Affinity bets again on the protein theory

The 12th and final investment from the fund completes the circle. Affinity has paid $123 million for a 40% stake in Beijing's largest dairy provider as the group looks to expand, addressing the milk demand-supply imbalance and the fact that consumers are willing to pay out for safer and better quality products.

"Small farms run by families produce 86% of China's milk," says a source close to the transaction. "How can 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."

The investment will be structured as a joint venture, with Beijing Capital Agribusiness Group - also known as Sunlon - holding the majority share. Sunlon is a food conglomerate, created in 2009 when the Beijing government decided to consolidate assets stretching from livestock to an interest in Starbucks' local operation.

Sunlon's dairy farming business will be spun out into the joint venture. It currently owns 32 farms with 46,000 head of cattle and accounts for 60% of Beijing's milk supply. The plan is to increase the herd to 100,000 cows over the next five years.

As it stands, Sunlon is China's third-largest dairy farmer, after Hong Kong-listed China Modern Dairy and Huishan Dairy. The former has seen significant expansion in the last five years - its herd has grown more than sevenfold to approximately 180,000 cows - with support from KKR and CDH Investments. The latter was previously backed by CLSA Capital Partners.

By contrast, Sunlon has somewhat unusual state-owned origins. "The business has been around since 1949," the source explains. "When the Communists came to power in Beijing the country was coming out of civil war and the leaders decided they needed a supply of fresh milk for the government. The company still delivers milk to the leadership, although obviously this is a very small portion of what it now does."

As a result of this legacy and ownership structure, Sunlon claims to have the leading domestic cow breedingcenter. Modern Dairy imported the cows that form the basis of its herd, or bred them locally using semen from US and Australian and New Zealand cows. Sunlon, however, 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.

Affinity sees significant growth potential in the business over the next 10 years, the source adds, noting that China's milk consumption is still less than one fifth that of the US.

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