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Photo credit: SunCulture

Acumen’s new ag fund ushers commercial capital to farmers’ fight against climate change

September 16, 2021

Editor’s note: AFN’s coverage of the emerging African agrifoodtech sector is supported by Dutch development bank FMO

A third of the world’s food is grown on farms less than two hectares in size. That food supply is increasingly jeopardized by climate change. But smallholder farmers lack access to the resources and technologies that are bolstering the climate resilience of larger operations.

New York-headquartered impact investor Acumen wants to ensure that smallholder farmers in Africa have not just a fighting chance against climate change, but can increase productivity to meet the continent’s growing food needs. Based in Nairobi, its $58 million Acumen Resilient Agriculture Fund (ARAF) is investing in tech ventures supporting smallholder farmers’ livelihoods and climate resilience.

“Our goal is to help farmers adopt sustainable practices, weather-smart inputs, increase their income, and reduce their income volatility. When they increase their income and reduce their income volatility, they can save money, so they are ready to absorb the next climate shock,” ARAF managing director Tamer El-Raghy tells AFN.

“We look at companies that use technologies to streamline the process for farmers’ access to finance, inputs, agronomy support, and markets,” he adds.

One of ARAF’s early portfolio companies, Kenya-based SunCulture, is providing low-cost solar irrigation systems to smallholder farmers on a pay-as-you-go financing model. The company says its systems, which cost between 65,000 and 129,000 shillings ($590 to $1,175), can help farmers 5x their yields and 10x their incomes.

“It’s all about access to sustainable inputs and practices,” says El-Raghy.

Bridging the adaptation gap

Most climate investing supports mitigation efforts, like renewable energy projects, new low-carbon fuels, and electric vehicles, rather than adaptation. Indeed, only 5% of climate-focused capital, or $30 billion, in 2017 and 2018 went to initiatives helping communities adapt to increasingly frequent and intense droughts, storms, wildfires, pests, and other natural disasters.

The ARAF team recognizes that investors perceive “adaptation” investment strategies, particularly in emerging markets, as higher-risk. The effect is higher costs of capital for companies and projects, and higher costs of products and services for farmers and other climate-vulnerable communities.

El-Raghy cites irrigation technologies as an example. “Irrigation, generally speaking, can be thought of as infrastructure,” he says. “When you have solar-powered irrigation in Africa, the cost of debt for those companies is north of 10%, while infrastructure projects in other markets cost 3%, 4%, or 5%.”

“That means the cost of financing working capital for a product targeting farmers is at least double the cost in other markets, because of the risk profile of the market, the currency, and so on,” he continues. “So the barriers to adopting new technology become extremely high.”

Acumen has thus structured its capital stack to reduce risk for commercial-leaning impact investors, with a goal of coaxing more commercial investors into climate adaptation in the future.

ARAF uses a “blended finance” model, which includes a mix of commercial and concessionary capital. The fund is anchored by $23 million in first-loss capital from the Green Climate Fund, a fund that invests in climate change mitigation and adaptation in emerging markets.

VeggieVictory is making meat alternatives suited to African tastes – read more here

Next in the stack is Acumen’s own investment in the fund, which was made possible by a grant from the Ikea Foundation.

And then there are ARAF’s commercial impact investors FMO, the Dutch development bank, and PROPARCO, the French development bank, as well as the Soros Economic Development Fund, the Children’s Investment Fund Foundation, Global Social Impact, and others.

“Having a first-loss layer brings huge de-risking comfort to commercial impact investors for a new concept like climate adaptation for African smallholder farmers,” says El-Raghy. “The market needs more blended financing for projects targeting smallholder farmers.”

The fund also has a “sidecar” technical assistance facility, funded by grants, to help its portfolio companies prove their early business models and get on a path to scalability. The facility pays for activities that El-Raghy says are “important to their success, but for which they don’t have the capital, such as farmer training, business development, and measuring impact.”

In the case of SunCulture, the company sells irrigations systems that it needs to train farmers to use.

“These are expensive activities that companies need to do but many can’t afford to, especially early-stage companies, so we provide them with grants to do that,” El-Raghy says.

Chickens, tomatoes, and milk

ARAF has so far made five investments. In addition to SunCulture, it has backed Rwanda’s Uzima Chicken, which provides day-old chicks to farmers in Rwanda, Uganda, and the Democratic Republic of the Congo. The breed it sells, called SASSO chickens, are bred to be fast-growing, resistant to common poultry diseases, and highly adaptable to hot and humid environments. They also double as both egg-laying and meat producing hens, El-Raghy explains.

Nigeria-based Tomato Jos runs a commercial tomato farm and processing facility that partners with smallholder farmers and other organizations in the tomato value chain. Its support for smallholder farmers includes access to financing, training, and guaranteed offtake of their products in order to increase productivity and income stability.

Kenya’s Countryside Dairy works with a network of smallholder farmers to procure and process milk and other dairy products for domestic sale. In addition to offtake agreements with farmers, the company offers livestock feed, as well as husbandry training, artificial insemination, and veterinary services.

And FarmWorks, also in Kenya, aims to alleviate persistent pain-points for Africa’s smallholder farmers by connecting them to agronomy training, high quality inputs, machinery, and markets.

“Pain-points” is a keyword for ARAF’s strategy, El-Raghy says. “What are the pain-points of most smallholder farmers now? In general, it’s access – access to finance, access to irrigation, access to proper inputs — like drought-resistant seeds — access to agronomy support, and access to markets. We look at companies that can address those.”

He acknowledges that assessing the impact such companies are having is “still at a very early stage,” but ARAF’s process involves preliminary farmer surveys and then following up regularly with each portfolio company over the duration of ARAF’s investment. 

“We monitor the farmers’ access to climate adaptation enablers, such as improved seeds, credit, agronomy support, and markets,  as well as their ability to absorb and adapt to climate shocks,” he explains. 

ARAF expects to made an additional one to two investments this year, as it continues raising capital for the fund.

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