Growing away from Grants – African Livestock Catalytic Fund

Kick-starting a virtuous investment cycle into Africa’s livestock sector

Nutrition. Income. Jobs.

Livestock sector growth is hard to finance

• Often long time periods - eg from calf to first calving is long

• Valuing livestock as an asset is difficult because of risks of asset dying

• Input sector riddled with credit/debt problems, long chains and often poor rural infrastructure (eg electrification/cold chain, roads, abattoirs)

• Resulting shortage of investment often leads development sector to use grants to try and catalyse the market instead

Types of Finance

Grants Debt Equity

Donations

Subsidized Debt

Patient Capital

Grants with requirements

Guaranteed Debt Catalytic Equity

Performance-based awards

Commercial Debt Private Equity

Are grants free and easy?

• Unsustainable – Must constantly re-apply

• Management distraction – Intensive application-process, relationships and reporting

• Mission drift – Push agendas outside of core business onto grant makers long list of broad priorities

• Hidden costs – Time, personnel, reporting

• Easy to misuse – Spend on OpEx unsustainability

• Not customized to financial need – Inappropriate timing and amounts

• Do not incentivise companies to build robust financial mgmt systems and commercial discipline – Consequently can remain “uninvestible”

How grants and subsidies can impede markets • Distort pricing within sectors

• Disincentive to invest in businesses in sector

Treatment/inputs at full cost from ABC AgroVet

Subsidized or free inputs

How grants can impede markets • Farmers addicted to subsidized prices • Long term suffer from lack of supply

Stunted market with no incentive for new entrants = no growth

ABC AgroVet leaves market

Subsidized inputs

Reliance on subsidized supply

Only subsidized players survive

Unstable supply

Myths about Finance

• “Paying for something I can get for free makes no sense”

Servicing debt shows financial maturity

Servicing debt proves your program is working

Running commercially attracts more finance meaning your

business becomes scalable

Forces management to focus on the fundamentals of cash flow management – critical to sustainability of any business

Myths about Finance

• “Equity investment means management loses control”

Committed equity investors help management

Solid long-term financing stabilizes program

Equity investors are in it longer term and only benefit

if you do too

Management gets a smaller slice but of a much bigger, more profitable and more sustainable pie!

Myths about Finance

• “Finance is inaccessible” Debt and Equity investors for many types of project…

Financing Term Rates Target Project

Patient Capital 10-20 years

5% return Developing Project

Catalytic Fund/ VC/PE

5-10+ years Variable and tailored to biz

Start-up & Growth

Guaranteed Debt 7 years 5% interest Start-up & Social

Commercial Debt 7 years 10-15% interest

Mature Project

Unique issues with livestock

• High Front End Costs and Risks

• Time, time, time…

• Coordination Failures

• Economies of Scale (production and distribution)

• Economies of Scale (inputs and services)

A catalytic fund’s distinctive approach involves a combination of investment and hands-on, in country management support

Project development (1 -3 years)

Start-up (1-2 years)

Mature phase (15 years plus)

Financial close

Private Equity

Market returns

25% exit after 5 years

10% payback over 7 years

Average project return is 15% over 20 years

Therefore it doesn’t work

Commercial Debt

Project development (1 -3 years)

Start-up (1-2 years)

Mature phase (15 years plus)

Financial close

Market returns

25% exit after 5 years

Debt with Guarantee 5% payback over 7 years Commercial debt 15% payback over 7 years

Average project return is 15% over 20 years

Therefore it doesn’t work

Commercial Debt

Catalytic Fund Private Equity

Debt with Guarantee

Project development (1 -3 years)

Start-up (1-2 years)

Mature phase (15 years plus)

Financial close

Market returns

25% exit after 5 years

Debt with Guarantee 5% payback over 7 years Commercial debt 15% payback over 7 years

Average project return is 15% over 20 years

Therefore it can work

Commercial Debt

Catalytic Fund Private Equity

Debt with Guarantee

Patient Capital 5% long term finance

Cluster Approach

ECA

Grains, starch and animal feed

Pork and poultry

Phoenix Seeds

Improved seedsBeer and non-alcoholic drinks

Nutrition programmes

Major Private sector

purchasers

Tsetsera & Guita Chicken

BAGC Catalytic Fund

Examples of livestock investments for a catalytic fund

• Dairy cooperatives

• Input distributors

• Input Manufacturers & Breeders

• Cold chain service providers

• Rural Abattoirs

• Major outgrower schemes (eg poultry linked to mill and hatchery)

• Processors

Leverage through partners

• Livestock Insurance Companies (eg Kilimo Salama)

• MFI’s and Commercial Banks

• Donors and NGOs

• Livestock Research Organisations

• Technology companies (Mpesa, M2M, livestock tech)

• Impact Investors, DFIs

Pitch

1. Launch a dedicated African Livestock Catalytic Fund to grow defined market clusters, partnering the livestock research and development community

2. To include a portfolio of SME and large scale business where social impact, positive financial returns and ‘additionality’ can be demonstrated

3. Include subsidised or free mgmt T/A for MSMEs alongside the fund (that could be grants!)

Thank You

Michael Shaw

Director

Wellspring Development Ltd

Nairobi, Kenya

michael@wells-dc.com

+254 (0)787 433301