Why this high yielding investment potential in developing countries is being overlooked & what the solution is

19 July 2022
video

FAO estimated that an additional $265 billion per year would be needed to achieve the development in agriculture needed to eradicate poverty and hunger by 2030. The impact of climate change, land degradation and water overuse, increasing pressure from crop and animal diseases and growing antimicrobial resistance, all raise concerns and call for more investment in agriculture.

Small farms in developing countries can contribute to eradicating poverty, achieving food and nutrition security, promoting inclusive growth, protecting water, land and biodiversity, and achieving climate action.

However, many do not have sufficient access to finance to fulfil their potential. Those small businesses and farmers that do are often faced with less-than-favourable terms, including higher interest rates, or a stricter repayment schedule. Financing remains especially limited for new innovative businesses, business models, and technologies at the forefront of climate solutions and agriculture.

What are the issues with raising capital for development in agriculture?

Traditionally private investors are reluctant to invest in early-stage enterprises due to perceived high risk and low returns, blended finance can help spread risk across the private sector and the taxpayer. This often leaves public and philanthropic organizations investing in agricultural projects on their own without benefiting from the experience, expertise, and capital that commercial investors can bring.

While developing countries often have attractive investment features that developed economies lack, such as high yields and fast-growing economies, if the risk-adjusted returns are not as attractive as the investment options in other markets, commercial investors will not take up these opportunities.

Projects in agricultural development in emerging markets often carry higher risk and are more challenging to finance given long investment terms and thus higher exposure to political, market and weather risks.

So, what is blended finance and how does it work?

Blended finance uses capital from public or philanthropic sources to increase or mobilise private sector investment in developing countries and sustainable development.

There are different blended finance models, but all include public and/or philanthropic bodies contributing the support necessary to incentivize the private sector to invest in a project in which it would not otherwise invest. Blended finance approaches can also amplify the impact of investments by the public sector. All models have one of three primary goals:

  • Reducing risk;
  • Improving returns;
  • Increasing the likelihood of social impact.

How can blended finance help development in agriculture?

Although agriculture has traditionally seen a high level of public sector intervention, it is estimated that only 15% of blended finance deals target agriculture. However, public sector budgets are likely to become even further stressed due to the Covid-19 pandemic, rising inflation, and political uncertainty and thus the need for blended finance solutions for agricultural development will grow.

Who is using blended finance for development in agriculture?

U.S. Agency for International Development (USAID) has led blended financing in agriculture and has supported the most transactions to date. For example, USAID sponsored a 50% loan loss guarantee on a portfolio of 274 agribusiness loans provided by three financial institutions in Cambodia, lowering the potential losses significantly and facilitating USD 1.8 million in additional lending.

Blended finance case study

Mountain Hazelnuts grow hazelnut saplings in Bhutan and distribute them to local farmers. Mountain Hazelnuts provides inputs, and training along with a market and guaranteed price, whilst the government provides land.

However, when Mountain Hazelnuts approached the International Finance Corporation (IFC) for investment, the IFC found the operational risks to be too high for offering long-term capital to this relatively new, pre-revenue company. However, a blended finance package was agreed upon with the IFC and the Asian Development Bank (ADB) investing US$3 million of equity in the company, with Spitzer and other Mountain Hazelnuts shareholders converting US$3 million of existing bridge loans into equity. The Global Agriculture and Food Security Program (GAFSP) matched the IFC and ADB investments with US$6 million as cumulative redeemable preferred shares. The use of GAFSP blended finance was essential to mobilize IFC and ADB funding and to close the remaining funding gap for the project. Without this support, the deal simply would not have been completed.

Clear opportunities for development in agriculture using blended finance

Despite its advantages, investors and financiers are yet to consider blended finance as the preferred mechanism. There is a clear gap in the market in terms of high-risk financing for innovative business models and technologies in the agriculture sector. Blended finance offers a means for SMEs in developing countries to access desperately needed finance to drive development in agriculture and contribute toward meeting sustainable development goals.

Finding investment potentials and workable solutions

Get an accurate and informed review of your target investments in developing regions with our expert consultants at Farrelly & Mitchell.

We can help you to make informed decisions by leveraging our expert commercial and technical insights. Working across the food system in many locations around the world, we have an in-depth understanding of all the constantly evolving facets of the food and agricultural industry.

