Delivering on development equity

A balanced blend of private equity and development finance aligns investor returns with food security, job creation, skills improvement and community upliftment

With a capital injection from global investors, a long-abandoned palm oil plantation and mill in Daru, Sierra Leone, is expected to produce over 5,000 tonnes of palm oil in 2014, and permanently employ more than 400 people. Complementing its own plantation output, the Goldtree palm oil business supports an extensive agricultural community, buying in fruit from over 5,000 out-growers. It is working on significantly improving the fruit yields and technical skills of these smallholder farmers while mitigating environmental risk and dangerous agricultural practices. Goldtree is an ideal example of the sustainable and far-reaching impact of development equity.

This form of investment takes conventional private equity to a new and more meaningful level. Phatisa is fund manager of the African Agriculture Fund (AAF), which in turn manages the Goldtree investment on behalf of multinational investment partners. Development equity takes traditional private equity, which is strongly focussed on investor returns, and combines this with development finance from governments and institutions. The outcome is multifaceted and positively impacts on all stakeholders.

Operational Goldtree mill, Q3 2013

Phatisa’s AAF is a private equity fund focused on businesses in agriculture and the food value chain. To date, it has committed investments in excess of $100 million in 12 businesses across the continent, reaching from Sierra Leone in West Africa to Madagascar in far East Africa, and a further eight countries in between. These projects account for about 50% of the total $ 246 million AAF investor equity available for investment. They touch on primary farming, protein production, processing, inputs, and fertiliser, mechanisation and FMCG beverages.

The Goldtree palm oil plantation and mill was the first agri investment of AAF, made in 2011. It was a unique start-up operation without a meaningful performance history or asset base and arguably did not meet the ideal criteria of an AAF investment. But it had exciting growth prospects which appealed to a range of development equity partners. These now include international development finance institutions; development and commercial banks including the Development Bank of Southern Africa; government agencies of Spain, the US and France; fund-of-funds; a large SA commercial bank and American and European private investors.

Palm oil is used in a vast range of edible (cooking oils and fats, margarines, ice cream, etc.) and non-edible products (soaps, bio-fuels, etc). The edible oil yield per hectare of a palm tree is typically more than three times that of soya or canola. Goldtree operations are located in a classic palm oil climate, close to water, and a reasonable six hour drive from the capital city Freetown. Its potential rewards for investors are closely aligned to the AAF investment philosophy of development equity. This approach builds sustainable assets in emerging countries, has a meaningful influence on communities through employment and training, and positively impacts on the African growth story.

Pre investment Goldtree mill, Q4 2011

At the time of AAF’s initial investment in Goldtree, the mill and surrounding plantations had been destroyed during the 1991 to 2002 civil war. Palm oil processing was basic and involved cooking the fruits, trampling them, adding water so the palm oil product would float, and then flushing the pollutant waste into rivers. This was a dangerous, environmentally destructive and low yielding method.

With an investment injection of $20 million plus and ongoing support from Phatisa agri specialists, Goldtree has been completely transformed. It now has a mechanised, safe and hygienic processing mill supported by office facilities, a canteen, workshops, stores, a quality control laboratory, holding tanks and a fleet of vehicles.  While presently managed mainly by expat staff, the aim is to transfer skills so local employees can ultimately run the business.

A development equity opportunity such as Goldtree is the perfect place for DFIs who want to invest in a way that generates returns and sustainably uplifts communities – rather than simply donate. Besides providing them with performance which could be over 20% per annum in the medium term, development equity is transformative. A project such as Goldtree has created a meaningful rural economy in the Daru area. We hope that a lost generation affected by civil war now has opportunity and prospects.

The expected investment horizon for AAF’s investment in Goldtree is until 2020 when at time of exit, the business should be solid, sustainable and pleasingly profitable. Over that period annual crude palm oil output should rise to 18,000 tonnes, supplying domestic and regional markets.

In line with global trends of increased accountability, private equity investors and particularly those in development equity are demanding high standards from their fund managers on sustainable ESG factors (environment, social and governance). AAF is able to demonstrate the many ESG qualities of Goldtree to its governmental and DFI investment partners.

Its own relatively small plantation is leased from the local community and provides them with a secure rental income. AAF follows an ethical code for land acquisition and land use in its projects, realising the political and social sensitivities of property when owned or used by foreign investors. Land must also be used sustainably and primary forest should never be destroyed.

In buying fruit from out-grower farmers in the nearby 40 km radius, Goldtree generates income for close to 20,000 people on a seasonal basis. Paying a monthly local wage bill of around $60,000, the company is a strong catalyst in transforming Daru and its economy.

With a focus on environmentally friendly business methods, the mill is energy self-sufficient, reusing fruit fibre from the milling process. Waste water is treated before being irrigated onto plantations as a fertiliser or recycled into rivers.

Goldtree ensures that workers prioritise safety, for example, by using personal protective equipment. Good corporate governance structures include anti-bribery and corruption policies and social impact measurements include offering the out-growers a fair and transparent price formula for their products.

Supporting all AAF agri investments is a Technical Assistance Facility, funded primarily by the European Commission. In the Goldtree project, this facility is helping out-growers improve their yields through training on effective replanting, growing and harvesting. For example, by safely using sickles on poles for cutting bunches, farmers no longer have to climb tall palms as part of a dangerous and slow harvesting process.

Duncan Owen