A window into sustainable ag funding

The AGRI3 fund is a sustainable agriculture and forestry fund and could become the largest climate mitigation fund in the market. What can investors and GPs learn from its structure?

“Tropical deforestation is mostly caused by agriculture production, whether by small holder farmers or large-scale producers,” explains Ivo Mulder, head of the UN Environmental Programme’s climate finance unit.

What exacerbates this, he adds, is that there are few incentives available for farmers, producers and financers “to change the way they finance production and the way the food supply chain works.”

So, instead of issuing a new UN paper that says, “More needs to be done,” explains Mulder, UNEP decided in 2017 to team up with Rabobank and several other partners “to create the means to make this happen.”

The fruit of their labor is the AGRI3 Sustainable Agriculture and Forestry Fund, a $150 million blended-finance fund structured to unlock $1 billion in commercial capital. The vehicle received its first commitments at the end of January in the shape of a $40 million pledge from the Dutch Ministry of Foreign Affairs, which was matched by Rabobank.

AGRI3 is an intriguing venture for several reasons. For a start, its potential to catalyze $1 billion would, arguably, be unmatched by any other sustainable ag fund. And at a time when there is increasing interest in agriculture’s role in the climate crisis, the fund’s composition offers a window into the structure – and returns – investors can expect to encounter in this space.

The blended finance fund has a junior equity, senior equity and senior debt tranche. Half of the $150 million required to seed the fund will come from government and equity investors, with the other half coming from commercial bank debt. This will then allow the fund to issue up to $300 million in partial credit guarantees at a ratio of 1:2, which, in turn, is expected to unlock $1 billion in commitments from commercial banks and development finance institutions.

The approach has the effect of bringing the client bases of the DFIs and commercial banks to the table, who, by funneling their capital through AGRI3, are able to provide affordable and extended tenor loans (around 10 years) to their clients.

“Whereas funds like &Green and others start from the sustainability side and then see if they can find deals, we start with the market and try to pull it to more sustainable production,” explains Rabobank’s Ben Valk, head of food and agri partnerships.

Rabobank has already done deals earmarked for AGRI3, which have been “warehoused” and are expected to be announced in March, says Valk, adding that typical deal sizes are expected to be in the $10 million to $25 million range.

Early discussions have been held with several pension funds, but none have made any commitments to date. AGRI3 aims to deliver returns of between 2-7 percent, which is typical of a climate mitigation fund.

Valk describes the fund’s ability to attract commercial banks as “relatively easy,” adding: “I’m not worried we’ll reach our volumes there.”

Perhaps unsurprisingly, the biggest challenge the fund faces is getting further donor governments to provide funding to the junior equity tranche, which will allow it to issue the full $300 million in guarantees required to unlock the $1 billion target.

Another feature of the fund is its technical assistance facility, which is managed by the Sustainable Trade Initiative. The TA facility acts as an advisory and grants arm and was identified as a necessary requirement, says IDH senior programme manager Nienke Stam, because innovation often requires “resources that are under less pressure to generate revenues.”

Support structures such as this, as well as AGRI3’s blended finance approach, will likely be a feature of similar sustainable ag and climate mitigation funds for the next five-10 years, adds Stam.

The combination of “implementing a restoration agenda that involves planting trees,” which means long tenors in countries often perceived as high risk, and in the ag sector which has its own risks, “is a complex mix for any fund manager to manage with fully commercial resources,” she explains.

For now, the proponents of AGRI3 and other funds like it will hope to show these risks can be mitigated and lead to a future landscape where similar vehicles can be capitalized fully by commercial and private capital.

Contact the author at binyamin.a@peimedia.com