Examples of blended finance facilities

Direct funding is the provision of debt, equity or grants. The public contribution to blending consists of grants, junior equity (with the donor accepting a high risk for a relatively low return), and/or subordinated/junior/mezzanine debt (with which the donor absorbs the first tranches of risks in the case of non-payment or late payment of loans). The effect of all of these blending tools is the private financiers in a transaction can achieve better returns at lower risk, to the extent that they can provide finance to a project/transaction that they would otherwise not fund (“additionality”). At times, it can be sufficient for an international agency just to become a stakeholder in a project, without providing any grants/concessional funding/guarantees, simply because the agency’s involvement provides comfort to private investors.

Apart from direct funding, blended finance also encompasses several specific supporting mechanisms:

  • Technical assistance: Supplements the capacity of investees and lowers origination and transaction costs.
  • Risk underwriting: Fully or partially protects the investor against risks and capital losses.
  • Market incentives: Provides results-based financing and offtake guarantees contingent on performance and/or guaranteed payments, in exchange for upfront financing in new or distressed markets.

Particularly technical assistance and risk underwriting were found to be highly effective in leveraging private finance, especially when compared to direct funding, with well over US$ 5 of private funding raised for every dollar of development funding.

With the exception of market incentives, all direct funding modalities as well as the two first supporting mechanisms can be found in the various blending schemes that currently operate. The following are some of the main ones:

African Agriculture Fund (AAF)

The African Agriculture Fund (AAF) is a private equity fund supported by a pool of European and African development finance institutions to make a positive impact on African agriculture and food production.

The fund reached US$ 246 million in mid-2013. The AAF Technical Assistance Facility (AAF TAF) is funded primarily by the European Commission. It is a grant-based facility that supports capacity building for small and medium sized enterprises (SMEs) invested in by the AAF and its SME sub-fund the AAF SME Fund, aiming to improve linkages between outgrowers, smallholders and the AAF portfolio companies, enhancing rural financing opportunities in communities where the AAF invests.

African Agricultural Capital Fund (AACF)

The African Agricultural Capital Fund (AACF) is a US$ 25 million investment fund (US$ 17 million from various foundations blended with a US$ 8 million commercial loan from JPMorgan, the latter with a 50% guarantee from USAID) that injects risk capital into agricultural supply chains in East Africa to support smallholder farmers and leverage additional financial and human capital in the sector.  It is the largest of four funds managed by Pearl Capital Partners.

African Agriculture and Trade Investment Fund (AATIF)

The African Agriculture and Trade Investment Fund (AATIF) is a US$ 146 million development fund created on behalf of the German Federal Ministry for Economic Cooperation and Development (which provides a first-loss-layer) by KfW and Deutsche Bank (who absorb a mezzanine layer of losses). Deutsche Bank acts as the investment adviser (by the end of 2016, its mandate will expire, and a new investment adviser will be appointed). The fund provides loans and guarantees and can potentially also provide equity, to a limited extent, across the value chain. Its investment targets include cooperatives, commercial farms, processing companies, and financial and other intermediaries that on-lend to smallholder farmers. AATIF’s aim is to unleash the existing potential of agriculture and trade on a sustainable basis; the main focus is sustainable promotion of income for those working in the agricultural sector and improved competitiveness of local enterprises.

African Risk Capacity Insurance Company

African Risk Capacity Insurance Company Ltd is an African natural disaster insurance pool, a specialized hybrid mutual insurance company that is meant to provide cover against weather-related food security emergencies. The inaugural insurance pool was launched in May 2014 with four countries and five seasons insured against drought for $129 million, for a premium of $17 million. In 2015 its member countries were Kenya, Malawi, Mali, Mauritania, Niger, Senegal and The Gambia. ARC is an affiliate of the African Risk Capacity (ARC), a specialized agency of the African Union.

Alterfin CVBA

Alterfin CVBA is a Belgium-based financial cooperative, managing a capital of US$ 65 million, channeling funds towards agricultural value chains (for working capital as well as long-term financing purposes). This is primarily done through funding rural microfinance and (with US$ 28 million allocated) small holder agriculture.

