Impact Voices | January 26, 2021

Retool finance to rebuild soil health

Logan Yonavjak and Adrian Rodrigues
Guest Author

Logan Yonavjak

Guest Author

Adrian Rodrigues

Regenerative agriculture may be in vogue, but in many ways, it’s as old as agriculture itself, as practiced by our ancestors and to this day by many indigenous communities. What is new: the process of ensuring the mainstream capital markets are enabling asset holders to invest in a manner consistent with regenerative principles.

We need A LOT more money to flow and align with companies and projects that are building both soil health and community health – what the Croatan Institute calls “soil wealth.”

At Provenance Capital Group, we are helping set up the financial infrastructure to support this capital flow. We are building the first integrated financial services firm in the country focused on regenerative food and agriculture. A big part of what we do is play the role of an investment bank, whereby we help entrepreneurs working across the value chain to prepare for, and attract, impact capital.

Backed by a family office in the Midwest, we are also building an investment advisory business to advise family offices, high net worth individuals, and foundations on allocating capital into funds and direct regenerative food and agriculture investments.

We use the term “regenerative” and it’s at the foundation of everything we do. The Capital Institute has written extensively about the eight principles of regenerative capitalism: in right relationship, viewing wealth holistically, empowering participation, honoring community and place, edge effect abundance, robust circulatory flow, and being innovative, adaptive and responsive. We look for investments that align with these principles. 

How the term regenerative applies to agriculture remains in flux, but it broadly refers to more holistic approaches to agriculture systems that enhance, instead of extract from, ecological and social systems. This is beyond “sustainable” because we need to restore many of our degraded systems before we can sustain them. Regenerative farming practices draw from a range of traditions and techniques, including indigenous land management, permaculture, biodynamic farming, and so forth. Indigenous communities all over the world have been practicing regenerative agriculture for millennia.

So, where are the opportunities for investors? While the space is still nascent in many ways, more opportunities to invest emerge every day. Capital doesn’t need to just flow into farms, but across value chains. From an investment standpoint, this translates into opportunities across asset classes – from cash and cash equivalents to fixed income, real assets, public equity, private equity and venture capital.

Implementing climate-friendly agricultural practices could mitigate nearly 170 gigatons of carbon dioxide equivalent, while generating a nearly $10 trillion net financial return, according to a report published by the Croatan Institute. It’s not just about carbon, it’s also about improving the water cycle, enhancing biodiversity, strengthening economic opportunities for rural communities and righting historical wrongs.

Achieving those goals will require an estimated $700 billion in net capital expenditure over the next 30 years. Based on the Institute’s analysis, there is only approximately $47.5 billion worth of investable assets with regenerative agriculture claims.

That leaves a lot of need for additional investment opportunities!

Regenerative capital

At PCG, we don’t cover every asset class; our sweet spot is primarily in direct investments and funds. These opportunities typically sit within the real assets, private equity, private debt and venture capital portions of an asset allocation. Direct investments are an individual company or asset; funds aggregate multiple companies and assets together.

From our vantage point, momentum is certainly growing. In the past year alone, we have been approached by over 100 companies collectively looking to raise more than $750 million, and that demand is increasing. We have also identified more than 100 funds in the space that claim to touch on sustainable and regenerative agriculture.

Companies that knock on our door come from across the value chain – from upstream at the producer level to downstream retailers. We also work with select agtech and foodtech companies that we feel have a regenerative focus and offer solutions across the value chain. Producers, processors, retail, CPG and tech are where we are currently seeing the most demand. Some recent examples include: a smaller scale lamb processing facility in the Midwest, a heritage breed milk products company, a bast fiber producer in the Pacific Northwest, and a company with a regenerative sourcing solution for consumer brands in meat, dairy, wool, and leather.

On the fund side, there are a number in their second and third, and even fourth and fifth vintages. These funds are both debt and equity focused. Overall, however, the majority of opportunities are in the US with first time managers raising or managing between $25-$250M of assets under management. While there are a wide range of investment theses that have specific focus areas in food and ag, natural resources more broadly, and climate, we are seeing a lot of the funds entering the space with a focus on tech as a way to try and achieve higher returns. Other focus areas include organic farm and ranch land transitions, sustainable and regenerative food products, and loans to farmers. 

To keep the momentum going in the transition to regenerative agriculture, we need entrepreneurs and investors to continue to come together. Specifically, to realize our shared goals, we can’t invest entirely through traditional approaches like venture capital. Instead, we need appropriate regenerative capital structures. There are numerous examples of these. One good example is revenue-based loans –  loans with a promissory note where the negotiated repayment is tied to a percentage of the company’s revenue. There are various ways these arrangements can be constructed, but in general they help align incentives on both sides (while matching more closely with the company’s cash flow), and prevent enterprises from having to dilute themselves early on. Demand Dividends rely on a similar structure but based on repayment as a percentage of profit instead of revenue.

If we want companies to achieve positive impact outcomes, such as rebuilding soil health, it would be detrimental for these companies to chase an explosive growth model. Like nature itself, outcomes such as rebuilding soil health and sequestering carbon cannot be rushed. To that end, we need more investors and companies to be prepared to take on these different forms of capital and ownership structures that better align with the needs of regenerative natural systems and communities

While firms like Cienega Capital, RSF Social Finance and the Boston Impact Initiative Fund have been trailblazers, we need more investors to be open to being patient and innovative opposed to being focused on incremental greenwashing or cherry picking regenerative ag tech investments. At PCG we use our relationships with investors to help capitalize regenerative businesses in a manner that produces resilient businesses as well as positive outcomes. As our country welcomes a new administration, we are hopeful there will be even more emphasis and support behind a transition to regenerative capitalism.  

For a more comprehensive and in-depth discussion of other gaps in regenerative agriculture investing, see: Soil Wealth Report, Barriers for Farmers and Ranchers to Adopt Regenerative Ag Practices in the US – Exploring a Roadmap For Funders and Stakeholders, and Does Regenerative Agriculture Have a Race Problem.

Logan Yonavjak and Adrian Rodrigues are co-founders & managing directors at Provenance Capital Group.