Monday, February 6, 2012

Funding for agri-biz sector

This article was published in Hindu BusinessLine on February 6th, 2012
http://www.thehindubusinessline.com/industry-and-economy/taxation-and-accounts/article2863213.ece

Think venture capital and private equity funding and IT, Telecom and Bio-Technology industries crop into our heads, followed by humongous returns like 10,500 and 1,692 times the initial investment in the case of Body Shop and Apple Computers. In the year 2011, the PE and VC deals in India totalled close to $11.26 billion, up about 25 per cent from that of 2010

(www.ventureintelligence.in; investments in real estate excluded). In spite of the turmoil in the financial markets, the inflow of PE and VC funds have seen a decent increase during the last year. Most of the investments have gone to the IT and ITES and BFSI sectors.

However, a miniscule amount has also made its way into the agri-business domain. There were 11 deals, totalling $116.8 million in 2010 and 10 deals worth $89.16 million in 2011 for agri-related businesses, a decline of approximately 24 per cent.


WHY INVEST

Given that agriculture is far from the kind of characteristics that a funding agency looks for in a business, viz, new, upcoming, at least 300-400 per cent returns, the above statistics is not surprising. However, knowing that agriculture is seeing a genuine revival in India, with many business houses getting into agri and related businesses on a big scale, the need for funds in this sector cannot be denied.

Agriculture contributes about 20 per cent to the nation's GDP and accounts for 50 per cent of the workforce. But, what is it that will attract the PE and VC funds to this sector? First, demand for agri commodities is increasing and will continue to increase as the world at large becomes more conscious about food for all.

Secondly, the need to innovate in this sector becomes more important as less and less land is available for agriculture with each passing day. Thirdly, an agri business does not mean farming alone. It includes investment across the value chain starting right from the agri inputs, agri output, agri produce distribution and agri services including finance in several sub-sectors within the agri business such as agriculture, horticulture, dairy, fisheries, poultry and meat etc. So within the gamut of agri businesses, there is a lot of scope.

Fourth, entry of large business houses in this sector offers more organisation and structure to the sector and scope for collaborations and consolidations.

WHY STAY AWAY

Howard Van Auken and Clyde Kenneth Walter of Iowa State University in their paper, “Facilitating the Flow of Capital to Niche Agricultural Producers in Rural Markets” published in Small Business Institute Journal in the year 2010, rightly point out that “Availability of capital has historically been a challenge in rural markets.

Niche agricultural producers face a daunting task when trying to raise capital because they commonly have business models that are not well understood by providers of capital and, thus, they are considered high risk”.
It is true that most of the PE and VC funds by virtue of having been promoted by Silicon Valley protagonists, understand computer software, hardware and bio-technology, but may not understand agriculture or related businesses. They may be experts at knowing about bugs and viruses, implementation issues, but may be totally unaware about the quality of soil or the pesticides needed to control certain pests.

Also, the gestation period may be pretty high for agri-businesses with cyclicality built in. In comparison to knowledge based businesses, agri-businesses are not only difficult to scale up, but also time consuming. This is against the PE and VC funds characteristics which typically look to exit in 5-6 years.

Barring a few bigger players, agriculture primarily comprises of relatively unaware farmers, who might look at the entire process of obtaining funding as a hassle. Similarly, capital providers might perceive them to be too risky because of the size and unorganised nature of their operations.

Another major hurdle is that, the VC and PE firms generally look at larger ticket sizes. To elaborate, in the past 10 years, there have been 3,667 non-agri PE and VC deals in India, with an average size of $17.28 million each. Compare this with 62 deals in the agriculture domain with an average deal size of $11.14 million each, over the last ten-year period.

What Now

The market is definitely responding to the needs of the sector with dedicated funds like India agri business fund by Rabo bank and Omnivore Capital by Godrej Agrovet coming up. The key is to build in or include the social benefit/impact angle when doing the project evaluation. Also, a lot needs to be done to educate, organise and assist the capital-seekers so that they can benefit from such funds. Here, regulators will need to take a lead. Unless they help the sector organise and seek co-financing, it would be very difficult for the VC and PE providers to finance every single capital seeker individually.



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