Chinese dairy firms catch private equity fancy

Private equity firms seem to be warming up to the Chinese dairy sector, with Internet tycoon Jack Ma spearheading a fresh round of investments in the sector.

Fonterra eyes China UHT milk plant in 2014/15

Fonterra challenged in China's milk powder market

Yunfeng Capital, a private equity firm co-founded by Alibaba Chairman Ma, Target Media founder Yu Feng and Citic Private Equity, have acquired a 60 percent stake for 2 billion yuan ($328 million) in a unit of dairy giant Inner Mongolia Yili Industrial Group Co Ltd.

According to Yili, the investment will help sustain milk supply sources, enhance farm building capacity and also expand and upgrade the dairy source network to boost profitability.

Jiang Aihua, an analyst from CIConsulting, said that Ma, who has invested in logistics, Internet financing, pharmaceuticals and football, will help raise the profile of the sector and draw more PE firms to the dairy industry.

Huaxia Farming a high-end milk producer in Sanhe, Hebei province, received investment from an investor group led by GIC, Singapore's sovereign wealth fund, and Olympus Capital Asia, a leading regional middle market private equity firm focused on Asia, which has invested an additional $106 million in the company. The investment proceeds will be used to fund the expansion of the company's farming operations as well as its retail dairy products business.

GIC is investing $70 million and Olympus Capital Asia is investing $30 million. Other existing shareholders, including Grand River Capital, are investing the remaining $6 million. Combined with its previous investments, Olympus Capital Asia has now invested $108 million in the company and is its largest shareholder.

Huaxia Dairy operates three farms in the Sanhe area, just outside of Beijing, with more than 13,500 cows. The milk produced at Huaxia Dairy is used to supply major dairy companies in China for their premium products, and for the production of Huaxia Dairy's own Wondermilk-branded products.

Dairy farms have become a key link in the manufacturing process, fueled by the growing domestic demand for dairy products, especially high-end products.

Song Liang, an industry analyst, said agricultural investments have become more attractive to PE firms due to the slowdown in economic growth. The dairy sector, buoyed by surging milk prices, also offers investors long-term profit opportunities, he said.