Palladium Impact Investing: Nigeria Trip Review - … · 1 Palladium Impact Investing: Nigeria Trip...

Palladium Impact Investing: Nigeria Trip Review

O c t o b e r 2 0 1 5

i Palladium Impact Investing: Nigeria Trip Review

Contents

1. Palladium Impact Investing Post- Nigeria Trip Review ........................................................... 1

1.1 Context and Background ..................................................................................................... 1

1.2 The First ‘Next Step’ ............................................................................................................. 3

2. Detailed Findings Nigeria Visit .................................................................................................. 4

2.1 Trip Findings - Potential Impact Investment Opportunities ............................................... 4

2.1.1 Key Partners .................................................................................................................. 6

2.1.2 The need to connect at a grass- roots level, as early as possible, to bring the

(impact) investor’s perspective to bear ................................................................................. 7

2.2 Key Challenges and Reoccurring Observations ................................................................ 8

2.2.1 Limitations regarding finance ....................................................................................... 8

2.2.2 Government intervention has often been misplaced or unreliable ............................ 9

2.2.3 Aggregation, as a point of facilitating access to goods/services to the northern

regions, remains a challenge ............................................................................................... 10

2.2.4 Physical challenges ..................................................................................................... 10

2.2.5 A distinctive lack of any sector/market data .............................................................. 11

2.3 Balancing Present Challenges: Necessary Considerations to Entice Private Impact Co-

Investors .................................................................................................................................... 11

2.3.1 Providing ‘Intelligent Capital’ ...................................................................................... 11

2.3.2 Finding the most appropriate and efficient legal mechanisms to deploy capital to

the sector ............................................................................................................................... 12

2.3.3 The market requires enhancement structures i.e. guarantees, interest rebate

mechanisms, blended capital pools or first loss facilities in order to mobilise private

capital ..................................................................................................................................... 12

2.3.4 There remains a distinctive disconnect to provide evidence of successful pilots

with potential to scale across the agricultural value chain in Nigeria. .............................. 13

2.3.5 Creating successful, alternative aggregation mechanisms...................................... 13

2.3.6 Building the wider impact investing space in Nigeria ............................................... 14

2.4 Pulse of Impact Investing in Nigeria ................................................................................. 14

2.5 Macroeconomic Considerations ........................................................................................ 16

2.5.1 General overview ......................................................................................................... 16

2.5.2 Government’s continued focus on the agricultural sector ........................................ 17

2.6 Building the Intermediary Market to support Impact Investing in northern Nigeria

across value chains: Evidenced by Palladium’s Approach ................................................... 18

2.7 Conclusion .......................................................................................................................... 19

ii Palladium Impact Investing: Nigeria Trip Review

3. Appendices ............................................................................................................................... 21

Appendix 1 – Definitions and Acronyms ................................................................................. 22

Appendix 2 – Palladium’s Structure ........................................................................................ 25

Appendix 3 – Palladium Impact Investment Strategy ............................................................ 26

Appendix 4 – Macroeconomic Indicators, Treasury Bill Rates, and Nigerian Banks’

Maximum Loan Tenors ............................................................................................................. 27

Appendix 5 – Meetings and Summary Status ........................................................................ 29

1 Palladium Impact Investing: Nigeria Trip Review

1. Palladium Impact Investing Post- Nigeria Trip Review

1.1 Context and Background

Palladium recently created a new proposition to focus on Impact Investing (“II”), with the

intent of becoming an impact investor itself and ultimately becoming an intermediary to

facilitate the flow of capital into impact investing opportunities. Palladium is well placed to do

so, as it is able to build off its existing International Development (“ID”) component of its

business. For clarity, an abridged organogram of Palladium’s newly created organizational

structure has been provided illustrating various business components at Appendix 2. This

provides a robust proposition of ‘boots-on-the-ground’ synonymous with impact investing

and necessary to execute a multitude of development projects globally in emerging markets.

Over time, Palladium will build its own track record and credibility in the impact investing

space with the intention of ultimately becoming an intermediary to capitalise on and address

one of the key challenges in impact investing within emerging markets, namely the lack of

sufficient intermediaries. This issue is widely considered a critical factor for both scale and

facilitating large institutional investor participation.1

As an aspirational impact investor, Palladium will seek to invest and steadily build its track

record by deploying discrete amounts of its own capital into investment opportunities that

generate both a financial and predefined social return. The exact parameters of the II

strategy are still being refined; however, Palladium’s reflection on key market findings such

as the recent trip to Nigeria will inform its II strategy. Palladium will seek to build and

enhance its core competencies around sector knowledge and geographic connectivity. An

overview of the Palladium II is detailed in Appendix 3.

The Palladium II team visited Nigeria—specifically, Abuja, Kaduna, Kano and Lagos—during

August 19- 29, 2015. The visit was jointly led by Chris Hirst, Managing Director, Strategy and

Corporate Development; and Tracey Austin, Director, Impact Investing. The team was also

joined by summer associate Jeff Osowski2. The trip was facilitated and supported

extensively by the Propcom Mai-karfi (“Propcom”) and GEMS13 project teams and by a

wider group of Palladium staff. The areas visited and agricultural players met included:

1 JPMorgan Spotlight on the Market, May 2014 and Social Impact Investment Taskforce G8 Report Sep. 2014

2 Trip costs borne by Palladium exclusively

3 The GEMS1 project has since come to an end


Itinerary: August 19 – 29, 2015 Key Players visited

The purpose of the trip was to assess the Nigerian agricultural landscape and to see what

impact investment (potential) opportunities may exist – specifically, in the northern regions4 –

relative to project activities currently being managed by Propcom and GEMS1. More

precisely, the project activities examined were based on the Propcom and GEMS1 projects,

and itinerary co-ordinated to maximize time spent in-country. The intention was also to

determine how defined the impact investing market is and who the key players are to assist

with co-investment on the ground and specifically within the small holder agricultural sector.

The visit provides a snapshot and is not representative of the entire country and sector;

however, Palladium took as comprehensive a view as possible in the limited time frame of 9

days, focusing on meeting as many of the following players:

1. Agriculture/value chains across the various sub-sectors

2. Ventures, partners/individuals at the grass-roots level (i.e. SMEs/entrepreneurs)

3. Government officials/ministries (albeit temporary in nature on account of recent

election)

4. Aggregators (of the few that exist)

5. Banks

6. NGOs

7. Private Equity (“PE”) investors

8. Other active players (i.e. Nigerian Sovereign Investment Authority (“NSIA”) and

Aspen Network of Development Entrepreneurs (“ANDE”)

In total, 37 meetings were conducted in 9 consecutive days while in-country. A snapshot of

these meetings/outcomes is provided in Appendix 5, including extensive details of all

meetings held in country (beyond SMEs/entrepreneurs/etc.). One key outcome of these

meetings was that while most of these SMEs/entrepreneurs are at an early stage or not

robust enough yet to be considered for direct investment at this time by Palladium – the visit

and meetings resulted in establishing the backbone of Palladium’s Nigeria pipeline, which

will serve as a co-ordination tool to convene interested players and co-investors/partners

alike. The Palladium II team wishes to express its appreciation and gratitude to the

4 Please note that while northern Nigeria was the focus of this visit, Palladium’s II strategy is not restricted to

northern Nigeria, and may include the entire country or even the wider West Africa region (led by Nigeria).


Department for International Development (DFID as well as the wider Palladium group with

its robust local projects, specifically the Propcom Mai-karfi and GEMS1 teams, without

whose support this successful trip would not have been possible.

