Ethical Entrepreneur – Investing in Nigeria’s Agribusiness Sector

Reflections on a meeting with Mezuo Nwuneli – Managing Director of Sahel Capital  and co-founder of AACE Foods

After an incredible evening of comraderie and delicious food shared with fellow

Fellows and agribusiness entrepreneurs in Lagos (hosted at the lovely home of Mezuo and Ndidi Nwuneli), I was fortunate to spend the next morning of my official “start” to my Eisenhower Fellowship speaking with Mezuo about AACE Foods and Sahel Capital.  After one of my first conversations with Mezuo on the phone while planning for this trip, and after meeting his incredibly outgoing and super intelligent wife at the dinner (check out her Wikipedia profile and her new book, Social Innovation for Africa), I knew I was in for a treat and likely in over my head going in to the conversation.  I know very little about the venture capital world, other than what I’ve learned on “Shark Tank” and from my minimal experiences with Slow Money and the various groups who have approached New Entry wanting to potentially invest in our World PEAS Food Hub as a “social enterprise.”  Although I like to think of myself as somewhat entrepreneurial (you have to be to be a farmer), I know that I am not enough of a “risk taker” to have ever fully embraced the kind of significant business development or growth that fuels people like Mezuo and Ndidi.  Perhaps I can blame this on my father who was always very measured and pragmatic about money – teaching me to save for college, encouraging me to work during high school to pay for my car insurance, gas, and clothes, sitting me down to balance the family checkbook every month, and explaining my college choices and how much debt I would be in and how many years it would take me to pay off that debt if I attended an expensive private school versus a well-regarded, yet more affordable public school.  Despite several scholarships to small liberal arts colleges, I wisely choose the state school, worked while studying, and ended college debt-free.  All that is to say, I have been very fortunate in life and I have embraced being frugal, conservative, and have always lived well within my (sometimes meager) means and tend to avoid debt.  Even when Pete and I started our own farm operation, it grew slowly and organically, constantly reinvesting our earnings back into the farm, never taking out a loan or getting into debt to grow the operation.

All of that is well and good as an individual or as a small niche farm business when you have other off-farm income, but as I’ve learned from very wise producers in the agricultural sector, credit can be a useful tool – as much so as a tractor or a hoe.  Many experienced farmers I have invited  to speak to our “Exploring the Small Farm Dream” courses over the years have often said that they wished (in hindsight) that they would have borrowed money sooner to purchase that “such and such” piece of equipment or to build that farm store or to buy that cooler.   Usually, as frugal farmers who are constantly managing unforeseen risks, we tend to err on the side of being scrappy, toughing it out, making do until we can finally pencil out how this thing or that contraption will save us the cost of labor or will preserve our sanity for a few more years.  The relatively low cost of “borrowing capital” in the US is pretty amazing – some farm loans from USDA charge a mere 2.5-3.4% interest, so borrowing farm money in the US seems like a good return on investment if whatever it is you are about to purchase helps you produce more, to sell more, to make more money.  Considering that capital in Nigeria will come with at least a 9% interest rate (that is for a subsidized agricultural loan if you are lucky enough to qualify and get through the cumbersome application process), and getting that subsidized loan has to be offered through a commercial lender who has all the same criteria as for any other business.  Most banks do not understand the realities of lending in the agribusiness space, don’t know how to value the agribusiness collateral, and expect a 6-12 month turnaround time to pay back the loan, usually quite impossible for many of the production cycles in farming or food processing.

Spouse and Nkiru Okpareke, Mezuo Nwuneli, me, Samaila Zubairu, Kola Masha, and Ndidi Nwuneli

Therefore, to set the context for Mezuo’s situation, after he and Ndidi returned to Nigeria from their MBA studies at Harvard (among other illustrious careers in investment banking, finance, starting NGO’s, consulting, winning awards, authoring books, serving on boards, and much more), they knew they wanted to start a business.  They spent a year exploring markets and doing their homework – initially considering producing jams and spreads from the abundance of fresh fruit – they found a strong demand for spices.  Over 85% of the spices used in Nigeria are imported.  So, they started researching and connecting with rural areas for sources of supplies and figuring out what they could buy and sell at a price point that would work for everyone.  They figured there was opportunity in the market to make a dent with local production.  In 2010, they rented a location, bought a $100(US) equivalent piece of processing machinery, hired one staff person, and started the spice operation from scratch based on the concept of import substitution.  Their goal was social enterprise-maintain a strong link to the farmers while making the price point for locally produced spices more affordable.

