Agriculture is well-suited to the types of partnerships and de-risking mechanisms respondents that are key to success in a recent frontier finance report, says the author of the paper.
Global Impact Investor Network research manager Rachel Bass, who wrote the Unlocking the Potential of Frontier Finance report, said although the study did not focus on differences between sectors, agriculture is central to many of the UN Sustainable Development Goals, which investors are increasingly using to focus the impact objectives of their frontier market investments.
“About a quarter of investors in this sample are trying to address SDG 2 (zero hunger) and SDG 3 (good health and well-being), both of which are often targeted by food and ag investors, so there certainly is some role that that sector plays in the market,” Bass told Agri Investor.
Based on interviews and analysis of 40 frontier finance transactions by 24 investors, the report aimed to highlight challenges faced by investors pursuing social impact through investment in frontier markets, mostly in sub-Saharan Africa and Latin America. The size of investments analyzed in the report ranged between $20,000 and $2 million, and focused largely on small and growing businesses with limited access to capital.
The report recommends deploying grant capital to help de-risk specific investments, using innovative investment structures that are appropriate for frontier markets, and increasing efforts to expand and strengthen partnerships among investors and other ecosystem players.
Bass said GIIN’s research found grant capital is particularly well-suited to supporting the broader enabling environment, which can help meet the key challenge of creating dealflow in frontier markets through investment in, and partnerships with, the incubators and accelerators that often help small businesses develop.
“There is some opportunity for risk-tolerant capital to offset the risk that is taken on by other market-rate players, and create structures that allow multiple types of players to come together into a single deal and still achieve each of their respective social and financial objectives,” Bass added.
Respondents also highlighted partnerships with local investors as another important factor in frontier markets, said Bass, especially for investors and capital providers located outside of the markets they look to invest in. Interview subjects reported relying on such partnerships to gain access to investees and insight on import risk factors.
“Thinking about ways to leverage those types of connections can be really effective, not only in channeling capital, but in improving both financial and impact results,” she said.
Four of the report’s five case studies were investment vehicles that include agriculture among their target sectors. This included a $30 million fund from Finca Ventures that supported the provision of advice to smallholders in Zambia, and the open-ended Social Venture Fund from Mercy Corps Ventures that invested in a provider of agricultural micro insurance in Africa.
Also featured was Partners Group-affiliate PG Impact Investments, which has made at least two ag investments from within the $130 million it has deployed to date, and Omnivore Partners’ investments into Skymet, which is a weather monitoring and agricultural risk assessment technology.