For clarity, and as mentioned in previous correspondence, the visit undertaken by the

Palladium II team, was in addition to the scoping visit undertaken by another one of

Palladium’s teams focused on innovative financing mechanisms (commonly referred to as

Development Impact Bonds or “DIBs”) to support the vaccination of village chickens against

Newcastle Disease in Nigeria. Thus, DIBs are not intended to be a specific part of this

report, even though some common partners were interviewed; as such, a separate report is

to follow with regard to DIBs and their potential within Nigeria.5

1.2 The First ‘Next Step’

One important finding of the trip and the first ‘next step’ suggested is to establish a

process for identifying which companies in Nigeria can become investment ready. In

order to support established and start-up businesses in the agriculture sector that

are looking for investment, position themselves to be investment ready, and enable

them to better access impact investment products, the Palladium II team

recommends that Propcom Mai-karfi identify and add a resource to the team to help

companies become ‘investment ready’. Once they are ready for investment, they

would then be introduced to impact investors – either Palladium and/or others. The

suggested framework for a Terms of Reference is the following:

Duration

Short term inputs totalling 4 months per year, spread out over as many as 5 - 7

different visits. Exact timing and duration of inputs would be determined by a work

plan established in an initial 4 week visit, as well as the progress of the entities in

becoming investment ready. Up to a maximum of 33% of the input may be

provided remotely based on the stage of intervention required to each company.

Tasks and Activities

Engage with different impact investment entities that cover multiple impact investment products (e.g. Venture capital, SME growth capital, inventory or equipment financing etc.) to determine what businesses and individuals need to demonstrate to be considered ‘investment ready’.

Create a check list of requirements for the different types of Impact Investment products.

Create templates and tools to support businesses to address each of these requirements. Examples include, inter alia corporate governance frameworks, impact monitoring tools, audited accounts.

5 Note to the Reader: It is important to bear in mind while reading this report that is has been written and

produced from the perspective of an aspirational impact investor, with the intention of seeking to assess the

market and potential investment opportunities in Nigeria focusing primarily on the stakeholders and clients of the

DFID-funded Propcom Mai-karfi and GEMS1 projects. This report is not intended to be a scoping document or

study.


Establish and manage an open dialogue with partners of Propcom in the agricultural sector in northern Nigeria, that have expressed interest in Impact Investment.

In consultation with the key individuals in the companies, create Investment Readiness Workplans.

Support the implementation of the workplans through benchmarking, coaching, analysis and facilitation.

Facilitate the introduction of the company to potential Impact Investors.

Provide advice to the company throughout the phases of negotiation with the impact investors.

2. Detailed Findings Nigeria Visit

2.1 Trip Findings - Potential Impact Investment Opportunities

The snapshot provided below summarises the most interesting opportunities identified

during the visit. It is worth noting that none of these investments are necessarily at the same

stage and no firm data has yet been provided in support of viability and scalability of any of

these potential opportunities; this will only be determined at the validation phase. The

assessment has been linked to data available from the Propcom Mai-karfi and GEMS1

project teams, the site visits, and interviews conducted with key players on the ground.

Some interesting prospects include:

Table 1: Potential Impact Investment prospects

Potential Impact Investment Prospects

Trip Observations Status and financing needs

Lambda Business buys animals, processes meat and dairy (branded drinking yoghurt) to sell to large players such as Master Meats/Spar/Shoprite as well as local buyers (conversations with financial institutions are ongoing aimed at improving credit terms).

Strong key man driving business alongside integrated team, with impressive knowledge and a mastery of numbers. Lambda is interested in efficiency supported by data and likely to be seeking well priced expansion finance.


GT tannery An impressive tannery facility that processes wet blue (local) and crust (export) – went from strength to strength and plans expanded (despite distorting EEG subsidies

6) to focus

even more on high-end exports globally (incl. new markets).

Strong/experienced CEO, with expansion plans, targeting exports- will likely require competitively priced debt/possibly trade finance facilities to do so. Requires further investigation.

Garko Agric Services Ltd

Integrated farming operation, including feed finishing/layers/milk production – with opportunity to reconfigure focus on feed finishing for greater impact. Sizeable land for feedlots.

Strong CEO, with ambitious expansion plans, and will require competitively priced debt. Audited/profit-bearing financials should be available.

Doreo Partners (“DP”)/Babban Gona (“BG”)

A well-known player, DP via Babban Gona, continue to increase yields and income significantly for Nigerian smallholder farmers. The model has grown and attracted equity from Gates Foundation (details limited at this stage) and the test of scalability is still pending – however, it remains interesting.

BG seems to be looking for equity presently (i.e. up to ~75% of capital structure), ~US$5-$8million and likely later debt. While impressive, the challenge is to shift to source finance from more commercially balanced impact investors and see the ROPO

7

(for working capital) migrate to commercial finance as well.

Africa Exchange Holdings Ltd. (AFEX)

Innovative financial commodity exchange for agricultural products to facilitate warehouse receipts, and has the ability to influence efficiencies for Nigerian small holder farmers. Backed by impressive/well-known local investors. Piloted in Rwanda.

Marketed to deliver commercially positioned returns (~20%) - but balanced with needed longer term patient capital. Strong social impact identified. Needs ‘intelligent capital’.

Wider leasing mechanisation model (through the likes of TOFHAN)

The leasing solutions around mechanisation driven by Propcom’s work and supported by NIRSAL and banking sector, has provided a platform for re-engineering a potentially scalable model for leasing of farm equipment.

Palladium has access to partners who have deployed similar models elsewhere. The challenges of local capacity, making it resource efficient, finding other co-investors prepared to accept the risk, etc are at the core to next set of discussions.

L&Z dairy Impressive integrated dairy and processing operation, which has current strong investor linkages and is tapping the market for equity funding. More of these types of SMEs sought.

Fully funded at present (equity) – likely to seek debt finance at later stage. Watch-list potential.

6 Export Expansion Grants (“EEG”) refer to the Nigerian Federal Government’s incentive scheme to stimulate

export-oriented activities in order to improve growth in the non-oil export sector. It includes negotiable duty credit certificates, which served as subsidies for non-oil exporters to enable them to compete effectively in the international market. In 2014, the government recognized the inefficiencies in the EEG scheme and voiced an intention to terminate the program. The EEG scheme has since been suspended, and is undergoing a review and restructuring. 7 “ROPO” Raise out of Poverty (ROPO) Bond. In April 2013, Propcom Mai-karfi invested in a ROPO bond issued

by Babban Gona issued in the amount of ₦72million. In 2014, Propcom Mai-karfi continued to support Babban Gona through a combination of a new ₦40million ROPO bond investment and technical assistance to achieve its agribusiness goals. The first ROPO bond which matured in April 2015 was rolled over for 18 months, and the second bond matures in February 2016.


2.1.1 Key Partners

The lack of a conventional impact investing market (discussed at length in the rest of the

paper), requires the convening of as many actors/partners as possible. Investing into the

northern parts of Nigeria, specifically into aspects of the agricultural value chain, will be

very challenging and requires partners with investment know-how, capital, local

knowledge, and strong local networks. However, in addition to sourcing impact

investment opportunities, other key players have been identified and even more need to

be convened to support the region and sector. Findings suggest the following are some

of the key potential partners:

Table 2: Some key local players in Nigeria relevant to impact investing

Key Players Importance to the Nigerian impact investing market

Investing know-how

Sufficient capital

Key local networks

Local knowledge

ANDE (association)

Key facilitator to local actors in the impact investing arena – relevant to assist with establishing parameters for impact investing within Nigeria

√

NA

√

√√

Tony Elumelu Foundation (Investor/HNWI/Philanthropist)

Successful investor/innovator i.e. AFEX and accelerator fund. Likely influencer of other High Net Worth Individuals (HNWIs) in Nigeria – good partner to work with especially for influence/market positioning, source of capital.