Over time, AACE Foods has increased their suppliers from 200 farmers in 2012 to over 2,000 farmers today.  They are mostly focused on ginger, chili, maize and soy.   The market for their crops is roughly 40% retail (to local super markets), 45% spice packets to noodle companies, and 5% for export (mostly to the Netherlands), and the rest to private label contract manufacturing.  Even as the business has grown, Mezuo and Ndidi are very hands on.  The company engages farmers, agrees to off-take (buy) all their production, and helps finance farmer clusters to provide the necessary inputs (fertilizers, improved seeds, etc.).  The way they leverage financing with local banks is to guarantee the purchase of the harvest at a set price: if the crop meets quality standards, the producer receives the price and a portion of the payback goes back to bank for the up-front financing and the rest of the profits pays the farmers.

AACE Foods work with both the banks and the farmers, but the food processing company is tasked with vetting the farmers.  They work to find “head farmers” in a community of producers and task them to form farmer groups or sometimes formal cooperatives.  They can then develop a MOU that specifies a certain volume of product they will buy from the group at a certain price, specifying the volumes per month over a period of time.  When they purchase the harvest during the harvest season, they develop a purchase order with producers to pool their product and give funding back to bank, which then gives to the farmers.  The payment plan arrangement creates a win-win situation:  farmers need help with financing and banks want processors to guarantee the debt.  By pooling resources, the company and the farmers can overcome one of the bigger barriers to lending in agriculture:  the timing issue.  Most banks consider a lender in default if the loan is not paid in the timeframe set by bank, despite seasonal setbacks or variability in harvest schedules.  This also addresses an issue for the processor (AACE Foods) that when market prices spike, farmers tend to sell elsewhere.  By working in partnership, they are able to lock in at least 20-25% of the volume needed (sometimes higher) under advanced contracts.

AACE Foods also incorporates other value-added benefits to the farmers it supports.  They partner with other NGOs (like 2scale – a Dutch NGO that works with farmer clusters and agribusiness incubators) and input suppliers (like IFDC – International Fertilizer Development Company) and extension providers to provide farmer training to improve production, help them meet quality specifications, help facilitate financing and more.  In order to scale the number of farmers they are working with these partnerships are critical, using IFCD as an intermediary, for example, to help coordinate larger farmer groups helps achieve the volume needed to grow and scale their operations.  For example, if AACE were to contract to purchase five tons of chili with a farmer cluster, they would contract with the bank and advance 50% of the funds to the bank which helps guarantee the financing to the farmer group.  The farmer group is then responsible for tracking the accounting of the group and to pay all the farmers in that team.  Each farmer participant marks their individual names on their bags which are delivered to AACE Foods who then weighs the bags and assesses quality.  If there are any issues with a particular producer over quality, they can communicate those issues to the farmers or intermediary and they can sort out the appropriate payments based on weight and quality.

In addition to financing, AACE has been able to introduce new technology to improve the post-harvest handling of the crops (check out this cool description of the PICS bags (Purdue Improved Cowpea Storage) – a new technology by Purdue University which are hermetically sealed bags designed for cowpeas but can be used in other commodities; they are slightly more expensive than jute bags (approx.. $1/bag), but they are reusable for 2-3 years).   When I think of crop storage, I also imagine that addressing food safety must be an issue, given all of the recent legislation passed in the US around food safety (FSMA), so I asked if they have any issues processing and storing the spices for export, especially given the various conditions different groups of farmers operate.  Mezuo said that in the industry, having a steam sterilizer is a “gold standard” for spices as ETO treated products are banned in EU since they are carcinogenic to workers and decrease air quality, yet no one has a steam sterilizer in all of Nigeria.  He said most companies they export to are not super worried about this since usually at some point in the supply chain their spice products are treated to ensure less than 1% pathogen content.  Since their primary export market is to the Netherlands, the companies buying from AACE usually treat their products on their own since applying heat sterilization incorrectly can change the flavor profile.  For quality, the main issue is whether their products meet the required specifications for the purchaser and steam treating may or may not add any financial value if the product already meets the minimum specifications, so it hasn’t been something they have had to invest in quite yet.

All of this work pioneering the spice business with AACE Foods also paved the way for sharing their expertise with donor agencies through ongoing consulting work – advising foundations and NGO’s on how to invest in the critical supply chains needed to further develop Nigeria’s economy.  As the business grew, in 2012, they expanded AACE foods and bought a 5,000 m2 processing facility, now employ over 55 people, and eventually formed a separate management team and independent executive board who now manage the day-to-day  operations.  Starting AACE informed their consultancy work since they had the credibility of market intelligence and the practical experience overcoming countless hurdles to doing business in Nigeria (the war stories of local police holding up managers at gunpoint over “regulations” and refusing to pay bribes, having delivery trucks stalled for licensing and inspection issues for days, having your first crew connive to steal from the company in the first week, figuring out proper tax regulations, (and more) are many of the challenges facing a persistent culture of corruption – yet leaders persevere and move on).

