In this guest post, Alex Simuyandi of AgDevCo discusses approaches for financing the “missing middle” of African agribusinesses, and tells us more about the new Lending for African Farming Company.
There are many challenges that agribusiness in Africa face. Skilled and experienced management is a resource in short supply, as is access to affordable finance. With the latest UN numbers suggesting that more than 200 million individuals in Africa are chronically undernourished, and the FAO estimating that investment in sub-Saharan Africa is 11 times more effective in reducing poverty than investment in any other sector, there is a great demand for financers to take a frontline position to combat poverty and increase food security.
As one of the most active investors in small and medium agribusinesses in Africa today, we provide innovative financing to help these businesses grow and mature. At AgDevCo, we also work with each of its investees to develop their management capacity, and provide its portfolio companies with hands-on commercial agricultural and financial management support.
Due to the type of funding we receive from our partners, most notably the generous support of UKAid, we are able to take a long-term perspective on our investments, and provide ‘patient capital’ that can wait for businesses to grow and become profitable before seeking a return. This long term financing is ideal for the types of enterprises that need early stage financing for capital expenditure and to be able to reach operational maturity, but can’t yet attract traditional funding from banks or other commercial investors.
However, we also come across many businesses whose growth is constrained by a lack of access to short-term, seasonal finance. Their funding needs are for day-to-day requirements, such as purchasing fertilizer for the season, rather than larger capital investments. This seasonal working capital is absolutely critical for businesses, and access to this finance ensures that crops can be planted and harvested at the right time. In these circumstances, the distinctive type of funding that we are able to deploy- long term, patient– is not best used to solve the business’s shorter term requirements.
Launching the Lending for African Farming Company
That is why we are proud to have recently announced the launch of the Lending for African Farming Company (LAFCo) in conjunction with KfW and Root Capital. Launched at the 2015 Grow Africa Investment Forum, LAFCo will finance agricultural enterprises throughout sub-Saharan Africa to enhance local food security and stimulate inclusive economic growth in the region.
LAFCo will finance agricultural enterprises that purchase crops from smallholder farmers, or that provide them with yield-enhancing products, such as seeds and fertilisers, and related services. It will provide flexible debt products in amounts of up to $4 million, denominated in both U.S. dollars and local currencies, across sub-Saharan Africa, with a particular focus on Ghana, Kenya, Malawi, Senegal, Tanzania, Uganda and Zambia.
Alongside KfW, we have launched LAFCo to ensure that SMEs are able to contribute meaningfully to food security, and we are very happy to have Root Capital managing it. This is an innovative facility that is composed of a ‘blend’ of different types of capital- combining public, private and philanthropic funding; debt and equity- that when combined can serve parts of the market not generally served by commercial banks.
With an initial launch of $15 million in committed funds, we are excited about the impact that LAFCo can have, and see it as just a first step to encouraging others to increase lending to the sector.