√√

√√

√√

√√

DFID Impact Facility (CDC) (Investor)

Appetite for the country and sector, if an efficient legal structure/mechanism can be pioneered, minimum ticket sizes of~US$5million plus should enable a complimentary partnership/co-investment model.

√√

√√

√

?/√

Sahel Capital (Fund Investor)

Recently due diligence by CDC/DFID Impact Fund – positions Fund for Agri-Finance in Nigeria (FAFIN) as an impact fund and with substantial capital to deploy within their 4- 5 year investment period, as a potential co-investor in the same sector/northern Nigerian regions

?/√

√

√√

√


The list of suggested partners is by no means exhaustive and Palladium has, as far as

possible, connected with other interested players (e.g. initial conversations with Dalberg

on a wider West African Impact Investing study contemplated in Q4 2015). In this regard,

we welcome readers of this report to share contacts to create a more informed/robust

approach to the sector. The visit was limited in its reach in that private/corporate players

were not engaged to understand their respective interest and contribution to agricultural

value chain financing or impact investing more generally – this is proposed to be

addressed as part of the follow up visit ~Q4 2015.

2.1.2 The need to connect at a grass- roots level, as early as possible, to bring the

(impact) investor’s perspective to bear

The local relationships built over time by the Propcom/GEMS1 teams are impressive,

and facilitated relevant access to the market under limited constraints (i.e. shorter time

frames and lighter/local resourcing). The longstanding relationships (5 years for GEMS1

and 3 years for Propcom) have provided a degree of timely efficiency to identify and

connect with potential impact targets. Further, the application of various interventions,

evidenced throughout the trip, show a high degree of adaptability as required by the

sector and the local environment.

However, the key observation evident from the trip is the need to ensure that

SMEs/entrepreneurs are made aware of prospective impact investor requirements and

way of thinking as early as possible; and where possible and appropriate, this

perspective should be built into current interventions. The six ventures listed above

(Table 1)—identified as early potential impact investment opportunities—generally share

common characteristics as shown below. These key criteria are common to what impact

investors typically seek to see prevalent when evaluating prospects, namely:

Table 3: Common Characteristics Shared by Potential Impact Investment Prospects

Opportunity Strong Commercial Leadership

Established Infrastructure

Operating Track-Record

Demand/Supply Established

Investor awareness

L/M/H

Lambda √ √ √ √ med

GT tannery √ √ √ √ med

Garko Agric. Services Ltd

√ √ ? ? low-med

Doreo Partners

√/? √ ? √ med-high

AFEX √ √ ? √ high

L&Z dairy √ √ √ √ high

Outside of the opportunities identified above, evidence of investor awareness was

possibly best demonstrated by entrepreneur/founder, Aisha Yakubu Bako, showing she

is mindful of what (impact) investors require from her venture ACT Agribusiness Ltd8

based out of Abuja. As the founder, she has capped for now the number of

tractors/states under her equipment leasing venture until further data validation has been

completed i.e. by fitting GIS9 devices on each tractor (aiming to address data collection

8 ACT is not included in the Prospective Impact Investment Prospects because ACT is an early stage

status company. 9 GIS refers to Geographic Information System


for a more robust model). A high degree of ‘investor awareness’ was further

demonstrated with regards to:

Operational and sector expertise i.e. she is a former Propcom employee with

experience in the market;

Impressive low cost model: 3-employees only, has forgone own salary etc.;

Shared (failed) experimentation with angel investors/HNWI’s and is open and

honest about her experience; and

Most importantly she demonstrates evidence of commitment via her own skin-in-

the game (family loan).

During the interview she shared experiences of how failure and naivety have been

fundamental lessons necessary for her to reshape the venture. Although at a very early

stage, the awareness to test the robustness of her model before expanding and avoid

deploying cash on an untested model, is appealing – even though incredibly difficult to

operate at present under an interest rate of ~23%. Palladium II will continue to track ACT

Agribusiness Ltd with interest.

2.2 Key Challenges and Reoccurring Observations

The observations made during the visit resonate with other key pieces of work conducted in

the past on the sector in Nigeria (by other institutions), and thus have been labelled as

reoccurring.10 Thorough access facilitated by the Propcom and GEMS1 teams not only

supports most of the findings, but also has been the subject of ongoing discussions with key

players on-the-ground. Findings are as follows:

2.2.1 Limitations regarding finance

There is a distinctive lack of alternative finance available to SMEs/entrepreneurs.

The limited amount of available bank finance is priced at interest rates in excess of 20%.

Most SMEs/entrepreneurs interviewed in the northern regions have little to no awareness

of viable alternative financing; however, most have strong perceptions around subsidised

finance, and they deem acceptable interest rates of ~ 9 – 10% (largely referenced to

what has been provided in the past under subsidised/guarantee schemes). This raises

the challenge around SME/entrepreneur education/trust building with banks/funders

more generally around what realistic financing costs are likely to be. Additionally

feedback provided by Sahel Capital (refer to Pulse of Impact Investing in Nigeria below),

indicated that the best calibre SMEs are generally able to access the ~10% priced-

facilities, as there is a glut of finance (mainly by select banks – off the back of

NIRSAL/Bank of Agriculture incentives etc.) chasing what are deemed the most credible

players.

Further peripheral research indicates that the conventional PE market, characterised

by large capital raisings of late11, tends not to target the agricultural sector, and the

ticket sizes necessary to invest in this sector are considered too small (generally sub-

US$5M). While this may have other future consequences of over-valued asset prices

due ‘various sources of capital chasing the same deals’, this will not likely impact the

smallholder agricultural sector at all. The obvious but challenging alternative is to create

10

E.g. KfW/Dalberg feasibility study on for the Fund for Agri-Finance in Nigeria (FAFIN) 2013 11

Incl. closed funds e.g. Verod Capital Fund II (US$50.5m), Synergy Private Equity Fund I (US$100m), Adlevo Capital Africa (US$42m) and Helios Investment Partners (US$1.1bn)


substitute sources of finance, i.e. more of the same such as guarantees/interest rebates

for leasing structures, as well alternative forms of finance, i.e. first-loss facilities, blended

pools of capital, newer efficient mechanisms (platforms), so as to encourage more

conventional/commercial investors to take on this risk.

Persisting limitations within the banking sector include the high cost of funding and

risk aversion of lending to smallholder farmers, despite a pressure – widely mentioned by

banks interviewed – from the Central Bank of Nigeria (“CBN”) for banks to increase loan

book exposure to the agriculture sector to as much as 5% by 2016. Of the banks

interviewed—with the exception of FCMB—the vast majority have approximately 2%

exposure to the sector and indicated they are unlikely to reach the target of 5% by 2016.

This is further exacerbated as banks prefer more established and larger agribusiness

clients such as Olam, Bunge, Dangote etc. which has given rise to a name-lending

culture. Given the cost of funding and liquidity constraints banks encounter, they do not

have the ability to support long tenor financing (see Appendix 4), and thus do not support

greenfield or primary production (excluding rehabilitated plantations referenced in some

meetings) agribusinesses. From the conversations the Palladium II team held, most

banks – again with the exception of FCMB – appear to have limited institutional capacity

focussed on understanding the sector and the infrastructure necessary to assess risks

specifically related to small holder farming (i.e. they either lack teams with agricultural

experience and knowledge or have just started building this capacity). Evidence of risk

aversion is best summarised by an unwillingness to provide vanilla leasing products for

farming equipment as this equipment is considered a specialised asset class, thus

requiring a vendor buy-back clause in the instance of default.

