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Growing away from Grants – African Livestock Catalytic Fund
Kick-starting a virtuous investment cycle into Africa’s livestock sector
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
+254 (0)787 433301