Critical capital for African agri-food SMEs

African inclusive business to benefit from “graduation strategy” and subsidized early stage funding
Finance for Inclusive Business
Agriculture or Food
Sub-Saharan Africa
25. May 2018

Critical capital for African agrifood SMEs

• 56 pages • Rabobank Foundation, AgriProFocus, ICCO Cooperation

The objective of this study is to document the current situation in risk capital for agrifood businesses in Sub-Saharan Africa as evidence for related policy recommendations to governments, investment funds, technical service suppliers, philanthropists and other stakeholders. The paper summarises funds providing risk capital to agrifood SMEs in Africa, analyses the demand for risk capital and the extent to which demand and supply are matched. Finally, it identifies alternative means of financing for agrifood SMEs and concludes with policy recommendations.


To address the mismatch between the risk capital offered by PE/VC and the need of the sector the report recommends:

  1. Provision of “free money” in the form of early-stage subsidies, intermediate mezzanine financing before equity capital, and developing a more elaborate toolbox of investment instruments.
  2. A graduation strategy to better assist SMEs in various stages of growth will also benefit the sector as a whole.
  3. Restructuring existing investment funds and facilitating regular dialogue with all stakeholders is required to better implement agri-SME financing. Private sector players should participate actively as spaces for participation gradually open up.

The flow of risk capital in Africa, specifically in the form of private equity (PE) and venture capital (VC), has been on the rise in the past two decades in both number and size – from a mere dozen in the 1990’s, amounting to USD 1 billion, to currently more than 200 funds managing a combined USD 30 billion.

Despite this increase in funding, the agriculture sector and, more so, small and medium enterprises (SMEs) in the agri-food industry get only a small share of risk capital investments because of the higher uncertainty of returns in the sector, and because capital providers prefer larger deals that are beyond what a typical agri-food SME can manage.

The findings of this ICCO study indicate a strong need for risk capital for agri-food SMEs in Africa. The case studies show that agri-food SMEs need assistance in business strategy development, governance and management, as well as operations and marketing. Existing PE/VC providers are helping improve SME governance and management by providing business development consultants to their investees, and in some cases, holding seats in the Board or serving as formal advisor. A number of factors, however, limit the reach and effectiveness of PE/VC providers in the region:

  • There is a mismatch between the available risk capital investment funds in the region and the needs and capacities of agri-food SMEs to access such funds.
  • Investments are saddled by high management and deal generation costs in the startup or takeoff stage, foreign exchange losses due to currency fluctuations, extensive governance requirements, which can cripple agri-SMEs.
  • Unfavorable political and economic environment in certain parts of Africa.

Closing these gaps would require the adoption of alternative agri-financing strategies such as embedding PE/VC funds in the local market, providing mezzanine funding, and blended finance.

Blended finance, in particular, is an emerging approach to agri-financing in the region. Existing strategies include lending to commercial banks and microfinance institutions, who then provided the necessary investment and/or working capital to smallholder farmers. It was observed, however, that nearly all of the PE/VC funds surveyed operated independently of existing development programs; in the few instances where capital providers were collaborating with other organizations, they commonly do so with incubators, rural development programs, commercial banks or insurance companies.