A mismatch between primary production timescales compared to terms of

conventional financing instruments persists. Both the banks and PE funds are not

prepared to accept long lead times to cultivate greenfield investments, which conflict with

the liquidity constraints mentioned above of banks and PE fund investment periods (i.e.

4-5 year investment period) respectively. The market definitively lacks established

greenfield developers such as AgDevCo, whose model, which operates across Africa,

presently excludes Nigeria.12 Some of the banks expressed an interest in reworking and

rehabilitating older, disused assets (in cocoa, for instance); however, this was not fully

explored, and did not appear prevalent within the northern regions.

2.2.2 Government intervention has often been misplaced or unreliable

A high degree of disconnect appears around the role of federal and state governments’

intervention in the sector. While well intended, the design and rollout of the mechanisms

tend to disrupt the market feedback received from banks and equipment vendors alike.

Many of the incentives and mechanisms are covered by present project interventions

(GEMS1/Propcom), and are not intended to be discussed here; rather, it is the need to

create alternative incentives and mechanisms to those provided by NIRSAL, i.e.

guarantee/interest rate rebate schemes. Further, poorly designed subsidies (i.e. EEG

subsidy) have also resulted in unintended consequences by over-inflating prices of raw

hides, flooding the market with opportunistic players, and forcing original, long-standing

producers to shut-down (e.g. Globus Tanneries), which has caused significant job loss.

Interestingly, during Palladium’s meeting with the Federal Ministry for Agriculture and

Rural Development (“FMARD”), the organisation spoke more than anything of wanting to

12

Confirmed in an interview with Co-Founder AgDevCo.


increase food production and exports of meat, constantly referring to the ‘McKinsey

report.’13 Yet, recent conversation of privatisation of multiplication centres and abattoirs,

for example, indicate that an advisor is required to assist FMARD with a revised plan that

reflects present macro factors (i.e. depressed oil price) and revised investor

considerations.

Palladium, through its wider proposition of strategy consulting, is well-placed as a

provider of consultancy services – competent at advising governments and private sector

and already working within Nigeria – to engage with FMARD in providing preliminary

advice. Thus, separate conversations may proceed in this regard to ascertain what

support FMARD may need from a prospective advisor.

2.2.3 Aggregation, as a point of facilitating access to goods/services to the

northern regions, remains a challenge

Within Nigeria, there are very few functioning co-operative structures (“co-ops”) that work

as one would expect more conventional co-operatives to do, especially to serve as a

point of consolidation and access to procure inputs, disseminate know-how, and

maximise prices (for a membership fee). The most established aggregators in this regard

are the two established tractor associations the Tractor Owners and Operators

Association of Nigeria (TOOAN) and Tractor Owners and Hiring Facilities Association of

Nigeria (TOFHAN). These associations are currently working with equipment suppliers

and the Propcom team extensively. The other player demonstrating relative success

around aggregation is Kola Masha, the managing partner pf Doreo Partners (“DP”), who

the Palladium II team interviewed. DP aims to serve 1 million farmers through the trust

structure of Babban Gona (“BG”) by 2025 (presently at 3,000), with an attrition rate of

10% annually. This model is at an interesting stage, and has inspired enough market

confidence that BG received an equity investment of US$5 million from the Gates

Foundation (which values BG at ~US$20M). While this is interesting and indicative of

progress, the terms of distribution and dilution under the trust structure were still being

agreed at the time of the interview. Successful clarification of the mechanism around

ownership and membership and actual increases in livelihoods will serve to cement the

commerciality of the model and provide a reference point to future investors. Palladium II

is keen to track BG especially as it seeks to engage more commercial investors and

takes on more conventional debt and working capital.

2.2.4 Physical challenges

The northern states of Nigeria remain a physically challenging business environment;

and the time frame of the visit did not allow for Palladium II to assess the enablers of the

northern Nigeria business environment. However, themes throughout Kaduna such as

cattle rustling (resembling organised and/or violent crime) and prevalent cultural

practices that see pastoralists at odds with farmers still prevail. The GEMS1 and

Propcom project terms of reference do not expand to include these aspects, but they are

believed to be addressed by other similar projects such as GEMS314 (run by consultancy

firm Coffey). This begs the wider question of addressing investor needs for data: how

13

McKinsey report covering the FMARD transformation plan of various crops/value chains - April 2013 14

GEMS3 refers to the Growth and Employment in States (Business Environment) Programme in Nigeria. GEMS3 works with private and public stakeholders at national, state and local levels to build and deliver a systematic framework that will make it easier to do business in Nigeria, leading to lasting improvements in economic opportunities for the poor, especially women.


can collated and comprehensive data, albeit from various consultants/players, be made

available to enable them to assess local investment risks? DFID has facilitated

introductions in this regard (post the trip), however wider convening structures are

necessary to build an investor-ready environment.

The continued perception and challenges around obtaining physical access to these

markets remains a barrier, as investors are unlikely to invest where they cannot travel in

order to visit their investment. Most Nigerian counterparties interviewed in Abuja and

Lagos expressed surprise at Palladium’s road trip to the northern part of the country, and

the degree of access the team had to these areas. In terms of infrastructure, roads were

passable by day, but wider irrigation and electrification are sporadic at best. It is worth

emphasising the road trip proceeded without any incidents, and demonstrated the

navigability of the regions covered. This visit serves to indicate that it is in fact possible it

does so off the back of well-established project/corporate infrastructure. Thus, the

commonly used term ‘boots-on-the-ground’ cannot be overemphasised in terms of the

challenging business environment, its vital importance for accessing SMEs/ and potential

ventures and understanding and mitigating local risk.

2.2.5 A distinctive lack of any sector/market data

The lack of credible data is an issue that persists in the northern region and for the

agriculture sector at large, and thus remains an overriding detraction for investors.

Investors have no reference point against which to model and forecast downside risk,

and are thus not able to manage and mitigate risk at all. Findings associated with

business models and pilots that have worked and/or failed are not reaching the market

actors – that despite the efforts of multiple donors, bilateral, multilaterals and other

philanthropic resources hard at work within Nigeria. Palladium II team proposes this in

conjunction with developing the impact investing sector, which is discussed further

below.

2.3 Balancing Present Challenges: Necessary Considerations to Entice Private

Impact Co-Investors

Based on the challenges identified as reoccurring and the latest progress and feedback of

the multiple Propcom and GEMS1 interventions, the following considerations have been

tabled by Palladium II for further investigation in an attempt to address them as a

prospective impact investor.

2.3.1 Providing ‘Intelligent Capital’

New investors like Palladium will need the co-investment and support of credible local

investors, which is essential for building local knowledge of both the business

environment and capital. The investment needed to deliver impact is more than sheer

capital, and it needs a balance of technical and operational expertise to understand the

sector and local environmental complexities. In reality, there are few sources of private

capital as there are neither local impact investors nor international investors who are

comfortable/competent with, and in, the market. Development Finance Institutions (DFIs)

have limited appetite for the Nigerian agriculture market (with the notable exception of

KfW15 and their support of conventional PE Funds), and the funding of smaller deals is

15

KfW refers to Kreditanstalt für Wiederaufbau. It is a German government- owned development bank.


not of interest to them. To mobilise interest in the sector at scale, the combined efforts

and sources of capital from all players across the value chain (i.e. corporate,

foundations, philanthropists) is required, and will need to take on the form of partnership-

type deals. Investor alignment will be of utmost importance and will be a defining

characteristic of impact investments in this environment.

