Impact investment into inclusive agribusiness
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Slides from a presentation @Inclusive Agribusiness Southeast Asia Roundtable September 23-24 2015, Ho Chi Minh City, Vietnam
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Impact investment into inclusive agribusiness
- 1. September 2015 Impact investment into inclusive agribusiness
- 2. © Palladium 2015 01. Introduction 2 Purpose of review • Assess the current status of impact investment into inclusive agribusiness • Provide recommendations on actions that could be taken by DFAT and Grow Asia to catalyse greater investment Methodology • Stakeholder consultations and secondary research
- 3. © Palladium 2015 01. Introduction 3 Impact investment “Investments made into companies, organizations, and funds with the intention to generate social and environmental impact alongside a financial return” (Global Impact Investors Network) Inclusive agri-business “Approaches that promote development through “core” business activity. These approaches are inclusive in the sense that they seek to bring poor people into the orbit of business activity as suppliers, workers or consumers, without compromising commercial viability or competitiveness” (Callen and Davies, 2012) Applied to the agricultural sector…
- 4. © Palladium 2015 02. Current situation 4 The review looks at a number of factors in detail… Three trends stand out in particular 1. Investment gap for early-stage agri-businesses 1. More generally, investors are looking for investees with similar characteristics 2. Family offices and HNWIs most likely to be valuable for early-stage financing Key trends
- 5. © Palladium 2015 • At one level, the market is working • However, there are problems in the market that prohibit its growth 03. Constraints 5 The problem in the core of the market Key problem: Limited pool of ‘investable’ agri-businesses No shortage of ‘impact capital’ • Why does this problem exist and persist? Supply: Impact capital Demand: Agri-business Market for impact investment (for agriculture)
- 6. © Palladium 2015 03. Constraints 6 Causes of the problem in the core of the market A number of factors underlie the problem. A. Constraints inherent to the impact investing business model B. Constraints in the market system for impact investment C. Constraints in agricultural market systems
- 7. © Palladium 2015 03. Constraints 7 A. Constraints inherent to the impact investing business model In general, impact investor intermediaries work within a business model that creates disincentives to investment in early-stage business. Two dynamics visible to us: 1. A tension in investment criteria – commercial returns vs. additionality 2. Intermediary remuneration – incentives to accumulate and manage more assets creates upward pressure on fund and deal size Two implications of not targeting early-stage agri-businesses…
- 8. © Palladium 2015 03. Constraints B. Constraints in the market system for impact investment 8 • A limited pool of ‘investable’ agri-businesses is also a result of constraints in the system that surrounds impact investors and investees. Impact capital Agri- business Supporting functions Rules Market for impact investment (for agriculture) Limited pool of ‘investable’ agri-businesses… …caused by underperformance in the surrounding system
- 9. © Palladium 2015 03. Constraints B. Constraints in the market system for impact investment 9 Market for impact investment (for agriculture) Supporting functions Rules x Deal sourcing x Investor community marketing x Social enterprise status x Others Impact capital Agri- business
- 10. © Palladium 2015 03. Constraints C. Constraints in agricultural market systems 10 Market for impact investment (for agriculture) Agricultural market x Impact investment …caused by constraints to the growth of early- stage businesses in agricultural markets The problem in the core of the market - limited pool of ‘investable’ agri-businesses… Agri supply Agri demand
- 11. © Palladium 2015 03. Constraints C. Constraints in agricultural market systems 11 Agricultural market x Impact investment x Professional services for early stage companies x Processing equipment and leasing Open data x x Others Agri supply Agri demand
- 12. © Palladium 2015 • Constraints at three levels – • Where there are ‘gaps’ in market systems it can be intuitively attractive to plug these directly with donor resources… • However, these services (financing, incubation, deal sourcing etc.) are part of any functioning market and should be performed, and paid for, by permanent market actors…. • While the road may be longer, working with and through systems – by nudging market actors to take up new innovations and roles – is the route to more scalable and sustainable impact. In this context, we suggest two distinct, but potentially complementary, options… 04. Programmic recommendations Principles for intervention 12
