Silverstreet Capital achieves attractive returns fixing African agricultural value chains

SilverStreet Capital, an investor in African agriculture, sees opportunities where others shy away from the high risks. “We are targeting the parts of the value chain that need fixing,” says founder Gary Vaughan-Smith.

In Tanzania, SilverStreet Capital invested in the poultry sector that was lagging because of the low feed quality and poor chicken breeds. SilverStreet Capital

In short

  • SilverStreet Capital, founded in 2007, is an investor in African agricultural supply chains, targeting the parts that need fixing.
  • It invests into processing plants, storage, the seed sector, and trading in South Africa, Zambia, Tanzania, Mozambique, Namibia, Kenya and Uganda.
  • Businesses within the Silverlands I fund have seen an annual revenue growth of roughly 16% since 2013.
  • So far, SilverStreet’s investments have benefited some 386,000 people economically in 2020. The portfolio of companies employs 10,400 people and has created over 3,000 quality jobs.

Supply chain issues continue to mar the African agricultural sector not only because of an increase in demand as the continent’s population grows but also because of weaknesses in the supply chain.

The poultry supply for example grapples with Issues such as, poor domestic chicken breeds, which tend to be significantly smaller and produce less eggs than those in developed markets. Because of the lack of a steady supply of chicken feed locally African nations continue importing both chicken and feed.

The feed, made up of a mixture of maize and soya, is needed for more intensive farming. However, the cost of imported feed makes it often too expensive for farmers to scale up their production.

Fixing complex value chains

These are the kinds of structural supply chain issues that SilverStreet Capital is attracted to. It analyses agricultural value chains for opportunities and looks to find parts of the value chain that need investment.

For example, investments into processing plants, storage, the seed sector, and trading in South Africa, Zambia, Tanzania, Mozambique, Namibia, Kenya and Uganda.

“We are targeting the parts of the value chains that need fixing,” says Gary Vaughan-Smith, founder and Chief Investment Officer of the investment firm that was founded in 2007.

The company is “most attracted” to investments that can “unlock a value chain by filling a gap.” Given that African agricultural value chains are still fragmented, there should be ample investment opportunities.

In Tanzania SilverStreet Capital invested in the poultry sector that was lagging because of the low feed quality and poor chicken breeds.

“We built a soya processing plant, a feed mill and introduced new poultry breeds. We sell the farmers day-old chicks and feed and thereby enable the whole value chain,” Vaughan-Smith says.

“We created a market for soya beans, allowing smallholder farmers to introduce soya beans, and thus legumes, into rotation with maize, which is from the grass family. Legumes have the positive effect of fixing nitrates naturally back into the soil, reducing the need for artificial fertilisers,” Vaughan-Smith explains.

Improving farmers’ yields

Some 60% of the sub-Saharan population live on smallholder farms and the challenges of poverty, poor nutrition, high levels of population growth and increasing ecological damage keep these farmers in a poverty trap.

“Crop yields can be boosted by introducing improved seed, lime and through sustainable farming techniques,” Vaughan-Smith explains.

Better seeds allow farmers to produce more food on the same land area. The investor: “Having better seed is key to raising yields and incomes. Moving away from slash and burn to conservation agriculture techniques will further boost yields and stop this negative influence on climate change.”

Conservation farming techniques imply the addition of organic matter to the soil through mulch or compost. Also, by rotating different families of crops soil health improves.

“Within a year a farmer can see a doubling of their yield by implementing these techniques and switching to improved hybrid seed,” Vaughan-Smith said. Zamseed in Zambia is one of the companies SilverStreet invests in for this purpose.

Moving away from mono-cropping by rotating high-value crops further boosts the living standard for the farmers, who are often women as their husbands may work away in mines or in cities.

Creating markets

In addition, SilverStreet invests in “development hubs” creating a market for these crops. For instance through processing plants for soybeans to be used for poultry feed. SilverStreet also builds and increases the infrastructure for storage and offers training in conservation farming techniques.

Other areas that SilverStreet invests in are crops that have significant health benefits, such as avocados and nuts. “Planting trees has an environmental benefit but at the same time we are aware of how water-intensive crops such as tree nuts are,” Vaughan-Smith acknowledges.

“These crops need to be planted in areas where water shortages are not an issue so that we do not cause knock-on effects elsewhere. The areas we operate in tend to have stable rains and water is replenished annually. We do not have the same problem that, for example, California’s Central Valley has, where water shortages are effectively endemic,” he says.

Impact measurement

Measuring impact is complex and many investors use this as an excuse not to invest in impact investments, but SilverStreet objectives are set and measured clearly. It quantifies how many people are achieving higher incomes and by how much.

So far, SilverStreet’s investments have benefited some 386,000 people economically in 2020. These farmers’ incomes have increased by US$116mn per year. The portfolio of companies employs 10,400 people and has created over 3,000 quality jobs.

The investment firm also ticks many of the SDG boxes by increasing income, doubling yield, increasing food security, empowering women through higher incomes and reducing deforestation and soil erosion.

Returns in the ‘low teens’

Solving problems is key to how the company views investments in the agriculture sector, as this is where the business opportunities arise, Vaughan-Smith says. And the “attractive returns” the company is striving for.

Businesses within the Silverlands I fund have seen an annual revenue growth of roughly 16% since 2013. SilverStreet targets an internal rate of return in the low-teens, but these “attractive returns” have to go hand in hand “with substantial positive social, environmental and climate impact”.

Improving the livelihoods for some of the poorest people is also key in the company’s investment strategy, the CIO says.

Launched in 2007, SilverStreet now has some $500mn in assets under management. Investors include European and US pension funds as well as endowments, foundations, family offices and high-net-worth individuals.

In its current funding round SilverStreet is hoping to raise some $500mn. “The investments provide strong diversification for investors because they are not related to the main global cycles or asset classes,” Vaughan-Smith says.

“Investors are investing into real assets with a yield linked to food inflation. If inflation is unexpectedly high one would expect a higher profit stream. This, combined with a high impact, makes it an interesting asset for all long-term investors,” he says.

Risk mitigation

SilverStreet also has investments from the development finance institutions of governments of the UK, Denmark and Finland. The first fund, Silverlands I, has approximately a $100mn debt facility from the DFC, a US government department, as well as political risk insurance through the World Bank and the DFC.

These types of partners give investors an extra layer of security in a sector that is often viewed as risky, the investor says. “The debt facility de-risks businesses as the US government is a long-term capital provider and sourcing working capital in Africa is difficult,” Vaughan-Smith says, adding “we also do not have to worry about renegotiating terms on an annual basis.”

“We have to demonstrate very high ethical and ESG standards to be considered for these loans, insurance and investments,” he notes.