Directing commercial funding to Africa’s fragmented agricultural sector is complex. For development finance institutions (DFIs), venture capitalists, and private equity firms alike, getting the right matrix has proven challenging.
But AgDevCo has found a formula for success. Established in 2009, the London, UK-based social impact investor has cultivated a niche of mobilizing funding from DFIs and others to back agricultural businesses and projects throughout Sub-Saharan Africa.
By making targeted investments in early-stage and mid-sized companies, AgDevCo cuts across categories to impact the whole value chain. So far it has provided capital to businesses that have directly created or sustained more than 15,000 jobs, and that work with 750,000 smallholder farmers.
To increase its scope, AgDevCo recently secured a $90 million package of new funding from UK government DFI CDC Group — which invested $50 million — along with its Norwegian and US counterparts, Norfund and DFC, which each contributed $20 million [disclosure: CDC Group sponsors AFN‘s African coverage as a network partner of AFN and our parent company, AgFunder.]
CDC, Norfund, and the UK government’s Foreign, Commonwealth, and Development Office provided a further $5.4 million for AgDevCo’s integrated technical assistance facility.
AFN interviewed Chris Isaac (CI), chief investment officer at AgDevCo, to find out how it plans to use the capital to fuel R&D, sustainability, and tech adoption in African agriculture.
AFN: Just how important is this $90 million funding for furthering AgDevCo’s goals?
CI: The funding represents a 50% increase in the capital we are able to deploy for long-term investments with African agribusinesses. It allows us to support fast-growing companies in the ‘mid-cap’ space who want to grow to become leading players regionally, and in some cases – for crops like macadamia and avocados, where Africa has competitive advantages – on a global scale. We will also continue to support smaller, earlier-stage companies, although we have to be selective given the high transaction costs of smaller deals.
AFN: What do you think are the most pressing financing needs for African agribusinesses and farmers?
CI: The needs vary greatly depending on size and maturity. At the smaller end, there is a near complete absence of equity-like funding to support business development and growth. Startups and smaller agribusinesses rely on capital from friends and family, and expensive and short-term bank loans. There’s no easy solution here because the costs and risks of investing with small ticket sizes – around $2 million or less – make returns for investors hard to come by. This part of the market will continue to rely on concessional funding and blended fund structures for some time.
For larger agribusinesses, capital is less of a constraint. The challenge is to be able to deliver consistently healthy margins in the face of competition from low-cost producers in the rest of the world, many of whom benefit directly or indirectly from subsidies. That requires strategic and operational excellence, and in particular the need to recruit good management. There’s also a growing appreciation that any agribusiness seeking a future exit – for example, through a trade sale to an international player – must be able to demonstrate ESG credentials which are more than skin deep. Environmental sustainability and mutually beneficial relations with local communities are an important part of that.
AFN: How much do you invest in each venture – and how do they use your capital?
CI: We plan to make new investments of between $40 million to $50 million per year for the foreseeable future, which we are able to do with the new DFI capital and as we recycle proceeds from exits from our existing portfolio. Individual investments will typically be in the range $3 million to $15 million, as mezzanine loans and equity, with a willingness to make multiple rounds with the same company where we see success and we have a good working relationship with the management team. Our investees use our capital for long-term growth projects, often to develop a new product or move into a new regional market, which create jobs and provide incomes for local communities. We also supply technical assistance to strengthen ESG and develop smallholder outgrower schemes.
AFN: Does AgDevCo invest in agritech?
CI: We are not agritech specialists, but technology touches every one of our investments in one way or another. We have coffee, cotton, maize, and bird’s eye chilli companies working with tens of thousands of smallholder farmers who are using bespoke mobile phone solutions that we helped develop to track, communicate with, and pay farmers.
Our farming businesses use precision farming technologies, including drones, and integrated pest management solutions to improve efficiency and reduce the use of water, fertilizers, and chemicals. We also have a leasing business, Equity for Africa, which is rolling out fintech solutions for sales, credit appraisal, and monitoring so we can reach smaller clients more cost-effectively.
It’s important not to put the cart before the horse. We see many business plans for technology startups which are built on the premise that with a sophisticated app you can reach millions of farmers, cut out middlemen, and transform productivity. We are sceptical about some of these models. We invest in the ‘bricks and mortar’ agribusinesses that are embedded in their communities, build trust-based relationships with farmers and markets, and take responsibility for marketing and quality control. You can then layer on technology solutions – geolocation, mapping by drones, and so on – to turbocharge efficiency, with benefits for both the company and smallholder farmers.