PE Feeds on Africa’s Food Sector

An expert from a Nairobi-based PE firm says this is the time to make deals in the rapidly expanding African food sector.

Food companies have not traditionally attracted the attention of private equity. But this is changing. Private equity firms are turning their eyes to the food sector in general and taking particular interest in emerging markets, where a handful of trends are fueling rapid growth in the food industry: burgeoning demographics, urbanization, and an expanding consumer class.

In Africa, the opportunity is huge. Markets are in need, populations are growing quickly, and economies are stabilizing and rising. One firm seeking to profit from the upswing is Nairobi, Kenya–based Fanisi Capital. It’s a $50M fund that makes PE and venture capital investments in businesses with potential for substantial growth—including food companies—in the East African countries of Kenya, Tanzania, Rwanda, and Uganda. Fanisi’s investments in the food sector cover the supply chain from maize mills to the frozen foods aisle.

“We like the food sector because the economy here in Kenya, and in Africa, is driven very much by consumption, and consumption continues to increase,” says Ayisi Makatiani, CEO and managing partner at Fanisi. “We are seeing the formalization of the consumer markets, and Kenya is ahead of the curve. We have seen huge growth in shopping malls, in grocery stores, in restaurants.”

More and more Africans are buying food and other consumer products from chains rather than from the local shops, and this opens opportunities for PE firms to invest in businesses and scale them up. Fanisi does deals in companies with annual revenues in the $1M-to-$10M range. Its investments target the emerging middle class—people who earn between $10 and $20 a day.

“That population is huge, and you will be able to build very profitable businesses that cater to this market,” Makatiani says. “We have made a decision to ride the growth in Africa.”

Recently, Fanisi invested $2.1M in European Foods Africa, an importer and distributor of frozen pizzas and frozen berries. “We really liked the technology behind the freezing,” he says. “When you take the pizzas out of the microwave, they are still very crunchy and fresh. That is new technology for Africa.”

European Foods Africa is now in eight supermarkets in Nairobi, says Makatiani, with the opportunity to expand into another 200 supermarkets, as well as to add new brands into the company’s product mix.

Another recent capital infusion was $6M in Kijenge Animal Products, which operates maize mills, makes animal feed, and raises and processes poultry. Other food investments include $3m in ProDev Group Holdings, which is engaged in maize production, and Ngare Narok Meat Industries Limited, which buys live cattle, fattens them up, and then sells high-end meat cuts at supermarket chains in Kenya.

There are a number of investment challenges in the African food sector. The most significant, Makatiani says, is information. PE firms must do a lot of their own research and extrapolation. Another challenge is finding good management. Firms usually have to train or import talent or hire industry consultants, often from outside Africa.

The focus of exits at Fanisi is a sale to strategic investors. “Before we even do the deal, we talk to the top three or four players in the market about eventually buying us out,” Makatiani says. “Everyone is looking for growth opportunities in Africa, and we can give international strategic buyers a good footprint and penetration in the African market.”

Lately, Fanisi has been hearing from large global PE funds that are stepping up their activity in Africa. That’s giving Makatiani additional confidence that his portfolio companies will attract acquisition interest once Fanisi has grown them to about $20M to $30M of annual revenue—a size range that appeals to larger PE funds.

“They keep knocking on our door,” Makatiani says. “Those who want to play in Africa have to figure out how to play now.”