Arvind GopalJournal #1
Arriving in Nairobi on July 19th, 2009, I have been working for the Acumen Fund for three weeks. The Acumen Fund is a social investing fund that provides capital and expertise to businesses to focus on the serving the Bottom of the Pyramid (earn less than $4 per day) using market-based principals. The idea is to invest in businesses that are sustainable, scalable and will have a large social impact on the local community. I joined the East Africa agriculture portfolio team based in Nairobi, Kenya.
Agriculture employs about 75% of the country’s formal and informal workforce, and is the major source of income for the majority of Kenyan’s as well for others in neighboring East African countries. However, faced with shrinking properties, limited technologies and quality inputs, and insufficient access to local and international markets, small holder farmers get trapped in a cycle of producing poor quality products that generate little income. Providing effective tools, processes and supply chain systems will be critical in preventing this cycle. Acumen Fund launched the Agriculture Portfolio in 2008 to find and invest in organizations that use innovative approaches to reduce input and production costs, increase yields, provide credit, and improve supply chain inefficiencies.
Since arriving, most of my time has been focused on two investment opportunities. The first potential investment would be in a cattle genetics company that hopes to start the first private artificial insemination (AI) center in Kenya. The goal is to provide high quality, low cost bull semen that can be used to breed high milk producing cattle. With increased milk production, the country’s one million dairy farmers could generate 2 to 3 times their current incomes. After getting up to speed on the AI industry, I joined a team member in an onsite visit of a farm that expects to produce AI. As part of the due-diligence efforts, we have also spoken with government officials, industry professionals, local scientists, sector research analysts, and small dairy farmers. Based on this research, we presented our investment thesis to an internal committee in New York via conference call and asked for approval to continue our due-diligence. We received approval last week and are now waiting for a detailed business plan, and are scheduling more management and industry meetings. The goal will be to complete our due-diligence of the industry and the firm’s operating model and develop a detailed financial model and investment committee memorandum by the end of September (bummer that I won’t be here for the completion of the deal).
The second investment opportunity I am working on an asset finance firm focused on the agriculture sector. Despite the explosion of Microfinance institutions (MFI) in the region, the majority of farmers (almost 70%) cannot access credit and therefore cannot scale their operations. The main reason for this is the high cost of doing business in rural areas which eats into thin MFI margins. Additionally, many local rural cooperatives have failed due to mismanagement and corruption.
This particular MFI provides loans for the financing of specific income generating assets (e.g., a purchase of a cow which will produce milk in one year to repay the loan). This investment is in the early stages and my first task is to help Acumen understand the agriculture financing market in East Africa. I have been and will continue to speak with industry participants, farmers, and government officials and plan on presenting my finding within the next two weeks. Additionally, I met with the firm’s management team to review their lending model, portfolio management processes and loan recovery policies.
On personal note, I have already had the opportunity to travel to a few nearby villages; Eldoret, a town in the middle of Kenya’s Rift Valley; and Diani Beach, a beautiful coastal village about one hour by flight from Nairobi. I have found the history, culture, food and music of the area to be extremely fascinating and very different from my prior experiences in the U.S., Europe and Asia. I have been completely blown away with the generosity and entrepreneurial spirit of the people here and have been inspired by many of their stories.
Journal #2
Week 7 (second to last week!): I am beginning to wrap up my work and look forward to presenting some of my findings next week on both the agriculture finance and the fertilizer industries. Additionally, during the past few weeks, I worked on developing an investment thesis for a domestic A.I. company dedicated to producing low cost, high quality bull semen for small diary farmers. Unfortunately, Acumen decided to pass on the opportunity due to business irregularities we discovered while reviewing the firm’s operations. However, I have kept busy by looking at several new opportunities and conducting research on the agriculture supply chain in the hope of finding potential investment targets.
During my short time in Kenya, I have meet with a variety of entrepreneurs including a couple who started a small banana tissue (TC) culture firm that sells high productivity, disease resistant banana plants that are grown in sterile lab environments. The plants are sold for about KSH 80 (~$1.10), but produce nearly twice the number of bananas as local varieties, helping small holder farmers generate additional income. While the small business is not ready for an Acumen investment, I submitted a memorandum on the firm to TechnoServe, a volunteer-based consulting organization. Based on the report, TechnoServe is to help the organization develop internal reporting, management and budgeting systems.
