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Chinese agriculture industry shows great latent

21 November, 2012 at 8:20 am in Business

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BEIJING - Venture capital and private equity companies are showing great interest in investingin China's agricultural industry.

However, analysts said the relatively small profits, inclement weather and other risks couldhinder their plans.

'Because of strong support from government policies, different kinds of capital, both at homeand abroad, have flowed into the agricultural sector,' Zhang Yuxiang, chief economist of theMinistry of Agriculture, said in Chengdu recently.

Venture capital and private equity companies invested $305 million in the agricultural industryin the first half of this year. Their total agricultural investments in 2011 are expected to hit arecord high, said Gavin Ni, chairman and chief executive officer of the Beijing-based Zero2IPOGroup, a leading venture capital and private equity consulting company in China.

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

For example, Beijing Century Chestnut Ecological Agriculture Co Ltd, a company that provideseggs and chickens to large Chinese cities, raised 100 million yuan ($15.8 million) this year froma financial consortium led by the Shanghai-based DT Capital Partners.

Legend Holdings Ltd, parent company of Lenovo Group, the world's second-largest personalcomputer maker, spent 1.13 billion yuan in acquiring shares and this year became the largeststakeholder in two domestic companies that make baijiu - a Chinese spirit produced fromvarious grains. The company purchased a 39 percent stake in Hunan Wuling Wine Co Ltd and34 percent stake in Henan Qianlongzui Wine Co Ltd.

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

Venture capital and private equity companies have invested less in the agricultural industrythan other industries, such as the medical and e-commerce industries, said Xiao Jun, anagricultural analyst with Zero2IPO. That, she explained, is likely because the rate of return onagricultural investments is fairly low and because capital usually chases bigger payoffs.

In addition, most agricultural products are susceptible to the weather, land conditions and otherenvironmental influences, Xiao said. She said just because a business model works in aparticular place, that does not mean it can be transferred successfully to others.

'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 companiesrequire time before they can undertake an initial public offering.

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

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

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