns profile based on groups agreeing to buy a certain portion of future output. Australian investment manager QIC has been engaged in broadly the same discussions with Chinese companies. The idea is that these agreements would be the precursor to lasting relationships and equity partnerships on new projects.

With its long-term horizons, CIC is one of a handful of sovereign funds and institutional investors that could ride out commodity cycles. As of year-end 2012, long-term investments - including direct investments in non-public companies and private equity, real estate, mining, and infrastructure - accounting for 32.4% of CIC's portfolio.

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• Topics
• Greater China
• Consumer
• Industrials
• LPs
• Australia
• China
• Agriculture
• CIC
• Sovereign wealth fund