Financial advices for corporations

Africa money feast and famine for africa farm investment

´╗┐* Private equity scouring continent for opportunities* Small farmers struggle for financing* Swathes of arable land lie fallowBy Helen Nyambura-MwauraJOHANNESBURG, Sept 28 African agriculture has a big investment problem: lots of private equity interest but few opportunities because most farms and companies are too small to absorb the cash or provide attractive returns. With only a third of its 630 million hectares of arable land under cultivation and large quantities of water flowing untapped, Africa is the last great agricultural frontier, its soil coveted by Asian giants such as China and India. Soaring grain prices and global food inflation are spurring investor interest in African farming, trends that are also eating into household income on the world's poorest continent and threatening food riots like those seen in 2008. The stakes are high in a region where agriculture still accounts for about a third of gross domestic product but remains undeveloped and rain-fed, with most farms tilled by peasants for subsistence instead of sale."What Africa has going for itself is that it has the land availability and space to grow agricultural production in a much more significant manner," said Joseph Rohm, a portfolio manager at Investec Asset Management, which oversees some $3 billion in Africa. African agriculture attracted $102 million worth of private equity investment in the first six months of 2012, compared with $54 million in the whole of 2011, according to the U.S.-based Emerging Markets Private Equity Association.

Some of that was by Standard Chartered, which spent $74 million earlier this year on a minority stake in grain and fertiliser trader Export Trading Group and another $20 million for an indirect stake in Zimbabwe's horticultural firm Ariston. The targets are either too small or too early in their development, and are grappling with price and weather risks, said Peter Baird, Standard Chartered's head of private equity for Africa, making deals scarce."It's hard to either acquire existing assets or to cobble together investible opportunities," he said. Many investors would rather put their money in the food chain rather than the actual farming, said Daniel Broby, chief investment officer at specialist frontier market investment manager Silk Invest. The fund's private equity arm is looking at a second closing for its $150 million African Food Fund by 2013 and has already invested in an Ethiopian biscuit manufacturer and a Nigerian fast food chain.

Standard Bank's head of agriculture in Africa, Mohit Arora, said some seven economies with top agricultural potential need at least $25 billion in both public and private spending over the next three to eight years to grow the sector. Ethiopia alone requires $11 billion until 2020. However, a good chunk of the total private funds raised for the region remained idle last year, he said."While the investors have gone out and raised quite a lot of money, putting that money to use is another thing," Arora said.

UNLOCKING FINANCE Operating in Africa comes with its unique challenges like opaque land rights, fragmented land in some areas, lack of skills, and poor or non-existent infrastructure. Even when there is ready financing, small farmers, who make up about 70 percent of agricultural activity, are reluctant to borrow because many are financially illiterate, cannot write up business plans, or are put off by high interest rates. To address this the Alliance for a Green Revolution in Africa

Banks better information may hurt loan investors study

´╗┐Banks that trade the stock of companies they make loans to have superior information, which can help investors trading in equities and hurt customers trading loans, according to a study. The study, by business school professors at Baruch College and Pace University in New York, looked at so-called "dual market makers" - banks that simultaneously were the lead lenders to companies and traded their shares with investors. In markets where there are dual market makers, dealers tend to buy shares from investors at higher prices and sell them at lower prices compared with markets without dual market makers.

That means equity investors were getting a better deal whether they were buying or selling shares in the stock market, which tends to trade actively.

But in the loan markets, which trade much less frequently, the presence of dual market makers translated to inferior pricing for investors, the study said. Dual market makers reduced equity bid-ask spreads - the highest price at which someone will buy a stock and the lowest price someone will sell it - by about 39.5 basis points or some 35 percent of the mean equity spread.

But the presence of dual market makers increased spreads in the syndicated loan market by around 25.3 basis points, or 21 percent of the mean loan spread, which minimizes liquidity. The study, titled "The impact of joint participation on liquidity in equity and syndicated bank loan markets" was published in the January issue of the Journal of Financial Intermediation.

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