As noted before, one of my deliverables for the summer is to understand and identify sustainable business models that could help the country’s ~6 million small holder farmers and their families (~30m people), most of whom live in extreme or near extreme poverty. One of the largest bottlenecks in the agriculture supply chain is access to credit. A survey conducted in 2007 by the Tegemeo Research Institute of Agriculture Policy and Development (www.tegemeo.org) revealed that only 30% of the country’s small holder farmers have access to any kind of credit. After several visits to farmers across the country, I began to understand this reality. Formal financial institutions (including microfinance institutions) were between 30 km and 50 km away from the farms and in many cases would not lend to the farmers I interviewed. As a result, the majority of the farmers that received credit did so through either input providers (fertilizer, seed companies or agro-dealers) or informal groups. The credit available through these channels is usually small and short-term and limits farmers’ investments in the essential ingredients needed to increase their productivity. Based on this information, I decided to take a deeper look on why microfinance institutions have had such a limited impact in the agricultural sector. I found some interesting data points.
In Kenya, the microfinance model has been very successful in urban areas – enough so that commercial banks are now reentering the high-end of the microfinance market realizing the income generating potential and stability of this group. However, only 0.8% of small holder farmers have access to credit through microfinance institutions. Surprisingly, more farmers access credit through commercial banks (about 1%) than microfinance institutions. The dominate microfinance models of today depend on small, short-term, and high interest rates loans to assure high repayments and cover operating costs. Some key success factors for this model include higher population densities and portfolio diversification. In contrast, much of today’s poor lives in rural areas and relies mostly on agriculture to generate income. These borrowers typically need larger loans with longer durations that coincide with crop cycles. Additionally, the returns generated by farmers are lower than that of micro-enterprises and high interest rates of 2% to 4% per month erode farmers’ incomes causing them to become trapped in poverty. These loans are inherently riskier to microfinance institutions because they are longer in duration, sensitive to weather conditions and international food prices, and limit loan diversification. Considerable agriculture expertise is needed to due-diligence loan applicants, monitor existing loans and train farmers on best practices including negotiating input prices and finding markets for their products. Almost all the farmers, research analysts and MFI consultants I spoke with agreed that a better system has to be developed in order to reach the majority of small farmers. While I learned a lot about the sector, I’m not sure if I will be able to find a high impact model that will work for Acumen.
On a personal note, I had the opportunity to travel to Massai Mara this past weekend to see the world’s best game drive. It was one of the best experiences of my life. I was able to see lions, cheetahs, leopards, wildebeests, elephants, giraffes, buffalo, zebra, baboons, impalas, gazelles, and a variety of other wildlife. I can never again go to a zoo after witnessing all of these animals in the wild.
Journal #3
Week 8: Finally finished – wish I could stay a little longer!
During the last week, I completed my analyses on the fertilizer and agriculture finance sectors and met with professionals and entrepreneurs in both sectors to pursue a few potential investment opportunities. I finished my last meeting on Friday morning with an organization that provides funding and consulting services to Savings and Credit Co-operatives (SACCOs). SACCOs are one of largest formal savings and credit providers for small holder farmers. However, years of mismanagement and poor governance practices have caused many SACCOs to go out of business or lose the support of its members. To stop this trend, the Kenyan government passed new legislation last year requiring SACCOs to meet certain reporting, governance, and accounting practices in the next two years. This particular SACCO umbrella institution is in need of additional funding to help its clients.
With the last week in Kenya being particularly stressful, the reality of my departure from Africa hit only as I touched down in New York. My heart sank – while I was glad to be arriving back at school, I realized that an amazing and adventurous chapter in my life had just ended for the time being. However, as I began to reflect on the summer, I realized that whether I go back to Africa or the Acumen Fund, the knowledge, memories, and experiences accumulated over the past 8 weeks will always be with me. Prior to arriving in Kenya, I had little experience with Africa and always wondered why it lagged the rest of the world in many social and economic benchmarks. After spending a few weeks here, I now understand, from first-hand experience, the magnitude of the environmental and political issues that affect this region’s growth and prosperity. I also now know that tremendous entrepreneurial spirits exists among the people in Kenya and East Africa – if we can unlock that spirit to reach its full potential, the continent can rid itself of many of its problems.
