The IUF's Private Equity Buyout Watch

Private equity buyouts account for a high and rising percentage of government-approved foreign direct investment (FDI) in the food processing sector, which is expected to top Euro 2.1 billion in 2007-08.

Indian financial regulators have expressed concern over the extent and the implications of mushroom private equity flows in general, the bulk of which goes into unlisted companies. Officials at the Reserve Bank of India are increasingly worried that unregulated investment flows into the booming real estate sector (including farmland) are driving up asset prices while contributing little to real development, and that capital repatriated to private equity investors is draining financial resources from productive investment. Drawing attention to the unpredictable nature of these flows, Reserve Bank of India Governor Y. V. Reddy recently conceded to India's Economic Times that "capital account shocks" could not be ruled out and that regulatory measures were needed to get a grip on these flows.

The rapid expansion of the Indian food processing sector, fueled by a growing middle class with greater disposable income, rapid growth (and concentration) in the modern retail sector, and tax breaks and subsidies for export processing zones has given an enormous boost to India's food processing sector, which is expected to triple in size over the next 8 years. Only 8 percent of non-diary food in India is currently processed. According to a recent study, value addition in food products is expected to increase from the current 8 per cent to 35 per cent by the end of 2025. Fruit and vegetable
processing, which is currently around 2 per cent of total production will increase to 10 per cent by 2010 and to 25 per cent by 2025. Crucial to this expansion is the process of greater integration into retail sales, including direct production for retail chains, and a forced march into global supply chains.

India's Yes Bank earlier this year set up a dedicated private equity fund of USD 100 million targeting exclusively the agrifood sector. Their Food and Agribusiness India Fund plans to invest its entire amount in 1-2 years, earmarking $5-7.5 million per company and expects an average annual return of 20-25 percent, according to Yes Bank official releases.

A typical example of private equity feeding industrial food processing is Field Fresh, launched initially by India's Bharti Enterprises (a USD 16 billion holding company) together with the European private equity Rothschild Group. Fresh Field initially exported onions, chilies, okra and other vegetables to Western retailers, including the UK's Tesco. On September 27, Bharti announced that Del Monte Pacific Ltd. was buying in to the company. According to the Indian Financial Express, "The development is essentially seen as a back-end support to the Bharti Retail initiative, which has entered into a technical alliance with the world’s largest retailer Wal-Mart. Field Fresh will also be serving the wholesale or the business-to-business models, which means it will also serve stores like the Metro Cash and Carry and the Bharti-Wal-Mart stores, which are going to come up by December 2008.

Field Fresh was essentially an export agro-based company and has been exporting fresh fruits and vegetables to various markets including UK, the Middle East and Europe. But now with the retail scene becoming increasingly attractive, Field Fresh will now be venturing into food processing as well."

Agrifood projects have been an important feature of the policy of land seizures carried out by Indian state governments, notably in West Bengal. Productive farmland has been seized and handed over to financial investors, subsidizing through low acquisition prices and tax and other subsidies the displacement of small farmers and landless labourers. The replacement of staple food crops with processed exports has generated hunger and rising insecurity in these areas and given rise to fierce opposition from workers and the rural poor.