India Agribusiness Fund is a leading private-equity fund focused on the agri-business and rural sectors. Sponsored by Rabobank, itself primarily a food and agri-bank globally, the fund has invested in a range of companies over the last few years. In this interview in his Delhi office, Rajesh Srivastava, Chairman and Managing Director, Rabo Equity Advisors Pvt Ltd, which is the investment advisor to the fund, talks about the fund and the opportunities that are opening up in India. “In our business, there are still a few sectors which can be great private-equity stories, but you cannot invest because they are so controlled,” says Srivastava, a career corporate and investment banker, who has been with Rabobank for 14 years. Excerpts from the interview:

Could you tell us something about Rabo Equity?

This is Rabobank’s sponsored fund called India Agribusiness Fund. Six-seven years back we thought why not start a private-equity business focused on the same sectors.

In 2007-08, we started talking about this fund and brought in some other investors — IFC (International Finance Corporation), FMO (Netherlands Development Finance Company) and DEG (German Investment Corporation), which are all developmental institutions, and CDC from the UK, plus some commercial investors later.

We set up a $120-million fund. We invest in growth and expansion of companies. Being the first fund of its kind anywhere in Asia, we were cautious. We wanted to build up a success story. We are getting there.

We started investing in 2009. Now we have done eight investments and ninth is round the corner. Almost 75 per cent of the fund has been deployed. With the complexities you have in agriculture and food business in India, we have done fairly all right. We have invested in different sub-sectors — agri-biotechnology, basmati rice, vegetables, food packaging, warehousing. It is a decent basket.

Typically how much do you invest in a company? What stake do you pick up?

Our maximum is $12 million and minimum $3 million. On an average, it will be $8 million.

The sweet spot would be [between] 20 per cent and 30 per cent. Except in the case of one listed company, where we could not have taken more than 15 per cent at that time because of the takeover code, [in] all companies we are [at] upwards of 20 per cent. We don’t invest in any company where we are an insignificant minority. Or, we do not have adequate representation on the boards. The idea is that besides being an investor, we should bring our knowledge and grow the investment on the back of our knowledge. We only do expansion and growth. The company concerned should have some track record. We try to put in money at a juncture where there is an up-curve and where you can grow to the next stage.

What is the kind of returns you can expect?

On an average if you get 20-23 per cent IRR (internal rate of return), you should be happy in this sector. Maybe five years later, it should be a different story. In the case of private equity at large in India, this is a decent enough return. If you get that in an agri-fund, investor should be happy.

You mentioned that 75 per cent of your fund has been deployed. Which means you would start looking to raise your next fund? Has that process started?

Yes, we are discussing internally with the sponsors. I think in the course of the next few months, we should definitely be out with the new fund. We are contemplating a $250-million fund.

We want to tap a few Indian institutions this time. Last time, there were no Indian institutions. It was also new, so we didn’t know the appetite. But in these last four years, we have been meeting banks and institutions, and they seem to be quite happy with the platform we have been able to build and also the fact that the Indian food and agri-business has come to some stage where you can now look at companies with some names, some size. Let us face it, food and agri in India is a great story.

But not too many people are sure of it. There are so many policy issues, so many government interventions and all that…

Despite that, I think one extremely good thing in India is on the demand side, you can’t go wrong. That equation is very strong. The demand for food per se will grow. On the other hand, production and productivity are not keeping pace. Land is a constraint. Irrigation is a constraint. Policy, regulation is a constraint.

If you have small bases, small per capita consumption, small per hectare production, restrictive policies, it can open only one way right. It is a one-way street. For us, in private equity that is the upside story.

The only issue is that you can go wrong with the timing. You can expect that this sector will open up in two years, it may take five years. This is uncertainty which you live with. That is an equity risk you do take. Sometimes you get encouraging signals, like recently you had FDI opened up and you get enthralled that things will get moving. In our business, there are still a few sectors which can be great private equity stories, but you cannot invest because they are so controlled. Like fertilisers, sugar. They are not the PE favourites. They can be huge capital guzzlers. We are waiting.

Have you had any exits so far?

We had one exit. We sold one company which was into edible oils, last year. We sold it to one of the major international companies. The promoters also sold with us.

Apart from the policy and regulatory challenges, what are the other risks and challenges you have faced so far in your investments?

Two or three of them. One, if you look at the mid-market promoters, that is a class by itself. Because [they are] family owned, they are not open to professional investors, they are not open to the usual corporate governance which we want to inculcate. If you go to agriculture and food companies, then you have mid-market companies and promoters coming from agricultural background. It is a different story. The challenge is to open them up, make them private equity friendly. I guess at every stage, right from the negotiation of the deal to handholding, it is some lung power that one has to use to convince them. It is not easy.

The other one in agriculture is the usual natural calamities. In food business, you have the non-tariff barriers. If you are an export business, for instance, very often you read about stuff getting rejected on the shores of other countries for some pesticide residue, for some standards which suddenly surprise you.

Will you look at cold storage as an area for investing?

Very good potential, but equally challenging. What we are looking at is an integrated cold chain solution. What you see today are more of captive chains. What we are looking at is 3PL (third-party logistics), which is difficult to come by. We are still in the hunt for a good cold-chain company. But, yes, very much in our focus.

Where do you see yourselves going forward? You will be raising your second fund, which will be more than double your first.

The second fund being double the size has two components to it. One is that even if you are on the same investment philosophy of 20-30 per cent stake, I have to invest more. Having gained experience, I want to become more adventurous now. We will get into buyout situations. We will buy some businesses: which means that I have to invest more money again. I am keeping my options open. I will get into infrastructure. You will have more cold chains coming up. You will have more of warehousing coming up. Who knows, micro-irrigation is opening up. We could do micro-irrigation. There will be rural healthcare, rural telecom. Anything to do with agri, rural will be my focus.

Healthcare and telecom would come under this...

It is part of the same rural development. I want to be in the agri and rural space. Obviously, we will look at them.

FDI in retail, what does it mean for agri-business and for a PE player like you?

These retailers bring number of things to the market. One, their category management, the products which they keep, the churn that they have, the technology by itself. They organise supply chains for all products. Their sourcing strategy itself is well oiled. Their quality will be secured, consistent, which organises the chain down below. Chain is right from farming practices, how you grow, what you grow, how you transport, how you preserve, the whole chain is organised by them. Which is what you don’t have today. If they really come in a big way, automatically cold chain will be organised. Then you will have 3PL cold-chain providers.

At the farm level, production and aggregation will get organised. We are looking at that part. Whenever we talk about the retailers coming in, we always say the small kirana shops will go away and the farmers will be hand to mouth. That is not the point. There is so much of inefficiency in the chain, you just have to redistribute part of that inefficiency and redistribution never happens at one end. It always happens across the chain. I am sure farmers will also benefit. Farmers are also consumers. Retail is not only urban. Retail is also rural. Why should you deny them those benefits. My sense is that you will see next few years a lot of changes in the quality of food and variety of food and grocery which you get.

I think the next best model in India which is still to come of age will be aggregation. Aggregation of farm produce will be a beautiful business by itself. I hope that some of the large corporates will see that as a business proposition and do it.

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