If you would like help uncovering the nuances around your target investments and projects, talk to our team today. Get in touch via email on [email protected]

Why this high yielding investment potential in developing countries is being overlooked & what the solution is

19 July 2022

FAO estimated that an additional $265 billion per year would be needed to achieve the development in agriculture needed to eradicate poverty and hunger by 2030. The impact of climate change, land degradation and water overuse, increasing pressure from crop and animal diseases and growing antimicrobial resistance, all raise concerns and call for more investment in agriculture.

Small farms in developing countries can contribute to eradicating poverty, achieving food and nutrition security, promoting inclusive growth, protecting water, land and biodiversity, and achieving climate action.

However, many do not have sufficient access to finance to fulfil their potential. Those small businesses and farmers that do are often faced with less-than-favourable terms, including higher interest rates, or a stricter repayment schedule. Financing remains especially limited for new innovative businesses, business models, and technologies at the forefront of climate solutions and agriculture.

What are the issues with raising capital for development in agriculture?

Traditionally private investors are reluctant to invest in early-stage enterprises due to perceived high risk and low returns, blended finance can help spread risk across the private sector and the taxpayer. This often leaves public and philanthropic organizations investing in agricultural projects on their own without benefiting from the experience, expertise, and capital that commercial investors can bring.

While developing countries often have attractive investment features that developed economies lack, such as high yields and fast-growing economies, if the risk-adjusted returns are not as attractive as the investment options in other markets, commercial investors will not take up these opportunities.

Projects in agricultural development in emerging markets often carry higher risk and are more challenging to finance given long investment terms and thus higher exposure to political, market and weather risks.

So, what is blended finance and how does it work?

Blended finance uses capital from public or philanthropic sources to increase or mobilise private sector investment in developing countries and sustainable development.

There are different blended finance models, but all include public and/or philanthropic bodies contributing the support necessary to incentivize the private sector to invest in a project in which it would not otherwise invest. Blended finance approaches can also amplify the impact of investments by the public sector. All models have one of three primary goals:

  • Reducing risk;
  • Improving returns;
  • Increasing the likelihood of social impact.

How can blended finance help development in agriculture?

Although agriculture has traditionally seen a high level of public sector intervention, it is estimated that only 15% of blended finance deals target agriculture. However, public sector budgets are likely to become even further stressed due to the Covid-19 pandemic, rising inflation, and political uncertainty and thus the need for blended finance solutions for agricultural development will grow.

Who is using blended finance for development in agriculture?

U.S. Agency for International Development (USAID) has led blended financing in agriculture and has supported the most transactions to date. For example, USAID sponsored a 50% loan loss guarantee on a portfolio of 274 agribusiness loans provided by three financial institutions in Cambodia, lowering the potential losses significantly and facilitating USD 1.8 million in additional lending.

Blended finance case study

Mountain Hazelnuts grow hazelnut saplings in Bhutan and distribute them to local farmers. Mountain Hazelnuts provides inputs, and training along with a market and guaranteed price, whilst the government provides land.

However, when Mountain Hazelnuts approached the International Finance Corporation (IFC) for investment, the IFC found the operational risks to be too high for offering long-term capital to this relatively new, pre-revenue company. However, a blended finance package was agreed upon with the IFC and the Asian Development Bank (ADB) investing US$3 million of equity in the company, with Spitzer and other Mountain Hazelnuts shareholders converting US$3 million of existing bridge loans into equity. The Global Agriculture and Food Security Program (GAFSP) matched the IFC and ADB investments with US$6 million as cumulative redeemable preferred shares. The use of GAFSP blended finance was essential to mobilize IFC and ADB funding and to close the remaining funding gap for the project. Without this support, the deal simply would not have been completed.

Clear opportunities for development in agriculture using blended finance

Despite its advantages, investors and financiers are yet to consider blended finance as the preferred mechanism. There is a clear gap in the market in terms of high-risk financing for innovative business models and technologies in the agriculture sector. Blended finance offers a means for SMEs in developing countries to access desperately needed finance to drive development in agriculture and contribute toward meeting sustainable development goals.

Finding investment potentials and workable solutions

Get an accurate and informed review of your target investments in developing regions with our expert consultants at Farrelly & Mitchell.

We can help you to make informed decisions by leveraging our expert commercial and technical insights. Working across the food system in many locations around the world, we have an in-depth understanding of all the constantly evolving facets of the food and agricultural industry.

If you would like help uncovering the nuances around your target investments and projects, talk to our team today. Get in touch via email on [email protected]

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