Palladium II as a provider of discrete capital to this sector would benefit the facilitation of

a wider working group via DFID to support building an aligned impact investor base for

the sector. Further, Palladium II will be keen to be kept abreast of whether DFID Impact

Fund proceeds to support Sahel/FAFIN, as they are regarded as a leader (albeit, a sole

leader) and have a distinctive grasp of the local market.

2.3.2 Finding the most appropriate and efficient legal mechanisms to deploy

capital to the sector

Innovation around legal structures is required in order to provide the most appropriate

and efficient legal mechanisms to suit the sector and specifically accommodate the

longer tenor in a market that doesn’t typically embrace impact investing. Common PE

fund investment periods of five years do not support the tenor of investment or the

sector. Additionally feedback at an SME/entrepreneur level favours a debt-like product,

which is more readily understood. Preliminary conversations with CDC/DFID Impact

Facility indicated they have appetite for agricultural value chains in northern Nigeria, but

require an efficient mechanism to facilitate the flow of capital into smaller tranches, so as

to avoid costly inefficiencies associated to funding and managing small deals directly.

Palladium II shares the same sentiment as CDC in this regard. While conversations are

at an early stage, the idea will be thoroughly investigated. 16

2.3.3 The market requires enhancement structures i.e. guarantees, interest rebate

mechanisms, blended capital pools or first loss facilities in order to mobilise

private capital

The volume of finance that can be mobilised by the support presently offered by the likes

of NIRSAL is insufficient to encourage the banking sector to lend to the small holder

agricultural sector. This is limited by the types of lenders eligible under the scheme,

which include Nigerian commercial banks, discount houses, asset managers, and

specialised trade finance providers, vendors and tractor manufacturers with their own

trade finance desks. The Palladium II team raised the prospect of what it would take for a

financial institution to act as a lender and benefit from NIRSAL coverage. The response

was “this will be tested on a case-by-case basis once a proposal is submitted.”

While not specifically assessed during the visit, understanding the extent of other

mechanisms available to increase the volume of enhancements should be investigated

further. Amongst others, these include:

The African Guarantee Fund (AGF) - created to enable partner financial

institutions (including Nigeria banks) to execute their SME financing strategies

while bringing their businesses to scale. The transaction process appears

relatively straightforward, but does require 3 year financial statements. The

16

Meeting with CDC/DIFD Impact Facility Director


widespread use of the guarantees by Nigerian banks appears low17, i.e. 17% of

guarantees appeared to have been advanced to Nigeria, Ghana and Sierra

Leone, especially when compared to the size of the Nigerian market?

The utilisation of USAID’s Development Credit Authority (DCA), which works with

local financial institutions to design investment alternatives that unlock financing

for entrepreneurs in developing countries. It is believed that the cover can be

extended to players with the capacity and appetite to provide credit guarantees

for early stage agricultural investments where they are viable and benefit

smallholder farmers (i.e. non-banking financial institutions such as AgDevCo).

The Propcom project is presently investigating18 how to use DCA guarantees

around mechanisation leasing initiatives.

Alternative platform structures combining blended capital pools of capital and

enhancements similar to AgDevCo, except covering Nigeria. Palladium through

its ID team, have recently been selected as the preferred bidder for the DFID

Agribusiness Investment Platform Scoping assignment, which will investigate

alternative models for deploying capital.

In this regard Palladium II would welcome the ability to explore DFID’s potential

appetite for specific sector/sub-sector support and enhancement to facilitate its

direct investment into northern Nigeria impact investment opportunities.

2.3.4 There remains a distinctive disconnect to provide evidence of successful

pilots with potential to scale across the agricultural value chain in Nigeria.

To better leverage the success of the numerous projects, interventions and even

innovations these need to culminate in the delivery of data points to deliver on the

market demonstration effect. Without this, impact investors are unlikely to be attracted to

invest in the sector and the region. Further complete, comprehensive data, upon which

investors – specifically impact investors – can base their investment assessment and

decisions, need to be available and will rely on multi-party cooperation. The lessons

learned at all stages of seed funds and accelerators and incubators (including failures)

typically provide the demonstration effect, as to what does and doesn’t work. This is

further discussed in context of piloting aggregator models (immediately below). As an

aspirational investor, Palladium II would be keen to access further challenge fund data

and seek support from DFID to ensure better sharing amongst projects aimed at

facilitating impact investment from the private sector.

2.3.5 Creating successful, alternative aggregation mechanisms

The limited number of co-ops, inadequate reach of the tractor associations, and lack of

innovation raises the question of: how to provide financing through alternate points

of aggregation in the value chain, i.e. warehouses, traders, or input suppliers?

From an investor’s/lender’s perspective, non-aggregated smallholders fail to meet

collateral and credit history requirements, but pose high transaction costs due to

inefficiency of transacting. The costs of originating, managing, and collecting small loans

for a large number of dispersed farmers are very high and pose a significant barrier to

financing non-aggregated smallholders and is not desirable in the instance of the highly

dispersed and fragmented northern Nigeria market. Thus, the proposed solution is to

17

AGF - Annual Report 2014 18

Due for discussion in mid-October


invest the finance via the vehicle for on-lending e.g. warehouse receipts, as

contemplated under the AFEX model. Due to the large amounts of testing and piloting

required to establish these finance models, investors shy away from backing these

ventures, or require innovative ways to share costs. In this regard, business

strengthening and model testing will likely still rely on grants (or similar) and would see

DFID and other donors still leading the support to innovation.

2.3.6 Building the wider impact investing space in Nigeria

Developing a common understanding of what impact investing means on the ground in

Nigeria is necessary to capture some of the current sources of impact capital and to link

current other private sources of capital to catalyse investment within the Nigeria

agribusiness sector. As referenced by the positive experience of working with a local

coordinator such as ANDE (as an example of an interested local player), Palladium II

considers it important to connect with other, currently less engaged players across the

Nigerian investing spectrum, beyond impact investing. Key stakeholders i.e. strong local

players, respected brands, HNWIs and other highly influential successful business

people, combined with best-in-class global players, driven by the strong local ‘facilitator’

would seek to go further than produce a study on the market – there is a definitive need

for convening all players.

The Palladium II team – in conjunction with its consultancy arm, based off its existing

relationships with the CBN/GoN and other work currently being undertaken in Nigeria19,

is proposing that the CBN should consider such a ‘facilitator role’ and commence

discussions in-country on how Nigeria can benefit from the supply of impact investment

capital, by trying to ensure a more conventionally and widely adopted understanding of

impact investing and ongoing dialogue in this regard. DFID’s participation, even at an

early stage, is regarded as instrumental to the proposed idea, and Palladium would be

interested in exploring this further.

2.4 Pulse of Impact Investing in Nigeria

Reference to ‘impact investing’ as a defined discipline or asset class, appears to have little

or no traction in Nigeria, specifically amongst various financiers. Conversations in the

northern regions with entrepreneurs and SMEs provided evidence that there is an

understanding and buy-in to the concept of investing for profit while employing local people

and improving livelihoods. The remoteness of the enterprises visited (i.e. location), the lack

of alternatives to employment, and the limited access to many basic services underpinned

the joint synergy between investment and the associated outcome of social uplifting. Some

banks confused impact investing with principles of Environmental Social Governance

(“ESG”) – but generally few interviewees shared the GIIN definition.

