September 2015

Impact investment into inclusive agribusiness

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01. Introduction

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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

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01. Introduction

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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…

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02. Current situation

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The review looks at a number of factors in detail…

Three trends stand out in particular

1.  Investment gap for early-stage agri-businesses

2.  More generally, investors are looking for investees with similar characteristics

3.  Family offices and HNWIs most likely to be valuable for early-stage financing

Key trends

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•  At one level, the market is working

•  However, there are problems in the market that prohibit its growth

03. Constraints

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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)

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03. Constraints

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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

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03. Constraints

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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…

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03. Constraints B. Constraints in the market system for impact investment

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•  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

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03. Constraints B. Constraints in the market system for impact investment

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Market for impact investment (for agriculture)

Supporting functions

Rules

xDeal sourcing

x

Investor community marketing

xSocial

enterprise status

xOthers

Impact capital

Agri- business

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03. Constraints C. Constraints in agricultural market systems

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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

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03. Constraints C. Constraints in agricultural market systems

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Agricultural market

x

Impact investment

x

Professional services for early stage companies

xProcessing

equipment and leasing

Open data

x

xOthers

Agri supply Agri demand

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•  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

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•  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

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•  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

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Thank you