APPROACH AND METHODOLOGY
Objective: The five participating stakeholders -- J.P. Morgan, the Bill and Melinda Gates Foundation, the Rockefeller Foundation, the Gatsby Charitable Foundation, and USAID -- approach the goal slightly differently, but with the unifying belief that greater investment in African agriculture is necessary for sustained growth and poverty alleviation. Some look at how investment in agriculture SMEs will directly benefit the lives of small holder farmers while others focus on the key interlocutor role that SMEs have in greater food security. Despite the different lenses that each stakeholder evaluates programmatic success, all believe that sustained growth and prosperity necessitates increased private sector investment in agriculture in sub-Saharan Africa. To this end, the stakeholders designed the investment as a proof-of-concept approach, which while benefiting 5,000 employees through 20 SMEs, will also demonstrate to domestic and international investors that agriculture SMEs are viable commercial opportunities.
Fund Capitalization: A total capitalization of $25 million will be invested in African Agricultural Capital (AAC) Fund. Equity will be provided by the Bill and Melinda Gates Foundation, the Gatsby Charitable Trust, and the Rockefeller Foundation. Debt will be provided by J.P. Morgan and will be partially guaranteed by USAID.
Fund Investment: With investments ranging from $250,000 - $2 million per company, AAC will be the first agriculture-only fund operating in this segment of the market. The investments are designed to provide a tailored structure to appropriately support agribusiness growth. For example, AAC may provide self-liquidating debt investments at market lending rates or minority equity investments that, while providing competitive returns, are not overly excessive in capturing the overall upside.
Technical assistance: USAID will fund and procure the complementary technical assistance to support the growth of SMEs. USAID intends to build local Business Development Service capacity wherever possible to foster the creation and deepening of domestic advisory service industries. Subject to the availability of funds, USAID intends to fund $3 million in technical assistance.
IMPLEMENTATION, TIMELINE, AND DELIVERABLES
Over a 12-year period, investments and technical assistance will be offered to approximately 20 SME agribusinesses.
The fund will measure the social and development impact of each investment, including but not limited to, the number of small holders positively impacted by the enterprises and indicative increases in household incomes.
The fund will evaluate and select potential investments using specific criteria in a number of areas, such as: business environment characteristics, enterprise performance metrics, and social development indicators.
While there is growing investor interest in agribusiness in Sub-Saharan Africa due to increasing demand-supply imbalances, the private sector continues to be reluctant to enter this new asset class. Domestic financial institutions frequently lend only to large businesses that need financing greater than $2 million while microfinance institutions and cooperatives attend to smallholder farmers. A critical missing middle remains without access to credit. It is these small and medium enterprises (SMEs), operating in agricultural value chains with investment needs of $250,000 to $2 million, that are pivotal in fostering food security through improved processing, packaging, and distribution capacity in the domestic market. Moreover, agricultural SMEs contribute to over 50 percent of GDP and are the primary sources of employment in the majority of countries in Sub-Saharan Africa.
While stimulating greater investment in agriculture is key to growth, employment generation, and food security, the means by which investment is channeled is just as important. Social impact investors and development professionals have the opportunity to seed a market-driven, sustainable approach by deepening the capacity of domestic financial intermediaries. Demonstrating to the market that private fund managers can be successful operating at this level is vital to correcting the shortfall of investment targeting agriculture SMEs. Combined with greater availability of patient risk capital, agri-businesses in Africa also need the business know-how to help them compete in national, regional, and global markets.
SEEKING: Financial Resources, Implementing Partners
For subsequent investments, commitment partners seek both new investors and experienced fund managers.
OFFERING: Implementing Partners, Best Practice Information
USAID will competitively procure the technical assistance package that will accompany the AAC investment.