New Investment Models for Agric in Africa

Agricultural projects take more time to mature and investors are developing new models to encourage businesses to appreciate a longer bottom line.

 

Investing in agriculture takes patience – not something a lot of investors, eager for quick returns, have in ready abundance. However, a new investment model is gaining traction, using professional fund managers to invest donor funds as 'patient capital' in small and medium-sized enterprises (SMEs).

UK-based social venture capital firm AgDevCo has become one of the model's pioneers after investors chose it to manage a catalytic fund for the Beira Agricultural Growth Corridor in Mozambique.

AgDevCo has $28m under management; $23m of that consists of funds for investment in the Mozambique catalytic fund, from donors including the UK, Dutch and Norwegian governments. So far, it has made nine investments in SMEs plus three larger investments with its own capital. Unlike some venture capital investors, AgDevCo invests in both primary agricultural production and agribusinesses.

Chris Isaac, business development director of AgDevCo, says the lack of bankable projects is the main constraint facing private equity funds and commercial banks looking to invest in African agriculture. "Our role is to invest to create a pipeline of bankable agriculture businesses which can attract third-party investment," says Isaac.

AgDevCo deems an investment successful if it can exit by replacing its investment with private capital. Any profits from the Beira catalytic fund will be reinvested back into the country. For other investments, profits will be reinvested back into AgDevCo projects.

The average SME investment is $200,000-$500,000 and the management approach – which it sees as project incubation – is very hands on. Sometimes strategic partners are brought in from the outset, such as with banana company FrutiManica when AgDevCo's $150,000 was matched by a private investor.

Another investee company – extension and marketing company Empresa de Comercialização Agricola – will soon sell grain to the World Food Programme and is about to sign a contract with a large brewer.

AgDevCo is also investing in the livestock sector, as demand grows. Founded in 2009 by executive chairman and principal sponsor Keith Palmer, a former vice president at investment bank Rothschild, AgDevCo was modelled on InfraCo, an infrastructure fund also run by Palmer.

But there is a difference in the size and timeframe of the projects: whereas a typical InfraCo project could go through the project development cycle in two to four years, it could take six to seven years for an agriculture project.

No shortcuts

"Where one has seen investment fail in the agriculture sector in Mozambique, in the biofuels sector for example, is because that process of developing the project was not done properly and there were short cuts taken,"says Isaac.

AgDevCo has made "significant process" in Mozambique, says Patrick Guyver, managing director of Prorustica, which advised on the blueprint for agricultural corridors in Tanzania and Mozambique. He says the jury is still out on the catalytic fund model, which is not a "silver bullet" approach but shows potential as a means of supporting the development of smallholder farmers.

Outside of Mozambique, the company has investments in five large irrigation projects in Tanzania and Ghana, and is working on more in Zambia.

In Ghana, it is investing in three projects involving irrigation and food crops, each requiring $30m-$40m. AgDevCo expects to commit the first $2m-$3m, according to Isaac, and hopes the World Bank will step in as a source of patient capital. It is also waiting for the launch of a tender process to run a catalytic fund that will invest in the Southern Agricultural Growth Corridor of Tanzania.

Source: The Africa Report