Beira Agricultural Growth Corridor (BAGC) Catalytic Fund 

Beira Agricultural Growth Corridor (BAGC) Catalytic Fund is a partnership that encourages responsible private investment in commercially viable, early-stage agribusinesses, with direct benefits for many smallholder farmers in Mozambique. The project has two key elements:(1) the BAGC Partnership, a Mozambican not-for-profit membership organization that supports changes at the policy level; and (2) the BAGC Catalytic Fund, a social venture-capital investment vehicle managed by impact investor AgDevCo, which invests in emerging agribusinesses.

Fund for Agricultural Finance in Nigeria (FAFIN)

Fund for Agricultural Finance in Nigeria (FAFIN) is an agriculture-focused investment fund, targeted to reach US$ 100 million, providing tailored capital and technical-assistance solutions to commercially viable SMEs and intermediaries across Nigeria’s agricultural sector. It uses quasi-equity, equity and debt instruments to structure investments.  FAFIN seeks to hold 25-49% of equity in an investee company and partner with it to substantially scale up the business. It may hold this equity directly through common shares or indirectly through quasi-equity instruments (convertible debentures or preferred equity). It does not seek majority shareholding. FAFIN has an independently funded technical assistance facility that supports investee companies and mitigates investment risks. With a target size of 10% of the fund, the facility is currently funded with $2 million in separate grants from donors (KfW); other funding comes from the Nigerian government.

The Nisaba Fund

The Nisaba Fund is a private equity fund, US$50m target with US$10m seed investment from Louis Dreyfus Holding (a major agro-trading and processing company), co-managed by Bamboo Finance and Louis Dreyfus. The Nisaba Fund will invest in strengthening market access by linking small-scale producers to end-consumers and in building local capacity and value creation notably through post-harvest handling & storage, and processing solutions.  The fund aims to increase capacity, promote more equitable value chain diversification, create local value addition, foster innovation, streamline distribution for smallholders & their communities and generally improve food security in Africa. The Fund is a 10 year, closed-ended fund with a target investment period of 5 years and an average investment of up to $3.5m. There will be a US$1.5m technical assistance fund. Nisaba will include specialized social and environmental metrics linked to manager performance. The Fund was launched in October 2015.

responsAbility Investments

responsAbility Investments is an asset manager, with some US$ 3 billion under management, that provides debt and equity finance in developing countries, including in agriculture.  It is one of the leading members of the Council on Smallholder Agricultural Finance.

Root Capital

Root Capital is a non-profit social investment fund focused on the agricultural sector in Africa and Latin America. It provides credit (both trade finance and longer-term investment credit) and targeted technical assistance to strengthens market linkages. Since its inception in 1999 it has disbursed approximately US$1 billion in loans, through over 2,500 deals.  Root Capital is financed through a mix of private and public sources. Notably, it receives guarantees from development agencies and foundations, which makes it possible to attract additional private capital, by issuing notes that range in tenor up to 10 years, and paying 0 to 4 % returns. For its technical assistance, it has access to a matching grant initiative of USAID. Among other things, Root Capital manages the Lending for African Farming Company (LAFCo), a US$ 15 million lending facility (structured as a Mauritius-based investment company) funded mostly by KfW and AgDevCo that focuses on working capital finance companies operating in Africa’s local and regional agricultural value chains; it aims for US$ 1 million + loan sizes.

Triodos Sustainable Trade and Agriculture Fund

Triodos Sustainable Trade and Agriculture Fund offers trade finance and term loans to small and medium-sized agricultural enterprises in Africa, Asia and Latin America that source sustainably produced crops from smallholder farmers and export to world markets. It manages US$ 30 million, with a first loss layer provided by donated capital, a mezzanine layer in the form of a credit facility by Triodos Bank Netherlands, and further guarantees by a number of donor agencies and high net worth individuals.