- 13. © Palladium 2015 • Expand the pool of investable agri-businesses by creating greater connectivity between impact investors and widest possible pool of potential investees. • Identify and understand what is prohibiting that connectively / opportunities to improve the way the market creates visibility and understanding between investors and potential investees. • A portfolio of mutually reinforcing interventions would seek to stimulate market actors to adopt innovations or new roles that address identified system level problems. 04. Programmic recommendations Option 1: Development of the market system for impact investment into agriculture 13
- 14. © Palladium 2015 • Expand the pool of investable agri-businesses by addressing systemic constraints to the formation and early-stage growth of agri-companies • Identify and understand what is prohibiting this from happening • Likely to involve identifying supporting markets and rule systems that cut across individual commodity/product markets, that play – or could play – an important role in supporting early- stage growth • E.g. Market for seed- and venture-stage funding in agriculture…. we recommend that opportunities to encourage flexible and risk-tolerant forms of capital (e.g. family office/HNWI) into this space be explored. • A portfolio of mutually reinforcing interventions would seek to stimulate market actors to adopt innovations or new roles that address identified system level problems. 04. Programmic recommendations Option 1: Development of the market system for early stage inclusive agri- business 14
- 15. Thank you
Notas do Editor
- Focused on Indonesia, Myanmar, Philippines and Vietnam Review of available literature and one-week in each country
- 1. Agri-businesses that benefit poor people as suppliers and workers Farming cooperatives with ‘poor’ members Vertically integrated processor and exporter MNC that has invested in its supply chain to the benefit of their suppliers/workers 2. Agri-business that target and impact the ‘poor’ as consumers Poor benefit as consumers of quality agricultural inputs (seeds, fertiliser, and irrigation equipment) Services (information, farmer education, financial, or pest control services) Businesses in the domestic food/beverage retail sector that create demand for the ‘poor’s’ produce
- Sources of finance, deal size, instruments used, return expectations, terms etc. Investors do not invest below a deal size of $250k Smaller deals have been done but… Congregate at middle of the risk-reward spectrum… There is some private, public and international donor capital at the seed- and venture-stage but it is thin and ad hoc. At least 2-3 years trading history A healthy balance sheet Those excluded or marginalised from domestic formal financial services Professional founders/managers with sectorial experience Commercial or near-commercial returns Potential for existing social impact to scale Some evidence that this is taking place through opportunistic angel investment and funding of business accelerators and incubators More flexible in their approach, more able to take risks, and less driven for short to mid-term returns.
- Impact capital has been invested in agri-business and levels of investment are likely to increase in years to come and thus, ultimately its potential for social impact If there is no shortage of impact capital, why isn’t it finding its way to more inclusive agri-businesses?
- Typically investors are looking commercial or near-commercial rates of return. Typically, IRRs of 15-20%. However, investing in businesses that are beyond the risk profile of the domestic financial service sector, pushes investors towards businesses that are too small in trading revenue, too marginal in profitability or too informal in operations to deliver IRRs of 15% or more Many impact investors are remunerated through a fixed fee calculated as a proportion of AUM. Creates incentive to accumulate and manage more assets. This, coupled with the fact that transaction costs vary little between different deal sizes + tendency towards a ‘light touch’ staffing in country, creates upwards pressure on deal size, towards growth stage companies. 2 implications: Large proportion of agri-businesses ruled out for investment If early-stage businesses are not getting investment, where tomorrow’s growth-stage businesses going to come from?
- Constraints found in the SFs and ‘rules’ of the system that inform, support and shape interactions… Where SFs and/or rules are underperforming, or are absent altogether, this maybe contributing to the problem in the core of the market: a limited pool of ‘investable’ agri-businesses.