Few incubators or accelerators are active within Nigeria, specifically outside of Lagos and

especially outside of the technology sector. This was confirmed during discussions with

Peter Longe of Enterprise Integrators20, whom the Palladium II met in Abuja. Enterprise

Integrators’ core focus is to build capacity and to assist/facilitate investments in Nigerian

SMEs. In this instance, they have been retained by Salid Agriculture Nigeria Ltd. (“SANL”)

19

Application of the “The Collective Impact Approach” proposed to the Nigerian Electricity Regulatory Commission 20

Please refer to the following website: http://enterpriseintegratorsng.com/


for a period of 36 months. Full terms of their retainer (i.e. fees for upside) were not disclosed

to Palladium.

The Palladium II team attempted to meet with Dalberg, who undertook part of the study

conducted during the design phase of the FAFIN21 fund in 2013, but key representative

Nneka Eze was on annual leave. However, the Palladium II team did manage to interview

Mr. CJ Fonzi (by skype), who confirmed Dalberg is presently conducting a deep-dive study

of the largest economies with regards to impact investing in West Africa which is expected

by year end. Further, the Palladium II team contacted the Global Impact Investing Network

(“GIIN”), but failed to receive feedback in time for the visit.

The ANDE West African Chapter Coordinator, Babi Subair, facilitated insightful meetings

with other members. Of specific interest were Alithea Capital, Travant Capital and the Tony

Elumelu Foundation (“TEF”), who were all well versed in the generally adopted

nomenclature of ‘impact investing’ and clear on expectations within the Nigerian market with

regards to returns necessary to satisfy investors. There is a distinctive need for ‘intelligent

capital’ to be deployed locally, providing all the aspects of business/capacity-building in

addition to capital. The TEF provided some insight around the design of their

Entrepreneurship Programme and associated boot camp, a holistic 10-year, US$100million

commitment aimed at identifying, growing, and creating 10,000 African entrepreneurs –

referred to as ‘A programme built by Africans, for Africans.’ The design of the

Entrepreneurship Programme provided valuable insights and ideas that could be applied to

conventional challenge or innovation funds. More specifically, their insights were around how

to capture applicant data, the importance of maintaining contact with applicants (even those

who depart from the programme), and establishing a proactive feedback loop at each stage.

Despite the large and successful capital raisings of Lagos-based PE funds, there seems to

be little appetite for sub-commercial returns (influenced widely by the Treasury bill

benchmark – see Appendix 4), the agricultural sector, and the small deal sizes typically on

offer. The closest the larger PE funds venture near impact investing deals, are those related

to mobile money and technology. Broadly, the consensus indicated that a return of

approximately 15 – 18% was the minimum their respective Limited Partners (“LPs”) would

accept. Interestingly the lack of availability of larger deals in Sub-Sahara Africa, which while

not Nigeria-specific, highlighted the trend of vast amounts of ‘dry powder’ and a reduction in

deal size to below US$10 million.22

To complete the assessment of the impact investment market, meetings were conducted

with Sahel Capital (“Sahel”), the Fund Manager to the FAFIN Fund; and NSIA, the Limited

Partner to FAFIN Fund in order to better understand positioning in the impact fund space.23

Sahel is attempting to complete the second capital-raising of the FAFIN Fund, but also

presents some alignment with Palladium’s proposition to build off its own consultancy

business. Sahel’s founder (Ndidi Nwuneli) spends 50% of the time on consulting projects,

(the balance of her time on the fund), which provides strong synergies for generating

pipeline in the agricultural sector. Ndidi is also familiar with the work of Propcom.

Indications from Sahel are that fund raising is taking longer than expected, which is likely a

reflection of the challenging market since FAFIN enjoyed a strong first close anchored by

21

The Fund for Agricultural Finance in Nigeria (FAFIN) is an innovative agriculture-focused investment fund that provides tailored capital and technical assistance solutions to commercially-viable small and medium-sized enterprises (SMEs) and Intermediaries across the agricultural sector in Nigeria. 22

http://empea.org/research/data-and-statistics/ 23

http://www.sahelcp.com/


KfW/Ministry of Agriculture and NSIA. The second close may extend to February, 2016,

beyond the expected close of December, 2015. It was interesting to observe that Sahel

described the FAFIN mandate as being ‘finance-first’ type of fund, and then being focused

on the social returns. NSIA was non-committal on whether they would be providing an

increase in investment in Sahel/FAFIN during discussions. Although the investment into L&Z

Dairy (also visited by the Palladium II team in Kano) is impressive and described as the

‘donor darling’, additional deal closure seems to take long, with the next two deals expected

to be completed in the next 6 weeks. 24 Sahel concurred with the view of focusing on

integrated agricultural value chain plays (as pitched off the back of Propcom/Palladium’s

work), and is targeting a ticket size around $5 million for SMEs with a 3 to 5 year track

record. Palladium received confirmation that CDC/DFID Impact Fund have undertaken due

diligence to review Sahel Capital and the wider Nigerian market, when they requested the

input of the Palladium II team on accessing the market/security precautions. Further

exchanges with FMO and Proparco confirmed that neither of these DFIs (“Development

Finance Institutions”) is likely to support the FAFIN Fund for their respective reasons.

Finally, for completeness, Palladium II team has sought to look at the entire impact investing

value chain, right down to the local skills available to work in the impact investing arena. As

such, the Palladium II team met with Lagos Business School (“LBS”) representative Dr.

Professor Henrietta Onwuegbuzie. Dr. Onwuegbuzie leads sessions in entrepreneurship

(MBA) and is the Project Director for the Impact Investing Policy Initiative at LBS. While

encouraging, the business school class is small at approximately 55 students per cohort,

and the focus of the course is geared towards conventional finance rather than impact

investing. Nonetheless, Palladium has agreed to engage with the Career Services Centre to

understand whether there is scope to adapt an internship programme to capitalise on local

talent and provide exposure to impact investing opportunities directly. Lagos Business

School is currently seeking sponsors for a social enterprise centre.

2.5 Macroeconomic Considerations

This report is not intended to discuss the challenges facing the newly elected President of

Nigeria, Muhammadu Buhari, and the current status of the Nigerian economy (see Appendix

4). However, it merits a mention as it affects the investing generally within Nigeria and

specifically the agricultural sector as revenues earned are likely to be Naira denominated.

The current Nigerian political/economic situation does produce some other opportunities

discussed below, but for the most part makes for a challenging investing environment.

2.5.1 General overview

Nigeria’s macroeconomic outlook is constrained, and predominantly affected by the

depressed oil price and slowdown in economic growth, which is likely to continue in the

interim. Coupled with expected, high inflation (>9%) and ongoing currency depreciation,

the situation has been exacerbated, as revealed by indicators:

The Gross Domestic Product (“GDP”) has slowed to a growth level of 2.35%

in real terms in Q2 2015, compared to 3.96% and 6.54% in Q1 2015 and Q2

2014, respectively.

A sharp decline in crude oil prices from $108 in June 2014 to $44 in January

2015 has put major pressure on the Naira and resulted in all but a collapse of

24

In the words of the CEO D. Abubakar himself


the Naira as a consequence. A major consideration to any investor seeking

competitive returns.

Since March, 2015 the Naira depreciated by 19% to N195 to USD1.0 as of

September, 2015, and the efforts by the CBN to shore up the currency have

not made a difference. The CBN adopted several measures, including

prohibition of demand and offer of US$ for local purchases and services,

closure of Retail Dutch Auction System for interbank foreign exchange market

and recently, the removal of 41 items from the list of imported items that

foreign currencies could be sought for importation. 25

These macro-factors, along with longstanding perceptions of corruption within Nigeria

and the most recently perceived uncertainty in policy direction,26 create the basis for a

challenging investment environment that raise questions, but also provide potential

opportunities for investors, such as:

Acquisition targets: possibly lower asset valuations with significant growth

potential due to the depreciation of Naira;

Expansion: emerging new local players following CBN measure of excluding

certain goods from obtaining FOREX;

Strategic partnerships: focus on sharing resources/efficiencies/synergies as a

reaction to the unstable current economic landscape.

