Palladium Impact Investing: Nigeria Trip Review
October 2015
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
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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
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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
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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).
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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.
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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 Trip Observations Status and financing needs Investment Prospects Lambda Business buys animals, processes Strong key man driving meat and dairy (branded drinking business alongside integrated yoghurt) to sell to large players such as team, with impressive Master Meats/Spar/Shoprite as well as knowledge and a mastery of local buyers (conversations with numbers. Lambda is financial institutions are ongoing aimed interested in efficiency at improving credit terms). supported by data and likely to be seeking well priced expansion finance.
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GT tannery An impressive tannery facility that Strong/experienced CEO, with processes wet blue (local) and crust expansion plans, targeting (export) – went from strength to exports- will likely require strength and plans expanded (despite competitively priced distorting EEG subsidies6) to focus debt/possibly trade finance even more on high-end exports globally facilities to do so. Requires (incl. new markets). further investigation. Garko Agric Services Integrated farming operation, including Strong CEO, with ambitious Ltd feed finishing/layers/milk production – expansion plans, and will with opportunity to reconfigure focus on require competitively priced feed finishing for greater impact. debt. Audited/profit-bearing Sizeable land for feedlots. financials should be available. Doreo Partners A well-known player, DP via Babban BG seems to be looking for (“DP”)/Babban Gona Gona, continue to increase yields and equity presently (i.e. up to (“BG”) income significantly for Nigerian ~75% of capital structure), smallholder farmers. The model has ~US$5-$8million and likely grown and attracted equity from Gates later debt. While impressive, Foundation (details limited at this stage) the challenge is to shift to and the test of scalability is still pending source finance from more – however, it remains interesting. commercially balanced impact investors and see the ROPO7 (for working capital) migrate to commercial finance as well. Africa Exchange Innovative financial commodity Marketed to deliver Holdings Ltd. (AFEX) exchange for agricultural products to commercially positioned facilitate warehouse receipts, and has returns (~20%) - but balanced the ability to influence efficiencies for with needed longer term Nigerian small holder farmers. Backed patient capital. Strong social by impressive/well-known local impact identified. Needs investors. Piloted in Rwanda. ‘intelligent capital’. Wider leasing The leasing solutions around Palladium has access to mechanisation model mechanisation driven by Propcom’s partners who have deployed (through the likes of work and supported by NIRSAL and similar models elsewhere. The TOFHAN) banking sector, has provided a platform challenges of local capacity, for re-engineering a potentially scalable making it resource efficient, model for leasing of farm equipment. 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 Fully funded at present processing operation, which has current (equity) – likely to seek debt strong investor linkages and is tapping finance at later stage. Watch- the market for equity funding. More of list potential. these types of SMEs sought.
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.
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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 Investing Sufficient Key local Local Nigerian impact know-how capital networks knowledge investing market ANDE Key facilitator to local (association) actors in the impact √ NA √ √√ investing arena – relevant to assist with establishing parameters for impact investing within Nigeria Tony Successful Elumelu investor/innovator i.e. √√ √√ √√ √√ Foundation AFEX and accelerator (Investor/HN fund. Likely influencer of WI/Philanthr other High Net Worth opist) Individuals (HNWIs) in Nigeria – good partner to work with especially for influence/market positioning, source of capital. DFID Impact Appetite for the country Facility and sector, if an efficient √√ √√ √ ?/√ (CDC) legal structure/mechanism (Investor) can be pioneered, minimum ticket sizes of~US$5million plus should enable a complimentary partnership/co-investment model. Sahel Recently due diligence by Capital CDC/DFID Impact Fund – (Fund positions Fund for Agri- ?/√ √ √√ √ Investor) 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
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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 Established Operating Demand/Supply Investor Commercial Infrastructure Track- Established awareness Leadership Record L/M/H Lambda √ √ √ √ med GT tannery √ √ √ √ med Garko Agric. √ √ ? ? low-med Services Ltd Doreo √/? √ ? √ med-high Partners 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
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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)
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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.
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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.
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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.
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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
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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
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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/
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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/
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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 $44 in January 2015 has put major pressure on the Naira and resulted in all but a collapse of
24 In the words of the CEO D. Abubakar himself
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the Naira as a consequence. A major consideration to any investor seeking competitive returns. Since March, 2015 the Naira depreciated by 19% to N195 to USD1.0 as of September, 2015, and the efforts by the CBN to shore up the currency have not made a difference. The CBN adopted several measures, including prohibition of demand and offer of US$ 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
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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
Private Investors’ Perspective Palladium’s Mitigate Enhance Increase Nigeria Test Case Proposition Financial Financial Social Risk Return Impact Illustrating alignment by investing own discrete Own discrete capital ‘skin- capital – first amongst in-the game’ committed-in- International principle Development consultants to do this Leveraging Palladium’s established sector Palladium expertise experience to evaluate across agriculture sector, and advise on current and related sub-sectors challenges Sourcing of investment opportunities from
Palladium’s current Starting with DFID projects project portfolio in Northern Nigeria that (reducing costs and have been running for 3- 5 shortening time to years assessment and ultimately investment)
31 Please see FMARD website for details on Staple Cross Processing Zones policies http://www.fmard.gov.ng/Stape-Crops-Processing-Zones
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Utilising existing ‘boots on the ground’ and expertise of local teams Focus on northern Nigeria to navigate local where Palladium’s teams conditions by learning live/work in from project leaders who Kano/Kaduna/Abuja/Lagos live locally and are etc. supported by Nigerian teams Building off of key Wide access from project established local sites to connecting with relationships (private key decision- and public) makers/influencers
Efficient site visits made Utilising established on- possible through local the- ground office, communications, infrastructure logistics, security etc.
Benefiting already by Leveraging existing low leveraging sunk costs of cost Palladium operating having established local model teams/operations Establishing future Utilising knowledge of investment vehicles by local legal and regulatory leveraging requirements built while learning/experience from establishing local Nigerian locally incorporated companies for existing project companies projects
Leveraging in- house Social impact data already M&E experts to develop gathered and theory-of- impact metrics/ change already taxonomies, and established for funded building sector-leading interventions intellectual property
Increased visibility and enhanced knowledge of Access to project pipeline, able to reports/teams/data communicate and share [continually being feedback from the improved on] ground Capability to manage Currency banking facilities and hedge local in place, i.e. pools of Naira currency risks – available to facilitate leveraging current liquidity/currency project operations and translation risks facilities
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
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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.
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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
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Appendix 1 – Definitions and Acronyms
AFEX African Exchange Holdings Ltd. ATA 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
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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 KfW refers to Kreditanstalt für Wiederaufbau. It is a German government- owned development bank. LBS 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 Public Private Partnership Propcom Propcom Mai-karfi (Promoting Pro-Poor Opportunities Through Commodity and Service) ROPO Raise Out of Poverty Bond SANL 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
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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
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Appendix 2 – Palladium’s Structure
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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
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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 $5.6 billion Investment 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 29.75 billion Exchange Reserves 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
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Source: Business Monitor Nigeria Business Forecast Report Q1 2015
Nigerian Banks Maximum Loan Tenors for MSME and Agro Loans 70
60
50
40
30
20
10
0
Maximum Loan Tenor (months)
Source: Central Bank of Nigeria, FMARD, Stanbic, Access Bank
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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
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34. Diamond Bank 35. Meeting with Lagos state officials 36. Babban Gona/Doreo Partners 37. Union Bank
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