Rabo Equity Advisors was the first firm in India to launch a dedicated food and agribusiness fund named ‘India Agri Business Fund 1’ in 2008, with investors including International Finance Corporation and DEG. Later in 2014, the PE firm floated its second fund with the corpus of $150 million to invest in in agribusiness industry, including food processing, cold chain storage and agricultural inputs.
Rabo Equity, which is 51% owned by Rabo Bank, has so far made 10 investments from the first fund in companies, including Super Agri Seeds, and Prabhat Dairy. It has already committed about 60% of the second fund and expects it to be completely deployed by next year. The firm is also in the process of exiting 3-4 of its portfolio companies from the first fund.
In an interview with Anuradha Choudhary of FE Online, Rajesh Srivastava, chairman and managing director, Rabo Equity Advisors, talked about the company, its growth plans, investment scenario, agribusiness industry and much more.
You have raised two funds so far. How has the journey been since you raised your first fund in 2008? How has the fund-raising and deal making condition changed since then?
Food and agribusiness sectors have been resilient in some ways to market dips since the “pull factors” of demand both in volume and value or quality are different. I can say though that Investors have been quite well disposed to us, especially after we proved success of our Fund I. If we do well in Fund II as well, which I assure we will, I see less challenges in growing this platform. Deal flow has been generous to us all these 10 years but I must say the tilt is now more towards early stages and buy-outs in our sectors than pure growth capital. The tougher challenge for me is on valuation expectations of Promoters due to market benchmarks.
Typically, how much do you invest, the quantum of stake you pick up, kind of returns you generate, and what is your investment period?
We typically invest $10-20 million for significant minority stakes (about 15% to 40%) and hold for about 5 years. This is the real work in progress period for us when we proactively help and support the companies to grow and grow sustainably. Return expectations are the same as a normal private equity fund. I am happy that we have demonstrated the success of food and agribusiness PE.
How has the experience been with your existing portfolio? Has there been any exit activity recently?
Existing portfolio has done decently well. I must confess we have had many learnings during the Fund I journey since no one had any track earlier. But we are now more seasoned and more rational while assessing the atypical risks of agribusiness PE. We are currently in the process of exiting 3-4 companies of our Fund I in line with the Investors’ expectations.
How much of the second fund has already been committed and by when you expect it to be completely deployed?
We have already invested approximately $60 million in six companies, and two more with another $30 million are committed. So 60% of the corpus is committed across very interesting, different sectors. I expect 3-4 companies to be invested in by next year which is well within the commitment period of the fund.
You have been investing in agriculture, warehousing and dairy business from second fund. What would be your sector focus going forward? What according to you or in which sector you think the golden opportunity lies?
Not many sectors can boast of each sub-sector growing in double digits and expected to do the same in next 5-10 years. But food and agribusiness does. I would like to pursue “enabling” sectors of agribusiness such as storage, logistics, markets etc on the agri side. On the other hand, food processing is a great sector and will continue to focus on “high value” processing where India could be globally competitive such as Organic and Nutraceuticals. The golden opportunity will lie in all those areas where production and consumption advantages can hold out sustainably for next decade.
What is your take on current scenario/agriculture conditions in the country, given that the government is giving push to the farm industry and widening crop insurance? As an investor, what do you think are the cons and pros in the sector right now and what can be done?
I see three major challenges.
One, Agriculture’s basic problem is disaggregated farmland which leads to major productivity challenges. Land aggregation is a sensitive subject and hence leasing, land banking etc appear a problem. To me, India is the fittest country for a cooperative movement in a mission mode. FPOs, SHGs are all good but not the panacea. If I look at the global food scene, there is not time to waste for India to raise its productivity bar. Ag-tech, innovation, farm mechanization etc are all available. The issue is in the cost economics of their delivery.
Two, Risk mitigation via crop insurance is again a problem since insurance products are yet inadequately designed and/or delivered. Without comprehensive insurance, farmers will continue to face distress and so would the lenders since the farm loan waivers will continue.
Three, another challenge is irrigation which seeks radical reforms, where I do see green-shoots (PPP models etc) but a lot has to be done to open up the sector fast to private capital. Micro Irrigation is fine but too small and too subsidy driven, needing a much more efficient and transparent delivery mechanism.
National elections are due in 2019. From that perspective, what is your biggest concern? What are your expectations, as an investor?
I will confine to connection between politics and agribusiness. It is true that farmers form a veritable “winning” base for all political parties and hence there is understandably a race amongst states (especially in election mode) to waive farm loans and extend sops, even if that bursts the balance sheet. To some extent this is inevitable. However, in order to avoid a longer term damage to credit culture, there has to be (i) a model code of conduct amongst all parties for enforcing credit discipline together with (ii) a very transparent and pragmatic mechanism to alleviate farm distress. I see no other challenge due to 2019 elections and the logic is simple: present Government is very well disposed to agri reforms and I can see no upsets. The consumerism and demograhics will drive a momentum growth in agribusiness, which can of course have a delta if politics does not overwhelm reason.