German development bank KfW and social impact investor AgDevCo have established a $15 million lending facility for African agricultural enterprises alongside specialised agricultural lender Root Capital.
The Lending for African Farming Company (LAFCo) aims to bridge the gap between farming communities and financing in an effort to increase smallholder productivity and incomes across the sector where access to traditional sources of finance are limited.
LAFCo will officially launch this evening in Cape Town at the Grow Africa Investment Forum during the World Economic Forum on Africa. It will be managed by Root Capital and will invest debt of up to $4 million into each enterprise in dollars and local currencies.
KfW and AgDevCo committed $11.6 million and $2 million in equity respectively and Root Capital will contribute $2 million in subordinated loans to LAFCo. The trio separately funded the set-up costs together.
The facility is also open to third-party investment and is targeting over $50 million ultimately, according to Chris Isaac, director of investments and business development at AgDevCo. There are two social impact investors that could contribute separately to the facility by the end of the year, he added.
As reflected in the initial commitments, LAFCo will have a blended finance structure involving different returns to different classes of investors. Senior debt providers will be able to earn market-based returns whereas as equity providers can expect positive but modest financial returns, which will improve as LAFCo scales up, said Isaac. “The combined financial and social impact returns should be compelling for philanthropic and development finance investors,” he told Agri Investor.
“The potential of Africa’s agricultural sector has attracted significant interest from equity investors, but the day-to-day financing needs of businesses are often overlooked,” said Isaac in a statement. “We’re delighted to partner with KfW and Root Capital to help African entrepreneurs and farmers access the capital they need to grow profitable businesses. Investment in agriculture means higher incomes, more jobs and increased food security.”
Root Capital will manage the facility alongside its normal business activities and could make co-investments alongside LAFCo. Deals will be sourced by both AgDevCo and Root Capital which combined have country offices with local teams in eight sub-Saharan countries, excluding South Africa.
“If Africa is to meet the challenge of sustainably feeding a rapidly growing population in ways that also contribute to poverty alleviation, reliable access to finance is essential,” said Nate Schaffran, senior vice president of lending at Root Capital in a statement. “With 15 years of experience in lending to agricultural enterprises, Root Capital is honored to manage LAFCo and help catalyse a broader financial market to benefit Africa’s smallholder farmers.”