Investing for the Long Term: Creating Real Value
Last week an interesting article showed up at the NYT about microfinance and predatory lending. While we tend to focus more on mechanisms that lend to the missing middle of agriculture finance it’s certainly a scary reminder what’s at stake and how easily things can go wrong.
Then again, with current financial crisis underpinned by predatory lending, did we really need another example?
When did investing become about making money exclusively in the credit-extension transaction and not about creating and driving value through meaningful enterprise development? How can we facilitate pro-poor growth by equipping in-country entrepreneurs to build great, necessary businesses? Certainly, these businesses don’t need dictation, but business development and mentorship should be inextricably tied to funding.
We know that the developing world is offering unprecedented avenues for growth and innovation, but focusing that energy into enterprises with social meaning and sustainable growth is perhaps a greater challenge. How are some leading firms and companies focusing on agri-enterprise packaging business development and a long-term finance perspective? Will these strategies eventually reduce poverty and leverage environmental managment?
The field is moving fast, suppliers, retail giants, and investment firms alike are looking to agriculture as a way to invest in a food and beverage market that is growing quick. By 2030, an extra 3 billion people will move into the middle class, consuming the staggering amounts of food and fiber (especially meat) that most of the developed world is accustomed to.
Suppliers are reacting by developing and investing in their supply chains. See a recent NYT article about Walmart’s move into Africa, and the pledge to spend over 1 billion on small farmer sourcing from emerging markets. (Check out a new World Bank report on African Agriculture and Value Chain Development).
On the investor side, getting many of these small scale agribusinesses moving has solid economic and development potential. Triple bottom line investors like the Acumen Fund, Grassroots Business Fund, Root Capital, and others are extending the capital needed by small scale enterprises to reach the quality and quantity demands of a growing retail sector. Check out a recent Stanford review of Acumen and their long-term strategy approach. The big guys are moving in as well, though perhaps not as publicly.
While the supplier and retail driven development is more difficult to gauge economic and environmental impacts, it’s certainly becoming somewhat easier to peak into these value chains. Food safety regulations and complicated certification schemes are creating great accountability, but also increasing transaction costs and reducing the competitive edge that many small farmers once obtained.
How well these entities support pro-poor growth and good environmental management strategies is less clear, but certainly excellent specific examples exist. They’ll certainly never be a one-size-fits all approach to agribusiness development, but long-term approach to enterprise development will remain critical. Investment packaged with business development means coming along side an investee, a process which takes time, energy and money. If we believe that a long term lending approach allows undervalued businesses grow in value over time, then we must avoid, at all costs, the pitfalls of lending and abandoning.