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December 30, 2011

 

Investors see potential in China's agriculture; limitations prevail
 

 

Venture capital and private equity companies are showing keen interest in investing in China's agricultural industry, but the relatively small profits, adverse weather and other risks could impede their plans, analysts said.

 

"Because of strong support from government policies, different kinds of capital, both at home and abroad, have flowed into the agricultural sector," said Zhang Yuxiang, chief economist of the Ministry of Agriculture.

 

Venture capital and private equity companies invested US$305 million in the agricultural industry in the first half of this year. Their total agricultural investments in 2011 are expected to hit a record high, said Gavin Ni, chairman and chief executive officer of the Beijing-based Zero2IPO Group, a leading venture capital and private equity consulting firm in China.

 

Venture capital and private equity companies began pouring into China's agricultural industry about five years ago. Between then and June this year, their accumulated investment in the industry has totallled US$1.76 billion, a report from Zero2IPO showed. Crop farming, pesticides, fertiliser and animal husbandry have garnered the most money, the report said.

 

For example, Beijing Century Chestnut Ecological Agriculture Co Ltd, a company that provides eggs and chickens to large Chinese cities, raised RMB100 million (US$15.8 million) this year from a financial consortium led by the Shanghai-based DT Capital Partners.

 

Legend Holdings Ltd, parent company of Lenovo Group, the world's second-largest personal computer maker, spent RMB1.13 billion (US$178 million) in acquiring shares and this year became the largest stakeholder in two domestic companies that make baijiu - a Chinese spirit produced from various grains. The company purchased a 39% stake in Hunan Wuling Wine Co Ltd and 34% stake in Henan Qianlongzui Wine Co Ltd.

 

Even so, the percentage of all venture capital and private equity companies' investment that has gone into agriculture in China is very small, said Ni at Zero2IPO. "It is about 3%, and I believe the figure is not likely to surpass 5% in the next three years," Ni said.

 

Between January and November, venture capital and private equity companies completed 175 mergers and acquisitions deals in China, according to Zero2IPO. The transaction amounts of 157 of those have been disclosed and totalled US$9.9 billion.

 

Venture capital and private equity companies have invested less in the agricultural industry than other industries, such as the medical and e-commerce industries, said Xiao Jun, an agricultural analyst with Zero2IPO. This is because the rate of return on agricultural investments is fairly low and because capital usually chases bigger payoffs, she said.

 

In addition, most agricultural products are susceptible to the weather, land conditions and other environmental influences, Xiao said.

 

"Investing in agricultural projects requires more patience and hard work," said Blecho Yan, partner of Fortune Venture Capital Co Ltd, a venture capital company.

 

Yan said investors should adopt a long-term strategy because most new agricultural companies require time before they can undertake an initial public offering.

 

Infinity Group, a private equity company supported by the Israeli conglomerate IDB Group, said it is cautiously optimistic about investing in China's agricultural sector.

 

"The uncontrollable factors in the agricultural sector have made us cautious," said Joey Zhu, a spokesman for Infinity Group. "But we are still interested in investing in areas such as biological agriculture, irrigation technology and high-end agricultural machinery."

 

Infinity Group manages assets worth more than US$730 million. It has relationships with more than 2,000 Israeli agricultural companies and has made several agricultural investments in China.

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