Update: ADB to invest up to $200m directly in agri annually

The development bank is now considering investing into the equity of agribusinesses, as well as providing loans to the sector.

*Adds extra detail about previous agri commitments.

The Asian Development Bank is considering various methods of investing into agriculture as it hopes to increase its footprint in the sector. The fund’s direct investment department is targeting $100 million to $200 million into agribusinesses each year through corporate loans and equity transactions, according to Martin Lemoine, senior investment specialist in the Private Sector Operations Department’s Infrastructure Finance Division.

The development bank’s private sector investment funds and special initiatives division is also looking at agri-focused private equity fund investments and currently considering two funds in India and China, according to Lemoine. And the trade finance team is working on guaranteeing banks that are providing rural finance in countries such as Pakistan, Azerbaijan and Tajikistan, he added.

ADB’s Private Sector Operations Department (PSOD) has provided $100 million in credit lines to bank and microfinance institutions in the agri sector since 2006. Under its trade finance programme, it has guaranteed about $1.4 billion of food and agriculture transactions since 2006. To private equity funds it has committed about $200 million and in direct investment, PSOD has approved four direct loans totaling $108 million to agribusiness companies between 2012 and 2013.

“In addition to the instruments used in the past, PSOD will consider innovative transactions to maximize its development impact, such as partial risk guarantees to banks lending to farmers, supply chain finance,  dedicated agribusiness private equity funds,  project finance to well-structure PPP projects, and direct equity investments in early stage agribusiness companies,” Lemoine told Agri Investor.

The direct investment team made its first private investment into agriculture in 2012 after a long hiatus during which ADB focused on public deals. It was a $25 million loan to Bangladesh’s PRAN Group, the country’s largest food manufacturer, to help build three food manufacturing plants. It has since signed two more deals: a $40.2 million loan to RG Brands Group, a Kazakhstani milk, juice and tea producer and a $18.4 million loan to India’s Champion Agro a cold storage provider and distributor of fruits and vegetables.

Until now the direct investment team has only committed to agriculture through loans but Lemoine and his team are looking more closely at equity deals now, he told Agri Investor.

“Since it is a new sector for us, it is a learning curve and so we are currently focused on corporate loans for expansion,” said Lemoine. “But whether we do equity or debt, the complexity is the same. We will try to do more equity because there is more of an upside and because many organisations like to have ADB as a partner; it’s good for their business.”

ADB would also be open to co-investing into deals alongside other investors or funds, he added.

“Co-investments are very interesting and the way most LPs make high returns so we should do more and for us it would make sense.”

The bank’s direct agri-investing capabilities are unlikely to increase beyond $200 million, which represents around 10 percent of its investment quota, according to Lemoine. This compares to International Finance Corporation’s seven percent allowance and European Bank of Reconstruction and Development’s 10 percent target, he added.

Part of the reason is the typical small size of agribusiness deals and the amount of work required for each one. ADB is more focused on deploying large amounts of capital into fewer deals.

We have a strong incentive to deploy in volume and small deals require more to be made and more people to do them, but unless ADB is organised differently, it is unlikely we will be able to hire a massive team for agri,” said Lemoine.

But Lemoine hopes that at a later stage, ADB could ramp up its exposure further to really see the benefits of the sector. A private equity portfolio-style approach would diversify risks across several investments and help to promote investment into agribusiness by other institutional investors, he added.

The private funds department could also step up its activity in the sector. It recently announced a plan to start co-managing and developing private sector projects in the infrastructure and renewable energy markets under Duarte Henriques da Silva, investment specialist. Until now, ADB has acted as an LP investing into other funds but now is shifting to take on more of a GP role, managing third party capital as well as committing its own.

Under the programme, named CP3, ADB will partner will three to five co-GPs each year. The programme was three years in the making, highlighting the time it takes for ADB to introduce new initiatives, noted Lemoine.