Affinity seals $123m dairy JV with Chinese SOE

Affinity's partner in the new venture is Beijing Capital Agribusiness Group - also known as Sunlon - a food conglomerate created by the Beijing government in 2009, with assets stretching from livestock to a minority interest in Starbucks' local operation.

Sunlon will spin-out its dairy farming operation into the joint venture, taking a 60% stake to Affinity's 40%. The assets comprise 32 farms with 46,000 head of cattle, which currently account for 60% the Beijing region's milk supply.

The plan is to increase the herd to 100,000 cows over the next five years, capitalizing on the growing demand for fresh milk and on consumers' increased willingness to pay a premium for safe and better quality products.

"Small farms run by families produce 86% of China's milk," says a source close to the transaction. "How can you expect people like that to introduce the equipment and hygiene standards required? The government has to encourage the development of a group of very large firms run as corporations, like in the US and Europe."

Sunlon was set up in 1949 by the newly installed Communist Party leadership, which wanted a fresh milk supply for government employees at a time when China was rebuilding after years of civil war.

The business is currently the third-largest dairy farm operators in China after Hong Kong-listed China Modern Dairy and Huishan Dairy, and its history and origins contrast those of its rivals.

China Modern Dairy is a relatively recent creation, having achieved significant scale in the last five years, with support from KKR and CDH Investments, which exited the majority of their holdings to Mengniu Dairy earlier this year. Huishan, meanwhile, transformed from SOE to private ownership in the early to mid-2000s and its previous PE backers include CLSA Capital Partners.

Consequently, while others have built herds from imported cows, Sunlon has been cross-breeding within its own herd for 60 years and the milk yield per cow is said to be close to international standards.

This is not the only food safety-themed investment in the Affinity Asia Pacific Fund III portfolio. The private equity firm completed buyouts of New Zealand poultry producer Tegel Foods and Australian deli meats specialist Primo Smallgoods, both of which are pursuing distribution deals in emerging markets in response to growing demand for premium produce.

Affinity's fourth fund launched last September. A first close of $1.5 billion came in March and a second close of $2.5 billion followed four months later. The final close is expected by the end of November.

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• Topics
• Expansion
• Consumer
• Greater China
• China
• Affinity Equity Partners
• Consumer
• Growth capital
• Joint Venture