ImpactAlpha, Aug. 20 – Conventional investors see uncompensated risk. Investors of ‘catalytic capital’ see an opportunity for outsized impact.
One Acre Fund has spent the last decade and a half demonstrating that small African farmers are not only lendable but, with additional support, are safe bets to reduce hunger and grow family incomes. In the last five years, the social enterprise led by Andrew Youn has doubled to more than a million the number of farmers it serves in Kenya, Rwanda, Burundi, Tanzania, Malawi, Uganda and Zambia.
One Acre has done the hard work in assembling the bundle of farm services needed to help some of the world’s poorest farmers help themselves. But the organization has not had access to working capital at the scale required to put a dent in rates of farmer poverty across the continent.
Now, a coalition of philanthropic investors is stepping up to lend $20 million in subordinated debt to the social enterprise with the aim of helping One Acre attract as much as five times that amount in senior debt and lines of credit. By taking the riskier position in the capital stack, the MacArthur Foundation and five other lenders aim to help One Acre secure financing from development and commercial banks and other institutional lenders.
“One Acre Fund has proven its impact,” says MacArthur’s Charles Coustan. “This extra capital can fuel the next stage of growth.”
Catalytic loans
The Chicago-based foundation used a “program-related investment” to make a 10-year, $10 million loan to One Acre, the latest in a series of investments MacArthur has made as part of the Catalytic Capital Consortium, a partnership formed last year between MacArthur, Omidyar Network and the Rockefeller Foundation.
This month, MacArthur announced a $5 million investment in the Acumen Latin America Early Growth Fund to invest in up to a dozen early-stage social ventures, primarily in Colombia and Peru. An earlier $30 million MacArthur investment seeded investments in Rockefeller’s “Zero Gap” portfolio of innovative financial structures aimed at meeting the Sustainable Development Goals.
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MacArthur’s loan to One Acre matches another $10 million in loans from new and existing lenders, including the family office Ceniarth, A to Z Impact Foundation, The ELMA Growth Foundation, Jasmine Social Investments and Netri Foundation. Backstopping the subordinated debt is a $10 million guarantee from the Ezrah Charitable Trust, a private foundation founded by South African investor, and One Acre advisory board member, David Cohen.
The new, single structure will streamline the terms, allowing larger, more institutional investors to crowd in at scale. The structure leverages blended finance, an investment approach that’s gained traction in recent years as a way for catalytic investors like MacArther and Ceniarth to take higher risk or lower returns in order to make deal terms in high-impact investments work for commercial investors.
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“While the perceived financial risk is high, the impact risk is low,” Coustan says.
One Acre plans to leverage the $20 million infusion to increase its debt capacity over the next five years by as much as $100 million and grow its farmer client base to four million. One Acre estimates another 50 million farmers in Africa alone could benefit from access to the organization’s services.
“We are proving that smallholder farmers are a good customer base,” One Acre’s Jenya Shandina told ImpactAlpha. Many investors, even impact investors, still view smallholder farmer lending as too risky. “One Acre Fund is showing that we can work with farmer populations and repayment rates are high.”
Working capital
One Acre’s market bundle of agricultural inputs on credit, training and post-harvest support has proved efficient at boosting the productivity and income of farmers who work on, yes, less than an acre of land.
The enterprise’s army of more than 6,500 field staff support farmers in seven countries across Africa. Profits on supported land are up on average 44%. At 97%, it has built a sound track record of farmer repayments.
One Acre requires infusions of upfront capital early in the planting season, when it provides seeds, fertilizers and other farming inputs on credit to hundreds of thousands of farmers all at once. Farmers repay the loans after harvest when they’re able to sell excess crops.
The model requires significant access to working capital in the form of debt and lines of credit.
One Acre has been a fundraising powerhouse. Last year the organization raised upwards of $85 million in grant revenues, which it uses to subsidize loans, provide training, invest in research and monitor impact. It also uses debt to provide short-term credit to farmers, which is secured from impact lenders like Ceniarth, Kiva, Global Partnerships, Missionary Sisters of the Sacred Heart.
One Acre’s ability to generate credit repayments means it more resembles a large microfinance organization than a traditional aid organization. That has gained the attention of impact investors.
“They have been methodical about putting mission and impact first,” says Greg Neichin of family office Ceniarth, a One Acre lender for years. Many for-profit social enterprises that set out to serve customers at the bottom of the economic pyramid, under pressure from investors, drift upmarket to serve wealthier segments. One Acre, Neichin says, is “going to continue to scale to serve the poorest farmers in the countries where they work.”
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But most lenders, even many impact investors, are wary of agriculture financing in emerging markets to a nonprofit serving rural customers. Until now, One Acre’s debt fundraising has been bespoke, with the organization negotiating individual agreements with impact lenders.
“Debt allows us to bridge the gap between when we incur our expenses and when we collect our revenues, and allows us to offer goods and services on credit to farmers,” says Shandina. “As we grow, we need to access larger sources of capital. The catalytic capital is filling a financing gap for us.”
“It’s also sending a very strong signal to the market, to say, ‘We support One Acre Fund’s model and we support an investment in smallholder farming.’”
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