Source: Financial Times Limited
STEFAN-ERIK VON EUW, PRINCIPAL OF ALDEN CAPITAL, A ZURICH-BASED SINGLE FAMILY OFFICE
Alden Impact Capital is a UNPRI signatory focused on impact investing. It serves as a dedicated unit of Alden Capital for direct, active investments.
Investment approach and asset mix
From the beginning of Alden Capital in 2006 we selected an “extreme” investment approach. A strong focus on passive investment, principally earnings per share-based, using index funds with regular rebalancing and requiring little brain power. On the other side, a very active component which initially was based on some hedge funds and private equity funds but soon replaced by direct investment based on our belief that added value would have to come from a more entrepreneurial approach and that money would be made again on tangible real assets. Our experience was that the alpha was not really there in our hedge fund investments, and that to have an alpha one has to sacrifice some liquidity. So no stock-picking, very passive on one side, very active on the other and nothing in between. I am the sole Principal, working now with 2 colleagues.
I personally became interested in investing in tangible assets and started looking for potential opportunities, countries and asset classes, and focused very early on farm land. I started looking at Argentina, South Africa, and considered the pros and cons of green field versus brown field or an existing operation. We saw we couldn’t really buy anything that had a strong cash flow generation, also that South African prices were a bit inflated and with macro-economic disadvantages – rather high labour costs, property prices, electricity costs etc.
„We made an investment decision after 2 years’ due diligence to focus on Mozambique“
It then took us over a further year to select the crop (bananas), identify the key requirements including water access, climate suitability, soil quality, proximity to ports, to South Africa for sales. Plus site selection, where top-down you talk to the local governor, bottom-up you negotiate with the community and in exchange they articulate what kind of social benefits you could offer them (e.g. to have a clinic built, roads, boreholes and other). The land is leased for 50 + 50 years. Whilst nominal prices are low, you have to include other costs relating to getting the buy-in of the local community, and give them benefits which are totally aligned with our strategy anyway but clearly do not come for free. Plus infrastructure spending – roads, 10 kilometres of water pipeline to the river Limpopo, 10 kilometres of power cabling so that the two villages as well as our farm now have electricity. Nothing was there and basically we are building the whole infrastructure ourselves. Aggregating all these costs, this is more expensive than buying either an existing farm in Mozambique or an up and running farm in South Africa. We had to bring in our own ecosystem with soil scientists, water specialists, irrigation specialists, banana specialists.
We are in the Gaza province which is just North of Maputo and it’s a big province and one of the poorest provinces but in Portuguese times it used to be the bread basket of Mozambique. So there are quite a few old commercial farms around, plus there were quite a few projects when we arrived, including Lonrho, and Lord Sainsbury’s Mozfoods.
Expectation management is critical, and we have certainly “paid our school fees”! Being more proactive in our communication and dampening early expectations would have probably been better. Expectations are very high and if you don’t meet them all, the frustration can bring problems. In our European business culture we expect the local community to understand all the issues: For example that we first need to make money before we can start distributing things. Very often with these local communities the expectation is that “you told us that you would do this by then, so why haven’t you done it yet”? I would also say that past unfulfilled projects, by those who underestimated the scale of investment required and retreated, have left a negative legacy for newcomers. Based on these rather negative experiences and understandably, the attitude has now changed to “first you deliver and then we give you what you want”. That makes of course the project planning and relationship management with the community and the government somewhat of a challenge so it is not that everybody is extremely supportive and believes in what you do.
Financial and societal performance to date
Against my initial target of breakeven after 3 years, we are in our 5th year and will achieve breakeven next year.
„I would say doubling both the time horizon and the budget we set initially, would have been a good idea.“
You have to be very committed, with planning skills, execution knowhow and a substantial financial buffer, particularly in the near absence of bank and fund availability. Many commercial agribusinesses in Mozambique are probably in distress based on the absence of the above-mentioned skill-set.
So far we have invested about US $8m, spread between our investments, bank loans and a Dutch government grant for US $0.8m.
