The skyrocketing costs of grain commodities have drawn many private equity investors to the global effort to bolster the world's food supply. Many of these investments target the developing world, where inexpensive, arable land is abundant and investors can select from a range of investment incentive packages.
When pursuing these opportunities, investors should be aware of the inherent legal and social challenges, as well as strategies to minimize these risks and protect the investment's bottom line.
The global food shortage is attributed to a number of circumstances, from high oil prices to increasing demand to global weather anomalies. The United Nations' World Food Programme calls the crisis its biggest challenge in its 45-year history. According to the United Nations Food and Agriculture Organization, global food production must double by 2050 in order to feed the increasing world population.
Continue reading below
Many within private equity have joined the effort to bolster the world's food supply. AIG Investments recently invested $65 million in Calyx Agro Ltd., a Latin American agricultural project sponsored by Louis Dreyfus Commodities. Last year, Olam International Ltd. of Singapore spread a $200 million investment in food and agriculture projects across 23 African countries.
Rabobank Group of the Netherlands recently started a $75
million fund to invest in agriculture projects in Africa and other
developing countries. Emergent Asset Management Ltd., BNP Paribas SA and Crédit Agricole SA are reportedly pursuing similar initiatives.
The driving force behind these investments is not just skyrocketing
grain prices but also the abundance of investment opportunities
throughout the developing world, where large tracts of inexpensive and
arable land are available, many of which are in equatorial and tropical
regions. Investors can find themselves on the preferred side of the
bidding process as governments of developing countries compete with
each other to entice investors with a variety of foreign investment
incentives. An investor's project can also benefit from the preferred
treatment developed countries give imports from the developing world.
Although the benefits are enticing, due consideration should be
given to the legal and social risks inherent in these investments.
A primary legal consideration pertains to the transferability of
ownership interests. Many developing countries impose onerous
restrictions on who may own domestic assets generally, and land in
particular. In selecting a host country, investors should consider
those developing countries that have relaxed or removed these
restrictions in an effort to promote foreign investment.
Certain social considerations can also increase the costs and risks
of investing in the developing world. Investors should be prepared to
take a quasi-governmental role, providing social and community services
including roads, housing, hospitals and schools. Investors should also
be aware of conflicts between cultural norms within a host country and
U.S. law.
For example, many U.S. investors find the antibribery provisions of
the Foreign Corrupt Practices Act inconsistent with accepted norms in
the countries in which they invest. Investors must develop a plan to
enable them and their agents to handle day-to-day affairs without
running afoul of the FCPA and other U.S. regulations.
Social volatility through war, insurrection and civil unrest can
also create significant risks to the project. Protection from
disruption can be achieved by minimizing the force majeure protections
available to major project participants while retaining the maximum
protection possible for the project. The possibility of disruption
should also be considered during site selection.
By recognizing and addressing the legal and social risks of
investment in global agricultural development, private equity
participants can make a significant contribution to alleviating the
global food shortage while remaining true to their underlying business
objectives.
Todd Alexander, a partner in the climate change and project
finance practices at Chadbourne & Parke LLP, and Richard Susalka,
an associate, have represented private equity firms in agricultural
investments in Africa and Latin America.
