IFC considers $20m investment in Hosen's China agri fund

According to a disclosure, the fund will be managed by a 23-person team, most of whom were initially part of New Hope Capital, the financial business arm of New Hope Group, China's largest animal feed producer.

New Hope said last year that it wanted to establish a $200 million offshore fund to invest in food-related businesses. At the time, Singapore's Temasek Holdings, Japan's Mitsui & Co. and grain conglomerate Archer-Daniels-Midland were said to have signed up as LPs in the vehicle, alongside New Hope.

The Chinese company previously backed Hosen Capital's agriculture-focused renminbi fund - New Hope Agricultural Investment Fund - which raised RMB1 billion ($162 million) in 2010.

Food security, food safety and farm technology are expected to be prominent themes in the new fund, tapping into wider issues in China's agriculture sector. The string of a safety scandals in recent years have created a climate of distrust, which has added impetus to an existing movement - driven by rising household disposable incomes - whereby consumers are willing to pay a premium for quality products.

This has wide-ranging implications for private equity. There is a need for the introduction of global standards into China's food-processing and agriculture industries, which covers everything from quality control to increased mechanization and automation.

China Modern Dairy, a portfolio company of KKR and CDH Investments, is a good example of this. The investment came shortly after the tainted milk products scandal of 2008, which cost the lives of six infants and hospitalized hundreds more. It was predicated on a demand from Chinese dairy brands for good quality milk and the company signed a 100% off-take agreement with China Mengniu.

Already a small shareholder in China Modern Dairy, this week Mengniu acquired a 26.9% stake from the two private equity investors.

Lunar Capital, meanwhile, has made several investments in Chinese food and beverage brands. It targets "tired" brands that have slipped out of fashion and seeks to reconnect them with a younger demographic, such as beef jerky producer Yonghong and walnut beverage maker Sichuan Zhiqiang.

The agenda is very much integrate and stabilize, trial new product lines, and establish a position in new market segments, but food safety features prominently in the stabilization phase. At Sichuan Zhiqiang, the initial focus has been on upgrading equipment, removing supply chain weaknesses and achieving international product quality accreditation.

Beyond improving domestic operators, private equity investors have also sought to secure high quality food supplies overseas with a view to boosting these companies' China exposure and perhaps eventually exiting them to Chinese strategic players. Affinity Equity Partners is following this path with Tegel Foods, a New Zealand poultry firm, and Primo Smallgoods, an Australian deli meats producer.

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