Food-safety concerns and a rising consumer class have China's buyout and growth capital investors heading out to the farm.
From fertilizer, food logistics and shipping, to milk, meat and snack producers, to rice and potato farms, China's staples and processed-food industries are attracting investors. It is a movement of capital that is a major change in a country where historical events have been tied to land reform.
According to data provider Dealogic, private investment firms and corporate acquirers spent $932 million in 2009 on investments in the agribusiness and food and beverage industries in China, up from $189 million in 2008. Investment this year is on track to be even bigger, at $611 million through April.
"A lot of investors became interested in this sector in late 2007, especially during the financial crisis," said Kevin Xu, an investment director with Shanghai-based growth capital firm Prax Capital.
Recently, a consortium of buyout firms, including Atlantis Investment Management Ltd., Blackstone Group LP, Capital Group Cos., Warburg Pincus LLC and Orchid Asia Group Management, invested $600 million in China Shouguang Agricultural Product Logistics Park, an agricultural products trading center; while Hopu Investment Management Co. put about $150 million into hog butcher China Yurun Food Group Ltd.
Deals such as these come on the heels of others, including a $791 million investment by Hopu and others in China Mengniu Dairy Co. Ltd.; an investment in Ma Anshan Modern Farming Co. by Kohlberg Kravis Roberts & Co. to help the dairy company build large-scale farms in China; and investments by SAIF Partners in potato company Landun Xumei Foods Co., corn company Jilin Sky-Scenery Food Co. and an undisclosed rice company in China's Heilongjiang province on the border with Russia.
China's long-term consumption habits are shifting from local fruit and vegetable vendors to Western-style supermarkets, a trend that has accelerated after a rash of food-related scandals in the country, according to several deal makers.
Additionally, foreign and local food companies are both seeking to find more of their ingredients locally. "The whole sector [is] being industrialized," said Brady Sidwell, head of Rabobank International's Northeast China research and advisory department for the food and agribusiness sector. "In the past 10 years, a lot of the major brands in China, or the branding business, has come from foreign players, and Chinese companies in the last five have started to catch up. Now it's about those brands trying to source more locally."
Mr. Sidwell also pointed to a strong initial-public-offering market in this sector as luring investors. According to Rabobank research, in 2009, 15 food and agriculture companies had public offerings in Hong Kong and local Chinese markets, reaching a total market capitalization of more than $2 billion. Local investors such as Shenzhen Fortune Venture Capital Co. and Jiangsu Venture Capital Co. did well with the IPOs of poultry company Fujian Sunner Development Co. and liquor maker Jiangsu Yanghe Brewery, respectively.
Another factor is the sector is less subject to upheavals associated with global imports and exports, thanks to the rising income of China's citizens and its steady domestic demand for increasingly scarce resources, Prax's Mr. Xu said. Recent government policies should allow more Chinese farmers to consolidate land into larger, potentially more productive tracts.
Historically, farming in China has been done on tiny, nontransferable plots maintained by a single family, which would consume most of the output. But in the past decade those restrictions have been eased, with the government allowing rural landowners to lease their land to other people for a longer time period. These leasing laws a shift from the way land was viewed by China's political leaders are helping to pave the way for agricultural consolidation and greater productivity, investors said.
Private-equity investors are helping to move land consolidation and the industry's professionalization along. Prax, which has passed on deals raising hogs, selling seeds, cultivating crops, and harvesting trees in the past two years, made its first investment in the sector in mid-April, providing $15 million in financing for fertilizer, pesticide and fungicide maker Rotam Global Agrosciences Ltd.
The company is uniquely positioned, Mr. Xu said, because it is one of only a few Chinese companies to sell pesticide, fungicide, and fertilizer solutions off the shelf. Most of the several hundred agrochemical companies in China sell active ingredients to farmers that then must be mixed on the farm.
Beijing-based SAIF is investing similarly, but in farming companies themselves. Potato harvesters, organic rice producers and corn-processing companies have all found their way into SAIF's portfolio lately, including a recent $25 million investment in Landun Xumei, a supplier of potatoes to restaurant chains.
