Since the turn of the 20th century, the global population has increased almost five fold with a further 1.5 billion inhabitants expected to be added by 2050. Such rapid population growth in addition to changing diets in emerging economies, consumption of meat, eggs and dairy products significantly increases as countries get richer, means that the demand for food will be one of the world’s critical challenges in the coming years. An often referenced statistic is that population growth coupled with changing demand means that agricultural output will need to increase by at least 70% by 2050, a sizeable task.
To add to the challenge, the requirement for greater output coincides with a desire, if not necessity, to reduce resource input requirement and limit the detrimental effect on the environment from food production. The challenge is such that sector participants must continually strive for increased efficiency in order to more intensively use the finite natural resources available to them.
Advancements in fertilizer science, use of sensors and GPS systems in harvesting, irrigation and crop management technology and highly efficient greenhouses and climate control equipment all drive vastly improved crop yields and reduce the overall resource requirement for production, not to mention profitability. As with all industry changing technology however, investment is required in order to scale and commercialise new ideas and it seems that the appetite is there to financially support businesses with differentiated intellectual property.
An example of blue chip private equity demonstrating clear belief in the sector is KKR’s investment in UK headquartered Sundrop Farms, which has ambitious global expansion plans. Sundrop has developed proprietary greenhouse technology which enables food production in arid locations with little access to water, energy or fertile soil. Its farms make use of solar energy and seawater, which it is able to desalinise on-site, rather than relying on extracted groundwater and fossil fuel powered energy to heat or cool its greenhouses as traditional producers do. Ken Mehlman, who leads the investment, cites Sundrop as an example of pursuing the thesis of tackling a resource scarcity challenge and believes leading returns can be made backing firms that address societal problems.
Interest is also being seen in the mid-market with investors eyeing the opportunity to support high growth, technologically differentiated businesses in this dynamic sector. Such appetite is evidenced by the launch of sector dedicated funds such as ADM Capital’s Cibus, raised specifically to focus on mid-market agritech in Europe and Australasia. Cibus’s mandate is simple, funding businesses that enable the production of more food from fewer inputs thereby reducing the overall impact of the industry on the environment. The fund had a first close at $100m earlier in 2017, is targeting a $500m final close and already has a strong pipeline of deals.
Feeding the world’s population is one of the key challenges to be faced in the 21st century and advancements in technology will play a key role in meeting demand. The rapidly increasing requirement means that dynamics in the sector are highly positive and firms with a compelling offering will continue to prove attractive to investors with capital to deploy and belief in the investment thesis.