„That grant came with quite stringent ESG conditions and was primarily influenced by our certified organic status. We are probably the biggest organic agribusiness in Mozambique and certainly the only one in bananas.“
The grant sets criteria, such as training people and paying a 25% premium over the national minimum wage. Some of the ESG targets are basically in line with the expectation of the community in exchange for land rights, such as we had to build two waterholes and an electric borehole with a water tank for the cattle. But on top of that we are now starting to construct a town centre, basically a small shop where we will sell our bananas, a doctor’s room, a small pharmacy, a small police station. We are also working on bringing the first ATM to the area, as well as a community office plus our own reception office. This is all towards being part of the community, but also reduces the flow of visitors to our farm. You may well imagine how many ministers and officials want to come and understandably have an involvement with this, in their eyes, prestigious project in their neighbourhood.
„We are looking to grow, following a build and then add-on strategy. We directly employ around 500 people currently.“
Apart from our actual farm we also have an office in Maputo, the capital which serves as the actual management company with around 7 staff from financial manager to logistics manager, HR to export-import people. In addition we have a small company unit in South Africa which takes care of marketing into South Africa (retailers and the fresh produce markets) as well as procurement of material, machinery and spare parts from South Africa. So we have quite a few experienced managers now and based on this management platform we are considering expanding through either a green field project (we are just starting to prepare a 1,000 hectare farm close-by), or an acquisition that is either closely aligned or a diversification. We have undertaken around 20 due diligence exercises in the last two years. Other reasons for not materializing these potential transactions are based on unrealistic valuations and unclear property rights.
UNPRI, co-investment intent
We signed up under UNPRI to build profile and gain some experience with the principles, specifically in order to be ready in the future to leverage on our investments and expertise to potentially attract co-investors. In addition to the activities and due diligences in South Africa and Zimbabwe and Mozambique and Ethiopia, we are also broadly 50% shareholder in a €2m horticultural business in Ethiopia, employing about 170 people. We want to build our own expertise, particularly in the case of Mozambique where we see there are not really that many companies or investors with specific expertise. The UNPRI provide a reporting discipline relevant for asset owners so pension funds, family offices. The guidelines are high level and not really a match to the actual needs of a project like ours.
We are really hands-on so far, almost like a CEO for these companies, there on average for one week each month. So we are now looking at relieving ourselves from day to day management of these companies, although it has been critical to learn how to pragmatically do the business on site, understand the issues and challenges, in order to be able to leverage on this in the future.
„Our “impact philosophy” is that profit comes first. The project needs to be profitable to then leverage these profits into environmental and social benefits. Profit is the common currency, in enabling broader benefits, measurement and accountability.“
Once profitable, the owners can determine the balance and weight they want to strike thereby also making the project more sustainable.
„When I am gone my kids can still continue with this company, this great project and make up their minds whether they want a big focus on the profits, or not. This family dimension is very important – giving them a sense of responsibility in this world.“
Obviously they can make their own choices whether they would like to accept that legacy, or not. I would certainly not want to squeeze them into a framework that I have chosen. But it is a natural way of growing up with responsibility. My children are 16, 15 and 13 and as an example I sent my oldest son with a friend of his for two weeks last April to do physical work on the farm. They did not stay in a hotel, but with one of the managers’ families, rose at 5 in the morning to work all day long and they were totally exhausted. Things like that are part of the responsibility also.
I would say at the end of the day the main motivation is this combination of making money and doing good. I have to say if you are investing in these countries with our view based here in London or Switzerland, you can achieve so much with relatively little money. For instance, we are giving loans to some of the managers for a side business or entrepreneurial activity – almost a small microfinance activity. Before we arrived there were no brick houses in the villages. And now there are at least 30.
„But it is difficult to quantify our impact. But the main impact I would dare to say comes really from just getting a job. I am driven by the fact that with relatively little money, one can have a huge impact on the lives of our employees and the local community.“