From fertilizer, food logistics and shipping, to milk, meat and snack producers, to rice and potato farms, China's staples and processed-food industries are attracting investors. It is a movement of capital that is a major change in a country where historical events have been tied to land reform.
According to data provider Dealogic, private investment firms and corporate acquirers spent $932 million in 2009 on investments in the agribusiness and food and beverage industries in China, up from $189 million in 2008. Investment this year is on track to be even bigger, at $611 million through April.
"A lot of investors became interested in this sector in late 2007, especially during the financial crisis," said Kevin Xu, an investment director with Shanghai-based growth capital firm Prax Capital.
Recently, a consortium of buyout firms, including Atlantis Investment Management Ltd., Blackstone Group LP, Capital Group Cos., Warburg Pincus LLC and Orchid Asia Group Management, invested $600 million in China Shouguang Agricultural Product Logistics Park, an agricultural products trading center; while Hopu Investment Management Co. put about $150 million into hog butcher China Yurun Food Group Ltd.
Deals such as these come on the heels of others, including a $791 million investment by Hopu and others in China Mengniu Dairy Co. Ltd.; an investment in Ma Anshan Modern Farming Co. by Kohlberg Kravis Roberts & Co. to help the dairy company build large-scale farms in China; and investments by SAIF Partners in potato company Landun Xumei Foods Co., corn company Jilin Sky-Scenery Food Co. and an undisclosed rice company in China's Heilongjiang province on the border with Russia.
China's long-term consumption habits are shifting from local fruit and vegetable vendors to Western-style supermarkets, a trend that has accelerated after a rash of food-related scandals in the country, according to several deal makers.
Additionally, foreign and local food companies are both seeking to find more of their ingredients locally. "The whole sector [is] being industrialized," said Brady Sidwell, head of Rabobank International's Northeast China research and advisory department for the food and agribusiness sector. "In the past 10 years, a lot of the major brands in China, or the branding business, has come from foreign players, and Chinese companies in the last five have started to catch up. Now it's about those brands trying to source more locally."
Mr. Sidwell also pointed to a strong initial-public-offering market in this sector as luring investors. According to Rabobank research, in 2009, 15 food and agriculture companies had public offerings in Hong Kong and local Chinese markets, reaching a total market capitalization of more than $2 billion. Local investors such as Shenzhen Fortune Venture Capital Co. and Jiangsu Venture Capital Co. did well with the IPOs of poultry company Fujian Sunner Development Co. and liquor maker Jiangsu Yanghe Brewery, respectively.
Another factor is the sector is less subject to upheavals associated with global imports and exports, thanks to the rising income of China's citizens and its steady domestic demand for increasingly scarce resources, Prax's Mr. Xu said. Recent government policies should allow more Chinese farmers to consolidate land into larger, potentially more productive tracts.
Historically, farming in China has been done on tiny, nontransferable plots maintained by a single family, which would consume most of the output. But in the past decade those restrictions have been eased, with the government allowing rural landowners to lease their land to other people for a longer time period. These leasing laws a shift from the way land was viewed by China's political leaders are helping to pave the way for agricultural consolidation and greater productivity, investors said.
Private-equity investors are helping to move land consolidation and the industry's professionalization along. Prax, which has passed on deals raising hogs, selling seeds, cultivating crops, and harvesting trees in the past two years, made its first investment in the sector in mid-April, providing $15 million in financing for fertilizer, pesticide and fungicide maker Rotam Global Agrosciences Ltd.
The company is uniquely positioned, Mr. Xu said, because it is one of only a few Chinese companies to sell pesticide, fungicide, and fertilizer solutions off the shelf. Most of the several hundred agrochemical companies in China sell active ingredients to farmers that then must be mixed on the farm.
Beijing-based SAIF is investing similarly, but in farming companies themselves. Potato harvesters, organic rice producers and corn-processing companies have all found their way into SAIF's portfolio lately, including a recent $25 million investment in Landun Xumei, a supplier of potatoes to restaurant chains.