2.5.2 Government’s continued focus on the agricultural sector

There is a sentiment that argues the decrease of crude oil prices will force the

Government to focus more on agriculture and other potential growth areas within the

Nigerian economy. This is particularly relevant to agriculture considering the sector

contributed ~ 22% to GDP in 2013.27 The largely informal agricultural sector employs

approximately 70% of the labour force in Nigeria28. President Muhammadu Buhari

pledged to make agriculture a major focus of his government’s agenda, promising to lay

the institutional foundation necessary to attract large-scale investment and revitalize the

national agricultural extension and rural support system.29

This all builds on the Agricultural Transformation Agenda (“ATA”), launched in 2012, an

initiative of FMARD, aimed at creating a productive and efficient framework for

production of agricultural goods. The main measures considered as part of the ATA

include:

improving the productivity, household food security and income of farmers

through the Growth Enhancement Support Scheme (“GESS”)30;

introducing NIRSAL, the incentivized lending scheme with credit risk guarantee to

provide farmers with access to finance; and

25

http://www.ngrguardiannews.com/2015/07/businesses-in-recess-as-exchange-rate-soars/ 26

The dynamic shift in the balance of political power, following 16 years of People’s Democratic Party dominance, has led to uncertainty in policy direction and created anxiety around decision making (due to President Buhari’s perceived lack of timeliness in appointing his ministerial cabinet).

27 Nigerian Bureau of Statistics

28 Nigeria: African Economic Outlook. AfDB, OECD, UNDP. 2014. P. 3

29 Buhari, Muhammadu. “My 100 Days Covenant with Nigerians.” Opinion Nigeria. April 2015

30 Please see FMARD website for details on GESS goals http://www.fmard.gov.ng/Growth-Enhancement-

Scheme

http://www.africaneconomicoutlook.org/fileadmin/uploads/aeo/2014/PDF/CN_Long_EN/Nigeria_EN.pdf

http://www.opinionnigeria.com/my-100-days-covenant-with-nigerians-by-muhammadu-buhari/

http://www.fmard.gov.ng/Growth-Enhancement-Scheme

http://www.fmard.gov.ng/Growth-Enhancement-Scheme


attracting private sector agribusinesses to set up processing plants through

appropriate fiscal, investment and infrastructure policies (Staple Crop Processing

Zones)31.

The ATA initiatives, while expansive and strategic, have not yet fully translated into

significant changes; focus on potential approaches/necessary mechanisms to facilitate

engagement at the smallholder farmers’ level does not appear evident in local

conversations with government and ministerial players. While impact investing as an

asset class cannot solve Nigeria’s economic woes, the vast quantity of capital that

exists within the discipline and the innovative mechanisms that are the key drivers may

unlock the potential within the agricultural sector and engage with the northern region

of the country.

2.6 Building the Intermediary Market to support Impact Investing in northern

Nigeria across value chains: Evidenced by Palladium’s Approach

The fundamental question of what it will take to engage with the Nigerian impact investing

market (albeit building a fit-for-purpose version relevant to Nigeria), and assess and find

potential (impact) investment opportunities, requires the assistance of an already connected

player such as Palladium. A complete proposition with a source of ‘intelligent capital’ is built

off of robust partnerships locally and globally. Palladium, as an intermediary, is well placed

to facilitate the engagement as follows:

Table 4: Palladium’s Impact Investment Proposition in Nigeria

Palladium’s Proposition

Private Investors’ Perspective

Nigeria Test Case Mitigate Financial

Risk

Enhance Financial Return

Increase Social Impact

Illustrating alignment by investing own discrete capital – first amongst International Development consultants to do this

Own discrete capital ‘skin-in-the game’ committed-in-

principle

Leveraging Palladium’s established sector experience to evaluate and advise on current challenges

Palladium expertise

across agriculture sector, and related sub-sectors

Sourcing of investment opportunities from Palladium’s current project portfolio

(reducing costs and shortening time to assessment and ultimately investment)

Starting with DFID projects in Northern Nigeria that

have been running for 3- 5 years

31

Please see FMARD website for details on Staple Cross Processing Zones policies http://www.fmard.gov.ng/Stape-Crops-Processing-Zones

http://www.fmard.gov.ng/Stape-Crops-Processing-Zones


Utilising existing ‘boots on the ground’ and expertise of local teams to navigate local conditions by learning from project leaders who live locally and are supported by Nigerian teams

Focus on northern Nigeria where Palladium’s teams

live/work in Kano/Kaduna/Abuja/Lagos

etc.

Building off of key established local relationships (private and public)

Wide access from project sites to connecting with

key decision- makers/influencers

Utilising established on- the- ground infrastructure

Efficient site visits made possible through local

office, communications, logistics, security etc.

Leveraging existing low cost Palladium operating model

Benefiting already by leveraging sunk costs of having established local

teams/operations

Establishing future investment vehicles by leveraging learning/experience from locally incorporated project companies

Utilising knowledge of local legal and regulatory requirements built while

establishing local Nigerian companies for existing

projects

Leveraging in- house M&E experts to develop impact metrics/ taxonomies, and building sector-leading intellectual property

Social impact data already gathered and theory-of-

change already established for funded

interventions

Increased visibility and enhanced knowledge of project pipeline, able to communicate and share feedback from the ground

Access to reports/teams/data [continually being

improved on]

Capability to manage and hedge local currency risks – leveraging current project operations and facilities

Currency banking facilities in place, i.e. pools of Naira

available to facilitate liquidity/currency translation risks

2.7 Conclusion

After exploring Nigeria’s impact investing landscape relative to the country’s agricultural

market in the north, it is clear that there is a need for greater innovation and alternative

sources of finance. SMEs and entrepreneurs face challenges from limitations in the banking


sector, ranging from high interest rates to low financing tenors, and inadequate PE

investments due to small ticket sizes. The impact investing environment in Nigeria,

especially in northern Nigeria, does not exist in terms of conventional understanding,

presenting challenges to investors due to both physical and perceived barriers. For one, the

macroeconomic environment exacerbates the already inadequate government interventions,

and state-sponsored support will be increasingly hard to come by with mounting debts and

unpaid employees. Moreover, aggregation mechanisms are nearly non-existent and there is

a dearth of data upon which investors can base their decisions, which likely dissuades

potential investors.

As such, using impact investments to build the Nigerian agricultural landscape—specifically,

in the northern regions—will require co-alignment amongst all interested parties and starts

with key lead actors such as DFID (including other donors, bilaterals, and multilaterals), to

convene a common platform for conversation and data collation. Demonstration of

aspirational and new investors such as Palladium (matched with sources of third party

capital) is important to validate the potential to build new intermediaries. The innovation will

need to extend to focus on practical elements such as legal structures, creative new finance

mechanisms, and comprehensive data collection.

DISCLAIMER:

This document has been prepared for general guidance on matters of interest only,

and does not constitute professional advice. You should not rely or act on the

information contained in this publication without obtaining specific professional

advice.

No representation or warranty (express or implied) is given as to the accuracy or

completeness of the information contained in this publication, and, to the extent

permitted by law, Palladium, its members, employees and agents do not accept or

assume any liability, responsibility or duty of care for any consequences of you or

anyone else acting, or refraining to act, in reliance on the information contained in

this publication or for any decision based on it.


