It might sound like a clichŽ but the Saskatchewan Agri-Food Equity Fund invests in people and ideas.
“The first four rules of equity investing are: management, management, management and management,” said Lyle Bolen, fund manager.
“Equity investors don’t take security, so management is the key component in our assessment of viability of a business.”
The fund was set up by the Saskatchewan government in 1994 with a mandate to invest $20 million over five years in companies that will expand the value-added sector in agriculture and food.
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Although it has six investments under its belt, the fund is still a bit of an enigma for entrepreneurs more familiar with government lenders and grant givers.
“In the first year of the program, the standard question from clients was ‘what is your interest rate and can you get me the money within a week?’ ” Bolen said.
But the fund’s role is to make investments – as little at $25,000 or as much as $1 million. It takes an ownership stake in the companies and co-ops it invests in, wants a seat at the board table and requires a profitable return on investment.
In 1993, a survey of small food processors showed companies had trouble meeting requirements set out by banks and credit unions.
Existing immigrant or labor-sponsored venture capital often had a minimum investment of $500,000.
“A lot of the smaller business, especially the mom and pop businesses in the food processing area, were locked out of those private sources,” Bolen said.
Other investors shied away from agriculture because of the unlikelihood of windfall returns.
“It’s not computer chips, it’s not internet protection software, it’s potatoes,” added Gavin Conacher, an investment manager with the fund.
The Agri-Food Equity Fund was to fill the gap.
The fund has invested in an elk semen and embryo export firm, an oat milling plant, specialty meat processor, a processor and exporter of desi chickpeas, a flax miller and exporter and even a novel popcorn and spice distributor.
The common denominator is the companies’ link to food and their management teams’ ability.
“I want to know what kind of decision-making process they have so that when they wake up tomorrow and there has been a change in the marketplace, or a new competitor has arrived, or they run into a problem with equipment, how are they going to make a decision as to where to go from there?” Bolen said.
The fund’s goal is to make money, but because some projects will fail, its bottom line is to break even on its portfolio of investments.
Won’t all be winners
“We will have winners and losers. I like to quote Gary Benson with the Saskatchewan Government Growth Fund: lemons go sour quickly, but pearls take a long time to grow.”
Agricultural companies can take a long time to show their luster, so fund managers expect to keep their investments for about eight years.
In most cases, the original owners will buy back the fund’s equity over several years.
That’s the arrangement with Canadian Select Grains Ltd. near Eston.
The company, owned by 90 shareholder farmers, has a pulse crop processing plant. Agri-Food invested $500,000 in the company in January, making possible the addition of equipment for de-hulling and splitting brown desi chickpeas to produce chana dhal, a popular food of India.
Vice-president Roger McLean said an equity investment appealed to him as a company officer and a taxpayer.
Previous government lenders had some spectacular failures, he said.
The eight-year time frame of the investment allows the company time to build the business, he said.
“Flexibility was important because we are doing something so new that we couldn’t exactly say how it was going to turn out and we didn’t want to create financial expectations for ourselves in the first couple of years that were unrealistic.”
The fund also strives to attract interest from private investors, and generate excitement about the opportunities in small agricultural enterprises.
“We want to say, ‘hey, maybe you didn’t think agriculture was such an exciting area, but look what we can show you, maybe you should take a second look,’ ” Bolen said.
