PE firm Affinity is Beijing’s new milkman

Private equity firm Affinity Equity Partners acquires a 40% stake in a Chinese dairy business, giving it a share of the biggest milk supplier to Beijing.
China is attempting to rebuild its national dairy industry and wean its citizens off imported milk.
China is attempting to rebuild its national dairy industry and wean its citizens off imported milk.

Private equity firm Affinity Equity Partners has acquired a 40% stake in the largest dairy supplier to Beijing for $123 million, according to a person familiar with the matter.

The deal with Beijing Capital Agribusiness Group (CAG) comes amid increasing demand for high-quality milk products as China’s middle class expands and demands creamier, fresher milk but, above all, safe food following a national tainted-milk scandal in 2008.

Most of China’s milk is still produced by small-scale farmers that sell to myriad middlemen before reaching consumers – meaning quality control is tricky to monitor.

Foreign firms have benefited from Chinese consumers’ flight to big name brands.

China is attempting to rebuild its national dairy industry and wean its citizens off imported milk. In the process it  is encouraging consolidation and is trying to create  industrial dairy farms with international safety standards and modern farming practices.

Private equity firms have been big backers of China’s ambitions in the dairy space.

KKR invested in China Modern Dairy, while Affinity has been a big investor in food companies across Asia including Korea’s Oriental Brewery and Pulmuone, New Zealand’s Tegel Foods and Australia’s Primo Group.

Despite the fund’s large injection of capital into the sector in recent years, analysts expect demand will continue to outstrip supply.

Affinity is forming a joint venture with food and beverage group CAG, which is controlled by the Beijing's municipal government.

Together, Affinity and CAG will carve out the state-owned conglomerate’s dairy farming operation that owns 32 farms with 46,000 head of cattle housed in sheds where their fodder is carefully monitored to improve their milk. The yield is relatively high at 11 tonnes of milk per cow a year, above the average of five tonnes a cow in China. The protein and fat content is also above average at 3.1% and 3.8% respectively.

The owners’ plan is to increase the number of cows to more than 100,000 over the next five years to meet booming demand, according to the person.

Many Chinese dairy herds have been shipped in from as far away as South America and Australia but CAG breeds its own cows using artificial insemination.

It already produces more than 60% of the milk in the Beijing area with around 21 million people – nearly as many Australia.

Urban dwellers are generally more likely to pay for higher quality dairy products and the average income per capita in Beijing is about double the national average.

The dairy business was started in 1949 to supply fresh milk to Beijing government employees.

CAG will own 60% of the joint venture and Affinity will have 40%. The new company will be called Beijing Sunlon. It will breed its own cows.

The deal was two years in the making and was signed on Friday.

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