The next move came in 2013:  a partnership between the Nigerian Ministry of Agriculture and the German government came together to launch a fund to further the development of the agricultural sector. They were looking to invest $33 million US targeted to SME investments (Small / Medium-sized Enterprises).   After an intense 6-month application and vetting process, given their experience in agriculture and his private sector investment background, Mezuo’s team was selected and in 2014, the fund finalized its legal status and Sahel Capital was launched!

The goal of Sahel Capital’s investment fund is to look for businesses operating at a scale of between  $500k – $5M (M=million US) in business value that with appropriate investment of between $3M – 5M over a five-year period can scale operations to between $1M to $15M and meet both their commercial objectives (to be profitable and make money) and meet important social development objectives.  To find these businesses, the fund hires staff to canvass existing companies, troll for prospects at trade/business associations, conferences, commodity groups, agribusinesses, through field research, referrals, agricultural lending desks at banks (which now they are building a reputation and getting better sifted referrals from banks), and they often get “walk-ins” from smaller companies desperately seeking capital.  They might research over 100 companies in a year, which drills down into 20 serious candidates, and they might start the due diligence process with five of these 20,  and currently they are investing and have signed deals with two companies.  It takes significant work to find the right match.

This is not wholly in part because the stakes are potentially high, but the fund also has a clear mandate and requirement to have “development impact” (and address environmental and social issues) by establishing clear links to small-holder farmers and gender inclusion.  Some of Sahel’s current investments include a large dairy in Northern Nigeria with strong links to over 10,000 cattle farmers; another is edible oils working with a palm oil producer.  They are also soon to announce a new deal with a poultry operation that has a hatchery, layer and broiler operation that is looking to scale to over 200,000 birds and they may soon be adding a new starch processor.  In addition to much needed equity capital, Sahel also provides technical assistance support to the firms at a tune of their $2.4 M in internal capacity to help these companies make long term improvements and investments in important issue areas where it is hard to justify commercial funds (the TA provided is less than 10% of the value of the commercial funds provided).    The team that does all the due diligence on making the initial fund investment is entirely separate from the team of consulting specialists and the ongoing operations management team once the deal is closed to eliminate any conflict of interest between the two.

The most common types of technical assistance provided to these growing companies is to build the appropriate “systems” to grow and scale operations.  Since the funds are considered an equity stake, Sahel helps to reconstitute the company’s board and management team.  They also become part of the operating team,  reviewing deals, helping structure operations, building markets, supporting growth – not running the companies or creating “shadow CEOs” – but advising, guiding, and providing strategic direction.    A strong focus of the TA is on compliance:  compliance with government regulations, tax compliance, tax law, completing audits, human resources, financial reporting, and meeting environmental and social goals.  For example, in the dairy company, they helped support new accounting systems, provided mapping services to pinpoint geographic clusters of milk producers, helped develop out-grower schemes (contract supply from growers and contract feed purchasing for producers), and make sure that business compliance issues are impeccable.

Sahel is currently working on the final closing process with a new investor that will increase the possible investment fund to over $75M and they are planning to invest in 4 companies next year.  As the investment fund grows, they are hoping to add four additional companies per year.  This is no small feat since as an outsider looking in to the inner workings of a SME, they often need to enter into a 3-12 month relationship and trust building process before moving forward.  During this trust building phase, they are reviewing background transactions and perhaps developing the deal terms and NDAs (non disclosure agreements) which can take up to 1-2 months, then they do a deep dive into the financials which can take another 1-2 months, and finally it can take well over a month to negotiate the term sheets.  Finally, then they enter a non-binding agreement and structure the terms of the deal.  Once they finish  signing, then the agreement goes to the investment committee and the due diligence process really begins in earnest.  This is where they then hire and engage experts, kick the tires, discuss findings, and decide to move forward with the investment or not.  If it is a “go” then it can take another 2 months to develop the official legal agreement, sign and disburse the funds!

The fun doesn’t end there for the fund managers, they then have to (of course) monitor the investment!  They have regular committee meetings with their top investors, produce quarterly reports, manage the governing body, monitor activities and financial performance and provide ongoing updates.  They engage in providing oversight for possibly the next 10 years of the investment.   They also approve the sale of assets of the company.  The fund also includes separate grant monies available to the companies they are supporting, but a separate committee oversees the grant funds.  It’s a whirlwind of people, teams, and companies to manage and be intimately involved with.  The stakes are high.  The potential social benefits are high.  The work and the fund are incredibly important for the future growth of the Nigerian agriculture sector and I can’t imagine a better qualified person or team to manage its growth.  I walked away both overwhelmed, awed, and inspired and grateful that these businesses poised to make a significant social impact are getting the investment in both dollars and “sense” to help them grow.

August 25, 2016
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