Food Waste in Agribusiness – Opportunity for Startups

Food wastage must be non-existent especially in developing countries with growing population. As per US calculation, the food wastage is high enough (45%)of produce for developing countries. Albeit, immense effort being put to increase production, emphasis to stop food supply chain losses has been avoided.

Causes of Food Wastage

• Insufficient storage system for produces, as it is often stored outside under tarps that cannot protect from pest and humidity.
• Inadequate cold storage and chain transportation facilities are the prominent cause behind perishable products to spoil.
• Restricted availability of Mandis, pose great trouble for small farmers who cannot transport their produce at their disposal. They need to travel several km to the nearest Mandi.
• Poor roads and improper transport facilities cause massive delays.
• Various segments of middlemen between the farmer and the end consumer drive prices up, cutting bargaining power.
• Lack of a developed agricultural funding system, leading formers to take loans with high interest from commission agents.
• Dearth of technology and education to produce agricultural products.

Solutions

• Post-harvest management system like Commodity Management companies can offer solutions to remove the middlemen and connect farmers with crop markets, simplifying the transportation of produce from farms to the professional and commercial buyers.
• Cold Chain Solution providing companies can offer customized solutions for cold storage and cold transportation for temperature-driven produce.
• Startup companies are offering alternate marketplaces to connect all stakeholders in the supply chain - from farmers to vendors of services like transportation and through a web and mobile driven information exchange system.
• Contract farming is yet another way to guarantee buy-back of the grains at a fixed amount that can improve efforts from the private sector.
• Right utilization of IT and mobile service in offering real time market information, micro loans and personalized advisory services can also be of help. All these initiatives are being taken and lot of private equity funds in India are being invested for improving the agribusiness of India.

Synopsis

Nonetheless, it’s still not the ripe time to predict that these solutions would result in improved supply chain management in Indian agriculture, right funding by the private equity firms in India, reducing inefficiencies and enhancing farmer realizations along with curbing food waste can indeed make a difference.

Private Equity Funds Comes of Age in India

Private equity funds in India have matured now. All these years private equity firms in India performed strongly, resulting in developing fresh investor interest and huge inflow of money.

It has been studied that performance of Indian private equity performance is less associated to public equity trends compare to European markets. This is due to the inefficiencies in a startup industry, particularly because of the dearth of transparency, less competition, and imperfect transmission techniques for capital.

Challenges before PE Managers

To be successful in this emerging and growing market, fund managers should have a comprehensive local network to acquire in depth knowledge and understanding of the cultural limitations in different countries when investing globally. Yet another challenge for investors also lies in selecting the experience and expert manager and gaining access to the right PE funds, as there are great difference in returns between average performers and top returns.

The emerging markets appears to be less susceptible to risk due to strong fiscal positions and improved institutional infrastructure, developed market risk, which is the result of global financial crisis.

Small Holding Periods

There is an emerging trend of a shorter holding period for PE investments. In India the holding stretch from the initial funding to the first exit is just two years prior to the financial crunch. The greater returns over a small time zone helped in generating more interest in private equity in the recent few years. In addition, domestic funds have been instrumental in influencing private equity in India.

It has been studied that the major obstacles before better growth in investment are the tax policies, availability of debt and the broader impact of informal economy. Public markets are playing role in improving corporate governance, cutting down the risk of investing in listed firms and offering an improved passage for private equity exits. It has catapulted the demand for equities.

Synopsis

Although the Indian market of private equity funds has reached a maturity stage, there are loop holes that require attention of the PE firms to compete and retain its relevance in the future market trends.

5 Metrics that Matter for Private Equity Firms to Make a Judgment

Private equity firms are driven by numbers –larger the better!  The first thing they do after making a huge investment is improving the information system of the business. It enables them figure out which services or products are in demand and what the costs really are.

Prior to investigating the details of current information system, the invested would like to meet the company owner. What they would be interested to discuss? Have a look!

Cash Flow: Net income is no way insignificant, private equity investors are focused on cash flow more. The real value of any business is based on EBITDA (earnings before interest, taxes, depreciation, and amortization) for them. Better EBITDA can enable them sell the business in profit.

Liquidity: PE investor would want weekly, monthly, and quarterly cash flow reports to ensure the company remains within the liquidity agreement negotiated with the lenders. It’s next to impossible to forecast liquidity requirement, but modeling helps avoid crisis. 

Product Evaluation:  Product-by-product analysis can help finding the true margins on each product. In service based businesses, focus is more on how contracts are bid and especially on avoiding contracts that improves revenue but aren’t all that are profitable.  

Industry-driven Metrics: Every business has its own core metric. The PE investors would be able to provide with a better understanding which metrics should the company focus on.

Expense Control: The new investor would dig deep into the current expenses; try to find out more about the existing policies, and why specific expenses have spiked, and how it was controlled.

Synopsis

The above 5 metrics, matter a lot for any PE firm. It gives a sneak peek how the private equity firms in India thinks about before investing in the company. So, be prepared for it as these metrics are the backbone that can bring any company closer to getting private equity funds.

Private Equity Firms Found Investment Opportunities in Cold Chain and Agriculture Logistics Industry

India, having extremely high percentage of food wastage, is witnessing an enhanced interest from private equity firms in India in the cold chain and agri-logistics industry, generating high valuations for their scalable and growing businesses.

