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A Case Study – African Frontier Holdings

Private Equity partnering with government for grass roots social impact and development

African Frontier Holdings (“AFH” or the “Group”) is a market leading integrated FMCG group focused on the food industry with investments in the full vertical value chain comprising farming, processing, manufacturing, in house distribution and logistics as well as retail.

Key facts since investment

Company: African Frontier Holdings
Investor: Musa Kubu Fund
Country: South Africa with significant scale opportunities throughout Sub Saharan Africa
Sector: FMCG / Agriculture
Stage and category of investment: Growth and expansion capital
Amount invested: R27m in 2008
Equity value: R110m as at 28 Feb 2014
Unrealised IRR: 26.4%
Employees: 1,355 as at 28 Feb 2014
Revenue: R982m as at 28 Feb 2014
EBITDA growth: 46.3% – 5 year CAGR to 28 Feb 2014

ESG impact:

  • Development of grass root black farmers
  • Access to commercial supply chains and off takes
  • Support from commercial farmers
  • Sustainable economic development of communities

ESG interventions:
Emerging farmer programme which provides access to funding, skills development, access to market and commercial sustainability
to grass root black farmers.

Percentage of women employed: 30%

Total employees trained in 2014: 50 Emerging Farmers with an aim to train 200 Emerging Farmers over a 3 year period.

African Frontier
Overview

In 2008 Musa Capital (“Musa”) acquired a 49% shareholding in AFH. Driven by its strong operational and entrepreneurial management team, AFH has subsequently developed an integrated and highly scalable vertical value chain comprising:
Farm production secured by Group produce and grain offtakes;

  • Food manufacturing and distribution to government school feeding programs (feeding c.1.1m school children daily);
  • A growing contract manufacturing operation to national retailers;
  • Fruit and vegetable processing and packaging for Spar retail outlets nationally; and
  • 9 retail stores focused on rural lower to mid LSM consumer groups.

As part of its backward integration into farming production, AFH partnered with the Department of Trade and Industry (“DTI”) to develop an emerging farmer program which would be a fully integrated component of its commercial farming operations and production supply chain.

The program provides an opportunity to black grass root farmers and rural communities to participate in an intensive 3 year training program aimed at developing the next generation of top black farmers. Successful candidates have an opportunity through the program to own and manage their own farming operations and be incorporated into the AFH supply chain. Furthermore AFH provides full support in terms of farm management, logistics as well as access to capital equipment.

Investment highlights

Strong Group historical performance – 5 year Revenue CAGR 32.2%, EBITDA CAGR 46.3%.

  • A major Group focus is the improvement of nutrition for base of the pyramid consumers in rural and urban areas through its government school feeding operation, its fruit and vegetable processing and distribution business and its acquisition and refurbishing of rural retail outlets strategy.
  • AFH has partnered with business unit industry experts and experienced management teams, incorporating them into shareholding structures.
  • Strong rural empowerment initiative through skills training, community upliftment as well as job creation.
  • Significant Group synergies realised through vertical integration.
  • 5 year scale expansion expected to create c.2,000 jobs.
  • Incorporating and developing grass root black farmers, informal traders and community farming initiatives into commercial supply chains through a fair trade policy.
  • Defensible market position through government feeding programs and rural low to middle income retail market.

Private Equity Firm’s Approach to ESG Issues

Musa Capital aims to generate attractive risk-adjusted returns through investing in companies that add significant value in terms of social and sustainable economic development to the base of the pyramid and previously disadvantaged communities and consumers.

The Company as an Investment opportunity

AFH has a highly driven and strong management team with a proven track record of growing significant shareholder value. The Group has developed a full value chain with a highly scalable business model throughout the African continent.

Relevance of ESG Issues to Investment

The South African agricultural industry is faced with significant challenges over the next 10 years as generational white farmers retire, leaving a significant skills gap and potential food security issues. Furthermore exacerbating concerns is that a significant portion of restituted land lies dormant or under-utilised. The Emerging Farmers program aims to address these issues through enrolling grassroot rural black individuals and communities into an intensive on-the-job and classroom training program aimed at creating the next generation of world class farmers.

Key Features of the Emerging Farmer Programme Include:

  • On-the-job and classroom skills development curriculum;
  • Equity participation through a workers trust;
  • Inclusion of rural farming communities and informal traders into commercial FMCG supply chains; and
  • High impact grassroots economic development.

African Frontier stats
Outcomes

Key development impacts:
Job Creation and Skills Development

The integrated emerging farmer programme is expected to equip 200 emerging farmers over the three year programme with the skills and necessary business acumen to run commercially viable farm operations. This initiative is focused on training that incorporates a unique blend of both practical
on-the-job and classroom training for maximum benefit to the emerging farmers. The full time and seasonal job impact of the farming operations will work to address unemployment in rural disadvantaged communities. The programme will provide top line  support and development to SMMEs in addition to skills advancement and job creation. The programme impact is not limited to emerging farmers but also informal fruit and vegetable traders and rural communities.

Sustainable SMMEs

In the first quarter of the DTI Incubator, there will be 4 SMMEs (Employee impact of 200) identified as initial beneficiaries of the program. The  sustainable SMMEs will contribute positively to rural and economic development. As the program continues to expand more SMMEs will be positively impacted. The incubated SMMEs will help improve the country’s skill deficit and it is through such DTI partnered initiatives, with wholly committed private partners such as AFH and Musa that such an impact is possible.

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