I don’t know if I am going to stir up some trouble here, but I would like to toss around an idea that has been on my mind. The thing is that I see investment funds moving into the agri-foods sector, and I have serious doubts as to whether it’s a good thing or a bad thing for the sector as a whole. Not all funds are the same, and neither are their actions.
An investment fund, to put it briefly, is simply a group of people or entities who use a manager to pool their funds and obtain more profit from an investment than they would obtain on their own. Nothing to object to, here. It even looks like a cooperative act. In this world we’re in, everybody wants to make money, and an investment fund is just one more way to seek profits. As with any capital investment, the return should in some way be greater than the investment. But it’s precisely in the “How?” and “How much?” of this return on investment that we find the tough nut of the question regarding the real contribution of those investment funds to the agri-foods sector.
From an exclusively financial point of view there is just one basic question that determines whether the action of an investment fund is good for the agri-foods sector, regardless of whether it is good or bad for the fund itself: Is the value extracted from the chain greater than the value created in it? If the response is NO, then in some way the fund is draining value from the chain; taking away value that the chain normally retains for its own purposes and siphoning it off to the fund. In this case we could then say that the fund is a parasite sucking life from the chain.
Another question could be this: Where will the members of the fund extract the value from? There are a variety of options:
- From new clients who will pay more for the products.
- From greater internal efficiency through better management by lowering costs or by other means.
- From paying less to providers or growers.
- From introducing new products, especially amidst dramatic changes.
- From the increased value of the fund itself for having bought out the shareholders.
The first three are not impossible but nevertheless very difficult in well-established agri-food sectors; the fourth demands exceptional knowledge and vision; the fifth simply escapes me. Perhaps a fund manager who reads this article would think that the same could be said for any shareholder of any company. It’s true that all shareholders extract value from the company they own, but there are factors which differentiate particular stockholders with a stable presence in corporate ownership, such as we see in a family business, in a co-operative, or in a classic company with no connection to investment funds:
- Before taking any profits out of the company, they make sure that enough value has been created to maintain the activity; if not, no dividend for the shareholders.
- They have a long-range vision for the company, like a marriage that is forever, for better or worse, in sickness and in health.
- They work without alternatives, no safety net; in some cases, they devote their whole lives to the company and never think to do anything else, anywhere else.
Along with return on investment there are other increasingly important aspects of doing business, especially a company’s concern for the stakeholders in the community as opposed to the stockholders. This is the Shared Value that Michael Porter (1) is talking about: sustainability, socially responsible capitalism, and other corporate trends which go beyond purely financial short-term considerations to get involved in the fabric of the community where the target company has launched its activity, in such a way that the products sold can interact with final consumers in matters of health and practical usefulness. In that way, not only do stockholders make a profit from the existence and the actions of the fund, but so does the larger society.
Though not all investment funds are alike, their bias is normally toward the short-term, the opportunity, the existence of more profitable alternatives, the financial profit pure and simple. This in turn can lead to situations which inhibit the ability to create value in the agri-foods sector from other points of view besides operations management and cost reduction.
The agri-foods sector is vitally important, as demonstrated in these times of the Corona virus, and it continues to need investment, vision, creativity and professionalism in order to keep creating value at the same time as it becomes more committed to finding solutions to problems in the societies where the agri-foods sector operates. Investment funds must also do their part for solutions: knowing the agri-foods sector very well, incorporating social values as well as short-term financial ones, and directing efforts confidently to the creation of value in the chain. In such a way can investment funds actually help the agri-foods sector by their presence.