- Deal sourcing Search tactics appeared to be a common shortcoming across fund managers Majority rely on personal connections among the professional urban elite, in addition to competitions and trade fairs If investor staff are not nationals, or don’t speak the local language, the circle tightens yet further Identified a number of positive tactics… but these tended to be outliers. The point - It may be that limited search tactics tactics - and weak deal sourcing infrastructure - hides from view some businesses that are investable, or near investable Investor community marketing Investors are looking for investees with similar characteristics. However, investor community collaboration in marketing is largely absent at the moment. Agribusinesses are not widely aware of impact investor financing… Perhaps scope for joint action with respect to investor community marketing, service awareness-raising, and local language press coverage. Greater awareness and understanding might serve to expand the pool and visibility of ‘investable’ agri-businesses for/to investors. Social enterprise To take a country-specific example. In Indonesia, there is no legal status for social enterprise, though a number of organisations are advocating for this. Most ‘social enterprises’ are registering (if at all) as a limited company (PT). Cooperatives, foundations (Yayasan), and organisations (Perkumpulan) are also formal statuses, but neither of these, nor the PTs, allow for the conditions that socially purposeful enterprises and impact investors ideally require - i.e. to make profit, to pursue and secure certain types of investment/financing, and to ‘reward’ positive social outcomes with ‘breaks’ of some kind. A legal status for ‘social enterprise’ would raise the profile of socially-orientated businesses generally as well as provide a ‘formal’ platform for socially-orientated start-ups (perhaps leading to more) in addition to those already generating socially positive outcomes. The effect could be amplified if certain incentives, credits or exceptions were related to this new status.
- Not just about the finance and the ‘investment’ environment, it is about the broader environment in which these agri-businesses have to operate We know that agri-businesses struggle internalise responses to the myriad of external market constraints that impede growth. The scale, range and complexity of market failure in which early-stage businesses operate is such that the odds are stacked against any one firm attempting to address and overcome these failures, to grow, and become ‘investable’. Question becomes: how is the market failing early-stage agri-businesses? Again, the answer lies in the system – the SFs and rules – that surround early-stage agri-businesses. Where SFs and/or rules are underperforming, or are absent entirely, this may prohibiting early-stage agri-businesses from getting to an investment ready position, and thus limit the pool of investable businesses.
- Professional services Numerous professional business services of all types are in short supply. Financial advisers catered towards the MSME market are one such gap: financial management advice, accounting and book keeping services, and investment brokering could all support less formal, less structured agri-businesses that would otherwise qualify to appeal to investors. Business service offerings in support of licencing and negotiating regulations relevant to market access would be advantageous also – for example, those related to exporting produce and processed products, food quality standards compliance, organic and tractability certification – helping early-stage companies to build a platform for high-value overseas distribution relationships sought by many investors. In the absence of such guidance, mentorship and/or reduced fee services, viable and prospectively attractive venture-stage agri-businesses will remain too expensive in terms of transaction costs. Processing equipment A pull on agricultural produce and an incentive for farmers to make productivity improving investments is the presence of agri-processors and the growth of the food and beverage segment. The growth of early-stage food and drink processors is limited by the availability of affordable machinery and equipment. Improvements in equipment leasing and the expansion of offers from equipment manufacturers and distributors could have a significant impact on the prospects of agri-processor growth. Open data The development of agricultural information service ‘products’ and service ‘offerings’ in the private sector can be bolstered greatly by the free availability of raw, semi-processed, or organised data pertaining to agriculture and agribusiness held in public offices and departments. For example, weather, soil and disease incidence data, hold commercial value and many encourage the development of products and services, the expansion of companies in response to market gaps/needs etc. At times, public offices may seek remuneration for data that, in the right hands, could support more pro-poor products and services. At other times offices are unaware that they are sitting on valuable information.
- Businesses cannot access credit or other investment, so subsidised finance is provided Entrepreneurs needs early stage incubation, so subsidise incubation facilities are provided There’s a gap in deal sourcing mechanisms so match-making services are provided When donors fund or perform these functions themselves they may achieve short-term results but are effectively, circumventing and potentially undermining the systems they are trying to strengthen. Moreover, plugging gaps directly, is neither scalable nor – given the temporary, project-based nature of donor funding – sustainable.