Huge Investment in Three Years
It has been estimated by the Venture Intelligence that PE firms have invested nearly 151.55 million dollars (Rs 940 Crore) in 11 enterprises in three years of span. The biggest recipient of this investment is Sohan Lal Commodity that has gained $33 million by Everstone, Mayfield, ICICI Bank and Nexus Ventures. Many more investments are expected in the next year.

Cold chain and Agri-logistics companies, which are expecting revenue growth within 20% to 100% annually, are expecting to get between Rs 15 crore to Rs 100 crore, to improve operations across the country.  Suri Agrofresh, Origo Commodities, Scheduler Logistics and IG International, Dev Bhumi Cold Chains are some of the companies scouting for private equity funds in India.

Current Scenario
Almost 40% of fruits and vegetables are spoiled in India while travelling from the grower to the end user, primarily due to lack of storage system, poor transportation infrastructure and bad roads, as per the food wastage report by Institution of Mechanical Engineers.

PE Investment Can Improve the Condition
Several businesses in this sector are family-run and does not welcome outside control. It may have unreliable balance sheet also. Still this growing sector is in need of professional handholding and guidance. ‘The concept behind this investment is to bring in a network of associations, corporate governance oversight, additional investors, and experience with M&Q’ - said Nikhil Shah, senior director of Alvarez & Marshal India, who is also advising several PE players on opportunities in this segment.

Albeit, these businesses are growing and are capable enough to grow faster, the gross margins is expected to be in the span of only 5-6%. This margin can be increased by developing more domain expertise and knowledge to weed out unprofessionalism and inefficiencies.

Synopsis
Given the above scenario of food wastage and poor condition of companies of cold and agri-logistic, it is necessary that this sector needs to be lifted and supported by private equity funds in India. Reacting to the need of the hour, private equity firms in India are staking on the potential scalability of well-organized players in this industry, in spite of rainfall dependent and seasonal nature of the business.

Benefits Associated with Private Equity Firms

Often founders of startup companies are not able to trust on conventional funding sources. Private equity is an alternative source of funding, provided by a stable foundation of long-term strong investors, like private or public pension plans, family offices, corporations, and charitable foundations.

Private investors are expected to bring attractive returns for their stakeholders i.e. corporate, partners, public compared to other traditional investments sources e.g., bonds, stocks, and cash equivalents. 

Benefits of Private Equity Funds in India 

The most pivotal benefits associated with private equity ownership, enabling the company to create value and realize capital benefit in a repeatable manner, include: 

• The cluster of expected company investments is immense for private equity. These are unchartered landscape of opportunity. They often invest in small companies that have just started out in their respective field of journey; they also invest in unconventional sections of huge corporations; they are more interested in investing on those listed companies that are not popular and mostly under estimated and under-appreciated in the stock markets.

• Private equity firms in India are quite articulate and invest in prominent resource for evaluating the potential of firms, to realize the risks associate and the ways to alleviate them. These firms often drill down from several potential companies to the one that has all the required potentials to attain growth.

• PE firms invest in companies to improve its potential and make it more valuable, over a couple of years, prior to ultimately selling it off to a buyer. This is what makes private equity firms patient investors, focusing on long-term performance targets.

• The management of the company, run by private equity funds, is answerable to an engaged professional shareholder with the right to act prudently to protect its shareholding.

• The fusion of this well defined accountability between shareholders and company managers, combined with the requirement for a realization says that the structure of incentive can associate with the valuable reward. Failure does not call for any reward.

• Such delineated accountability offers several benefits giving comfort to potential money lenders, enabling investments to yield the dividends.

Synopsis

Above said are some of the benefits, associated with private equity funds, offered by private equity firms in India to the start up businesses looking for long term benefits.

How Do Private Equity Funds in India Work?

In several cases, private equity funds in India are provided by the traditional private equity firms in India, which are formed by a group of investors, who have pooled their money together for promoting businesses with their investments. These investments include providing funds for start-up businesses, which have just entered the market to established and developing companies, mainly private companies, who first prefer to stay private before possibly taking the public route at a later stage.

Private equity investment comes in different forms that usually comprises of purchasing equity securities, providing growth capital, venture capital and mezzanine capital. Each of this investment type is carried out in specific types of situations in order to reach targeted objectives. In the realm type of investing, investors usually provide required financing to take control of companies. Investors prefer to purchase equity securities, which entitles them for an ownership share in the company.

Private equity firms in India sometimes purchase businesses, which are normally called as leveraged buyouts (LBOs). This type of businesses is generally funded by large debt amount. These transactions carried out simply means those assets of the businesses being bought together with the firms doing the procedure of buying will be used as collateral.

As startup businesses are at their initial stage and just have entered the market, they don’t possess that capital as required at initial stage to run the business smoothly, but later can prefer to raise capital by issuing bonds or stocks to the public. For such startup or new ventures, even banks don’t provide financing options, so the owners of such businesses usually choose to opt for investing in private equity funds in India. The other reason is that start-up companies usually don’t have substantial earnings and are extremely risky to be provided funding, but for agencies, the companies might look very promising.

Private equity investing can be made through investments done on the secondary market. Typically, it has been seen that private equity transactions require investors to stay committed to oversee their investments for a specified time limit, which can be pretty long. Thus, secondary market allows investors to come out of their commitments, before the end of the particular period, which in turn allows other investors to enter.