3. Appendices

1. Definitions and Acronyms

2. Palladium’s Structure

3. Palladium Impact Investment Strategy

4. Macroeconomic Indicators, Treasury Bill Rates, and Nigerian Banks’ Maximum Loan Tenors

5. Meetings Summary


Appendix 1 – Definitions and Acronyms

AFEX

ATA

African Exchange Holdings Ltd.

Agricultural Transformation Agenda

BG Babban Gona

BoA Bank of Agriculture

Boots-on-the-ground In order to achieve the desired outcome in emerging markets, investors typically insist on an active/locally

domiciled presence in the market the investment is made in

CBN Central Bank of Nigeria

CDC CDC Group plc, the UK development finance institution

CSR Corporate Social Responsibility

DFIs Development Finance Institutions

DFID Department for International Development

DIBs Development Impact Bonds

DP’s Distribution partners

EEG Export Expansion Grant

FCMB First City Monument Bank

First Close Post a successful fund raising process, a date when the initial/or final tranche of capital is confirmed by the delivery of an investor’s unconditional commitment

Final Close When a final (usually second) threshold has been reached,

new investors can no longer join in on that particular fund

FMARD Federal Ministry of Agriculture and Rural Development

Fund Raising The process by which capital is solicited from investors. Firms typically set a target when they begin raising the fund, and ultimately announce that the fund has closed at such-and-such amount. Sometimes the firms will have multiple interim closings. The term cap is the maximum amount of

capital a firm will accept in its fund.

GDP Gross Domestic Product

GEMS1 Generating Employment in States Programme (Meat and

Leather)

GEMS3 Generating Employment in States Programme (Business

Environment)

GESS Growth Enhancement Support Scheme

GIIN Global Impact Investing Network

GIZ German Corporation for International Cooperation


GoN Government of Nigeria

GPS Global Positioning System

HMO Health Management Organisation

HNWI High Net Worth Individuals denote an individual or a family with high net worth. Although there is no precise definition of

how rich somebody must be to fit into this category.

ID International Development

II Impact Investing

IRR Internal Rate of Return (IRR) is the compound return of a series of cash flows over a specific period (usually several years), used as one of the two main measures of private equity returns. The strict business school definition is that compound return, found by iteration, which will reduce the

NPV of any stream of cash flows to zero.

KfW

LBS

KfW refers to Kreditanstalt für Wiederaufbau. It is a German

government- owned development bank.

Lagos Business School

LPs Limited Partners

ND Newcastle Disease

₦ Nigerian Naira

NIRSAL Nigerian Incentive-Based Risk Sharing System for

Agricultural Lending

Patient Capital Patient capital is another name for long- term capital. With patient capital, the investor is willing to make a financial investment in a business with no expectation of turning a

quick profit.

PE Private Equity

PM Propcom Mai-karfi

PPP

Propcom

Public Private Partnership

Propcom Mai-karfi (Promoting Pro-Poor Opportunities

Through Commodity and Service)

ROPO

SANL

Raise Out of Poverty Bond

Salid Agriculture Nigeria Ltd.

Skin-in-the-game The existence of a significant financial contribution and commitment to the business by the entrepreneur(s), illustrating commitment and supporting alignment of

investment objectives.

SMEs Small and Medium Sized Enterprises

TEF Tony Elumelu Foundation


TJ Tomato Jos

TNS Technoserve

TOHFAN Tractor Operators and Hiring Facilities Association in

Nigeria

TOOAN Tractor Owners and Operators Association of Nigeria

TSP Tractor Service Providers

UK United Kingdom

USAID United States Agency for International Development

USD US Dollars


Appendix 2 – Palladium’s Structure


Appendix 3 – Palladium Impact Investment Strategy

The II arena is attracting many first-time players (with varying degrees of success), while Palladium will not initially raise an impact fund, it is focussed on building an investment track-record by making direct investments across market such as Nigeria (other markets presently being evaluated). The current Palladium II strategy is aimed at maximising success to recipients of capital and mindful of the need to attract third party capital (alongside its own), and has considered the following;

Sector Focus Focussing on sectors consistent with Palladium’s current core expertise incl. (not limited to):

i. Education ii. Healthcare iii. Governance iv. Various other sector under Growth & Livelihoods (e.g.

agriculture/water/sanitation etc.)

Geography Focussing on geographies consistent with Palladium’s current coverage (key relationships, established offices etc.)

Skin-in-the-game Discrete pool of capital (off own balance sheet)

Returns Commensurate with chosen markets, aimed at bridging the gap as an alternative source of finance

Term 7-8 years *

Instruments Direct debt-like instruments, but may include equity

Ticket size Likely range: US$0.5M – US$2M*

Control Position [25-40%]stake*

*Subject to review – not yet finalised

Palladium’s Approach to Impacting Investing: Evolution in two phases, building track

record and credibility off of our existing business


Appendix 4 – Macroeconomic Indicators32, Treasury Bill Rates, and

Nigerian Banks’ Maximum Loan Tenors

Total GDP

$568.5 billion

Largest economy in Africa

24th largest economy in the world

GDP Per Capita $3005

GDP Growth 6.3%

Foreign Direct Investment

$5.6 billion

Population 177.5 million

>70% of population under the age of 30

Forecasted to be the 3rd

largest population by 2050, with a population of approximately 400 million

Inflation Rate 9.2%

Unemployment Rate 30%

Liquid Foreign Exchange Reserves

29.75 billion

Oil Production 2220 BBL/D/1K

Source: Central Bank of Nigeria

32

Based on data from Travant Capital Partners Limited, World Bank, Central Bank of Nigeria, and Trading Economics

http://www.cenbank.org/rates/govtsecurities.asp


Source: Business Monitor Nigeria Business Forecast Report Q1 2015

Source: Central Bank of Nigeria, FMARD, Stanbic, Access Bank

0

10

20

30

40

50

60

70

Nigerian Banks Maximum Loan Tenors for MSME and Agro Loans

Maximum Loan Tenor (months)


Appendix 5 – Meetings Summary

# Organisation

1. Briefing with Propcom/GEMS1 teams – sharing Impact Investing/wider Palladium Strategy

2. SANL (Salid Agriculture Nigeria Limited)

3. Enterprise Integrators

4. NIRSAL (Nigerian Incentive Based Risk Sharing System for Agricultural Lending)

5. AFEX

6. Meeting with Springfield Agro Ltd (Mahindra Tractors)

7. Meetings with Director Animal Production and Veterinary Services/Permanent Secretary FMARD

8. Nkataa

9. Gashfah Farms

10. Feed Masters

11. MASS International (Massey Ferguson tractors)

12. Lamda Farms

13. TOHFAN (Tractor Owners and Hiring Facilities Association of Nigeria)

14. Garko Agric Services Ltd

15. Dandago Agricultural Machineries

16. Globus Tannery

17. L & Z Farms

18. GB Tannery

19. ACT Agribusiness Ltd

20. Agropro (corporate TSPs)

21. Habgito/Hello Tractors

22. NSIA

23. Charlie Papa Sierra Nigeria Ltd

24. Dr. Patrick Utomi

25. Aspen Network of Development Entrepreneurs (ANDE)

26. Travant Capital

27. Alithea Capital

28. Stanbic Bank

29. Lagos Business School

30. Tony Elumelu Foundation

31. Fidelity Bank

32. Sahel Capital

33. FCMB


34. Diamond Bank

35. Meeting with Lagos state officials

36. Babban Gona/Doreo Partners

37. Union Bank

Palladium Impact Investing: Nigeria Trip Review - … · 1 Palladium Impact Investing: Nigeria Trip...

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