Africa Finance Forum Blog
Currently the posts are filtered by: October 1
Reset this filter to see all posts.
Paving the Way for Capital: The Role of Technical Assistance in Mobilising Finance for Smallholder Farmers and Businesses27.10.2014,
Today, much of the conversation around smallholder agricultural finance is happening among an inspiring yet small group of social lenders and investment funds. These pioneering institutions have developed new products and disbursed millions of dollars in support of smallholder agriculture worldwide. However, as highlighted in Dalberg's recent report, an estimated gap of $400 billion still exists between demand and supply of finance to smallholder farmers. Without access to financial products and services, smallholders and agricultural enterprises are unable to purchase necessary supplies, expand production and increase their incomes.
There are several opportunities for non-lenders to play a more active role in closing this gap. Organisations that provide training, technical assistance and financial advisory services can help "de-risk" agricultural finance by offering farmers, cooperatives and small businesses capacity building and advisory services. With local knowledge of smallholder realities, expertise on value chain dynamics and established in-country networks, these organisations are uniquely positioned to offer multiple benefits to stakeholders throughout the financial ecosystem. By providing training and capacity development, they help smallholder farmers and small businesses understand, forecast and communicate their financial needs to potential lenders and investors. By designing and implementing transparency tools and processes, they help lower transaction costs for financial institutions and often serve as their "eyes and ears" before and after investment. Based on insights from regional projects in value chains such as cashew, cocoa and coffee, we identified four scalable approaches for how technical assistance providers can increase access to financial products and services for small farmers and businesses while reducing risk for capital providers.
1. Agricultural value chains and market systems can be strengthened through programs that develop capacity, promote market connections and improve business environment. Organisations can operate as a catalyst to strengthen agricultural value chains and market systems. These programs often begin with a value chain assessment and an industry strategic plan to determine pathways for growing a sector, addressing market failures, identifying and quantifying opportunities to benefit producers. Financial institutions can use these analyses as blueprints for expanding lending into new and unfamiliar markets.
2. Develop a pipeline of investment-ready clients. In order to prepare clients to access growth capital, technical assistance providers can offer pre-investment training including helping cooperatives and small businesses to develop business plans, improve operational efficiencies, build financial models to forecast revenues and cash flows, assess appropriate capital requirements, and provide transaction support in applying for loans or negotiating contracts. Technical assistance providers can also play a valuable supply side role by training bank analysts and loan officers on the economics of agricultural value chains. Lenders can then better evaluate financial health and viability of potential clients, as well as more efficiently structure investments, deploy capital and monitor performance.
3. Build data-sharing tools to promote transparency and streamline due diligence and monitoring. Agricultural finance continues to suffer from an information gap that drives market uncertainty and limits efficient capital flows. Recognizing the lack of cost-effective tools to collect, analyse and track information about client performance, many organisations have started to develop their own in-house mobile and cloud-based platforms to deliver real-time data to lenders and buyers. As the market continues to evolve, consolidation and efficiency gains can yield even more cost-effective and broadly applied solutions.
4. Design specialised risk management solutions. Risk is inherent in agriculture, but technical assistance providers can help mitigate this uncertainty by bringing together market players with skills and resources to design loan guarantees, risk-sharing models and matching funds based on appropriate incentives. When such mechanisms are structured along-side technical assistance and with the long term plan for any exit of donor and subsidy support, these mechanisms can lead over time to sustainable financial solutions for smallholders and small businesses.
Depending on their financial health and objectives of its clients, TechnoServe integrates the above approaches into its programmatic activities. Where appropriate, we provide our clients with simulation-based financial literacy training through our "Farming as a Business" and "Keys to Financial Success" curricula. Beyond training, TechnoServe's field-based network of more than 600 full-time business advisors and farmer trainers work hand-in-hand with farmer organisations and small businesses, helping to strengthen their operations and become more profit-oriented.
