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.
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 (AGRA) is guaranteeing commercial bank loans for agriculture on one hand, and teaching farmers how to run their farms like enterprises on the other.
So far, the Bill and Melinda Gates-supported organisation has made available $17 million in guarantees that has enabled banks to lend another $160 million.
Some governments are now catching up and giving similar incentives. Nigeria is offering commercial banks $500 million to unlock $3 billion.
In Tanzania -- where AGRA's $2 million of guarantees to the National Microfinance Bank led to $10 million in loans -- maize yields in some farms have tripled to 4.5 tonnes per hectare.
"The private sector needs to see a viable business opportunity from the agriculture sector, and the agriculture actors need to practice their operations as a business," said Nixon Bugo, an Innovative Financing officer at AGRA.
With a one billion-strong population growing at 2.3 percent each year, governments are allocating more budget resources to farming but the amounts are still woefully low and the outlook for Africa's hungry millions remains precarious.