12 Sep SEAF’s Jan Cherim on the Financing of Agribusiness SMEs in Developing Markets
Our first post focuses on Jan Cherim, SEAF’s European Hub Managing Director for Business Development, based in Amsterdam. Jan has been involved in emerging and frontier markets finance for decades, frequently involving agribusinesses. Jan has been working in recent months with various organizations dedicated to improving nutrition and food security in underserved markets. His focus is on the financing challenges of SMEs in these areas. We asked Jan to share some of his insights into the sector’s challenges, as well as his takeaways from this summer’s crop of investment workshops on food and nutrition.
Jan was a speaker at three SME/food-related industry events this summer: the Stockholm Food Forum 2019, co-hosted by Global Alliance for Improved Nutrition (GAIN) and EAT, a global non-profit dedicated to transforming our global food system through science, disruption, and partnerships. Spinning-off from this, he was asked to participate in an SME investment session at Chatham House in London, as well as the “Building Business Contribution for the 2020 Global Nutrition Summit” conference held in The Hague, Netherlands. The event was organized as a key first step for consulting with and including the perspective of business into the Japan 2020 Global Nutrition Summit. It was hosted by the Government of the Netherlands and the Government of Japan and was co-organized by GAIN and the Access to Nutrition Foundation (ATNF) with the support of the SUN Movement, the Netherlands Working Group on International Nutrition and the World Business Council for Sustainable Development (WBCSD).
Jan, frequently the only private sector investment professional at these events, addressed workshops focused on businesses and the financial industry as essential players to drive food systems transformation, particularly to help improve nutrition in a sustainable and scalable way via support to agri-SMEs. These gatherings aimed to address three key issues: how current trends in finance can serve to direct more investments into sustainable, nutritious foods in emerging markets (EM), specific approaches to financing small and medium enterprises (SMEs) in agri-food in EM, and how innovative investment approaches can help investors balance risk and return. The session was primarily focused on Africa. Jan comments further on what SEAF had to say here:
My pitch essentially was that if you look at issues around the financing of agri-SMEs in developing markets today, a few generalizations are possible that relate to our work as an impact-oriented investment firm. The basic message is that investors like SEAF fill a vital gap in the market that needs aggressive expansion. But this won’t be easy. I’ve included some of the main points below.
Local banks aren’t the (only) answer
- First, the local banking sectors are barely relevant to agri-SME financing. At times they have an institutional reluctance to do with having been burned with bad agri-lending experiences in the past, made worse by a lack of know-how and understanding to do with agricultural production and risks.
- Beyond this reluctance regarding the sector more generally, local banks are frequently hamstrung by highly restrictive lending regulations requiring them to work with high levels of physical or cash collateral – which SMEs in Africa or other frontier markets have already used or simply do not have.
- Local financial institutions also have expensive legacy systems and delivery models, making the servicing of smaller, dispersed agri-clients not economic unless and until radical new banking models arrive in the countryside with equally radically changed perceptions of risk. Fintech innovations are starting to appear here.
- And finally, the opportunity costs for local banks are often high: urban, big corporate and public sector lending is easier and seen as less risky.
- But the reality is that the local banks do have reach, coverage, and capital. So how to get them lending into agri-SMEs? Short of policy-driven regulatory pushes (like Indonesia’s requirement for banks to have a certain proportion of agri-lending), the major challenge concerns risk perceptions and risk-sharing. As advisers, SEAF is working to address some of this bottleneck.
- The relevance of private equity generally to these issues has received a lot of attention recently. According to the Emerging Markets Private Equity Association, billions of dollars have been raised in recent years – even for African markets.
- Managers of this pile of “dry powder” however, have found it notoriously difficult to generate the sorts of deal flow they seek: big deals, addressing major markets, with clear pathways to exit and liquidity. Think of them as “elephant hunters” – outside the financial, natural resources, infrastructure, and utility sectors, big deal sizes are few and far between in many emerging markets.
- Even those relatively fewer funds looking at agriculture and/or SME opportunities have experienced trouble finding the deal flows they need.
Addressing the Missing Middle
- Dedicated rural lenders and microfinance institutions fill some needs, but often at the lowest level of the value chains – leaving an unfinanced “Missing Middle” of productive SMEs, often innovators and big potential job-creators.
- This leaves local and international Development Finance Institutions (DFIs) to address this gap. The issue is that they are ill-equipped for this. Operating out of major centers with relatively few staff, they need to move large amounts – which pushes them to deal sizes which are simply too large for African SMEs (think upwards of US$10 million). So, they lend to local banks, hoping in this way that funds will trickle down to the SME level. Experience with this has, on the whole, been disappointing.
- So, the DFIs have also invested in funds, hoping these can provide reach into the SME sector. SEAF works in this space of course, with DFI investors in most of our funds. We have generally targeted SMEs in this “Missing Middle” category, and some of our funds specifically source innovators with major potential.
The funnel problem
- Consider that there are probably endless opportunities in the SME sector which would address issues in nutrition, food security, reduced waste, more jobs, less internal and cross-border economic migration. In short, better outcomes all around. Most of these opportunities remain latent, however, given that they require business sense and realistic funding. As we’ve seen, the local banks aren’t doing the job.
- Accelerators and incubators help with this, and they have also proliferated in recent years. SEAF’s own CEED network of Centers for Entrepreneurial Education and Development is a great example. But these have to be selective and can only help somewhat experienced SME entrepreneurs to grow and improve their skills. There is rarely financing attached.
Thus, there is seemingly endless work for SEAF in the SME agribusiness sector! Apart from helping to unlock banking flows, the challenge is multiplying our own reach, and finding ways to clone our investment skills, as well as making them more scalable. SME deals are just as difficult as bigger deals – with real risks associated. You must sow a lot of seeds (and CEEDS) to achieve significant impact. That’s the challenge ahead of us.
Working with GAIN and some other NGOs in the nutrition and agricultural sectors, we see some interesting opportunities, particularly to help facilitate our DFI friends to generate some real impact in this area.