For example, building on an industry strategic plan developed for the East Africa coffee sector, which formed the core component of TechnoServe's Coffee Initiative, the program helped aggregate production from nearly 200,000 farmers and supported farmer cooperatives in building and upgrading 285 wet mill businesses. During the first four years, the program provided critical advisory on product quality and sustainability standards to the participating wet mill businesses. To address the lack of transparency in the local value chains, TechnoServe launched CoffeeTransparency.com, a cloud-based platform that delivers real-time data to lenders and buyers. During the harvest season, the system is populated daily with SMS reports from more than 80 coffee wet mills in Rwanda and Ethiopia. Four financial providers subscribe to the system, which has reduced the costs and logistical constraints of rural finance by offering powerful financial and performance metrics comparable over time and across clients. In 2013 alone, this system helped more than 50 cooperative and private coffee wet mills in Rwanda to access more than $3 million of working capital. In parallel, in Ethiopia where financial landscape is particularly challenging, TechnoServe established a new risk-sharing partnership between the International Finance Corporation (IFC) and Nib International Bank, one of Ethiopia's largest private commercial banks. With a $10 million risk sharing agreement from IFC, Nib has made available a revolving loan facility to more than 60 coffee cooperatives, reaching 45,000 farmers. As a result of the integrated approach, TechnoServe clients were able to access $38 million in long-term credit and working capital over just the first four years.
The presence of technical assistance providers in certain farming systems or value chains can play a critical role in incentivizing lenders to engage in smallholder finance. Buyers and traders are also more willing to extend financing when a technical assistance provider is involved, particularly when the duration of technical assistance and financial exposure is aligned. When delivered effectively, collaboratively and with a long-term vision, technical assistance to farmers, cooperatives and small businesses can pave the way for increased capital flows from financial institutions.
However, it is all too common that either capital is available and technical assistance is not, or vice versa. What is needed is a coordinated approach that links provision of capital to provision of technical assistance. This must be addressed in ways that incentivize the respective institutions to work together to benefit smallholder farmers and agricultural enterprises. Over time, this will unlock new income-generating opportunities for rural communities and help to close the smallholder-financing gap.
TechnoServe is an international non-profit development organisation headquartered in Washington, DC. Since its founding in 1968, TechnoServe has successfully used a private enterprise approach to assist low-income people in the developing world to build and strengthen sustainable businesses, industries and the enabling environment. Over 46 years, we have been a trusted partner with corporate, foundation and public development partners, implementing diverse value chain, market-led agriculture development, and entrepreneurship capacity building programs. For more information about TechnoServe please go to www.tns.org or email A2F@tns.org.
Local Capital in African Private Equity: An Interview with Sev Vettivetpillai, Partner, The Abraaj Group13.10.2014,
You have been investing in Africa for two decades and pride yourself on being local as opposed to GPs who manage their funds out of London or New York. How much local capital financing have you mobilised for your African funds to date?
Over the years, we have raised about US$150 million from local institutional investors, representing a mix of banks, pension funds, social security funds and corporates. We raised some local capital in the 1990s with the CDC Group plc, and, in the last ten years, we have secured commitments from the likes of the National Pension Fund of Mauritius, South Suez, which has several of the local pension funds in southern Africa in their investor base, and Nigerian banks, which came into our funds under the Central Bank initiative.
How significant is the unlocking of huge amounts of local capital across Africa to your strategy, particularly with your funds going forward?
Local capital is an important part of the overall story in Africa. If Africans and African institutions are not investing in their own markets, why should somebody from outside the region think there is an opportunity here? To give credibility to the story they must invest, otherwise the story doesn't hold together.
The markets in Africa are all at different stages of development in terms of regulation and knowledge about this asset class. For example, in Nigeria, the regulatory framework has changed considerably and pension funds are increasingly able to invest in different asset classes. South Africa and Botswana may be a bit ahead of the game; however, Botswana's internal markets lack depth, so the investment strategy is oriented more externally. Then you have the South African pension funds, which have a lot of capital and are now starting to look beyond South Africa. As you can imagine, South Africa combined with the rest of Africa is a great story. So for them, understanding the challenges and the characteristics of investing outside of South Africa is their learning curve.
Limited partners in these markets face different issues, but I can see them all converging to form a very big investor group in the next five years. They are starting from virtually zero in terms of exposure to private equity, so allocations are going to go up from 0-5 per cent to maybe 10 per cent or 15 per cent of their portfolio. On the other hand, pension fund assets under management are increasing at exponential rates because their markets are growing, and more people are coming into the workforce. The importance of African pension funds as a source of capital is not to be underestimated.
What are some of the key challenges in raising local capital in Africa?
Getting the pension fund managers to understand how to build their private equity portfolios is the biggest challenge. I was at the Private Equity Master Class for Pension Funds at the African Venture Capital Association Annual Conference in Cape Town in 2013, which was organised in conjunction with the International Limited Partners Association. There were about 30 pension fund analysts in the room and the question was asked: how many have a private equity programme already? Only one put a hand up. How many have started to invest? Three more hands went up. How many are yet to start? The balance of the hands went up. So imagine the J-curve effect of investing in a private equity programme - these funds are going to have to commit capital based on their own risk/reward profile, and there's going to be a net cash outflow for a period of time until the cash flow starts to mature. That learning curve is going to be a challenge for many of them.
African pension funds often have concerns around liquidity, transparency and lack of benchmarks when it comes to private equity. How do you respond to them?
Pension funds should be looking at fund managers that have raised their third fund or beyond, because a first-time fund manager is a high-risk strategy. For pension funds, the loss of capital is a much bigger issue than the need for liquidity in the short term, relatively speaking. Each private equity fund is illiquid; you are tied in for 8-10 years. But the returns and the cash multiples should compensate for that illiquidity. If they don't, you are choosing the wrong private equity fund managers. One way to manage illiquidity is to have a co-investment program, and invest alongside the GP in larger deals. This gives you the ability to adjust the cost and liquidity because you're not tied up for ten years; you can sell your stake and get cash back.
You need to invest in GPs that provide you with the level of transparency that you need. If they don't, then you shouldn't invest with them. Look at the reports that they give on their fund, and understand how much of that information is transparent and can give you visibility of the underlying portfolio. This should be a key part of the due diligence process.
On lack of benchmarks, the first AVCA/Cambridge Associates benchmark study has been presented, and while it does not yet cover all the private equity funds in the region, what we saw was that performance is in line with Asia and Latin America. African funds are not doing any worse. The average returns, over the last ten years, of the industry are 10-12 per cent. As more information becomes available, this benchmark point will be further addressed. In addition, data from RisCura in South Africa show that the growth in the public equities market is not as strong as it is in the private markets. Pension funds have to get into this asset class or they will lose out on this significant growth.
What advice would you offer pension funds about risk and risk mitigation?
It is important to be aware of all risks - from financial to reputational. Please remember that the higher your returns, the more risk one assumes, and risk does change. Look to get back your capital and protect your downside on each investment. Look at the structures and the terms. Make sure they are applicable to you based on your risk/return profile. Don't partner with the wrong people; test the intent of your sponsors through negotiations to ensure that they are aligned with you and share the same values. And don't follow a herd mentality because LPs have done so in the past and burnt themselves badly.
Markets by their very nature tend to be volatile. We can expect one, maybe two, cycles minimum in a 7-10 year period. So building a portfolio to weather those cycles is key to ensuring that this volatility does not significantly affect your pension fund. I would encourage every fund manager to look at diversifying by country and sector, and to also look at splitting invested capital to receive returns in the form of income contractually built into the structure and capital gains. This allows you to de-risk your investment as quickly as possible, because you are not waiting for a single liquidity event to get your original invested capital back. It also helps deal with exchange risk because of currency devaluation in these markets.
How well aligned is private equity with the long-term obligations of African pension funds?
The average pension contributor in Africa today is very young, so pension fund liabilities are going to increase further down the road. The pension funds, therefore, have to invest in assets that will build long-term value, like private equity. At the same time, GPs need to understand the pension funds' level of experience and not take advantage of them. For instance, I know of managers in other markets that have gotten away with deal-by-deal carry as opposed to a full fund pay-out carry, because the pension funds were not aware of the consequences of this misalignment. Of course, this may be to the managers' advantage initially, but it will eventually be a disadvantage to everybody.
Do you think that GPs are doing enough to encourage pension funds to look at private equity, or can they do more?
GPs can and need to invest more in educating local pension funds. We at Abraaj are prepared to do so - we travel to every pension fund event to which we are invited and provide any information that we can. These investors may not commit immediately, or even invest in an Abraaj fund, but that's fine. This is bigger than that - it's about increasing the pool of capital available to the whole industry. If we as managers do not get on board now, in five years it will be a much harder job.
This interview is an extract from the newly released publication "Pension Funds and Private Equity: Unlocking Africa's Potential", a joint-publication by the Commonwealth, MFW4A, and EMPEA with the support of The Abraaj Group.
Sev Vettivetpillai is a Partner at The Abraaj Group and a member of its executive and investment committees, with over 20 years of direct private equity investing experience. Mr Vettivetpillai previously held the positions of Chief Executive Officer of Aureos Advisers Ltd. and Chief Investment Officer for the Aureos Group. Prior to joining Aureos, Mr. Vettivetpillai was a senior investment executive at CDC Group plc. His other appointments were at Vanik Incorporation (Sri Lanka) as a Portfolio Manager and Mott Macdonald Group (United Kingdom) as an Engineer.