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Promoting private investment in SME agribusinesses: Palladium and CSIRO host workshop at DFAT

Earlier this month, members from Palladium’s Asia Pacific Economic Growth Practice and the Commonwealth Scientific and Industrial Research Organisation (CSIRO), facilitated a workshop at the Department of Foreign Affairs and Trade (DFAT) to discuss how to spur more private sector investment into innovative SME agribusinesses in the Southeast Asian region. Workshop dialogue built upon key research undertaken by Palladium into impact investing in inclusive agribusiness and the scope of an Innovation Facility.

Our research: impact investing in inclusive agribusiness
In June 2015, Palladium conducted a review of the market for impact investing in inclusive agribusiness in Myanmar, Vietnam, Philippines and Indonesia. This work complimented CSIRO’s earlier research exploring where innovation is happening across Southeast Asia. SME agribusinesses were identified as the key driving force of innovation in the agricultural sector however they are often unable to bring their business models to scale. Wanting to understand why this is the case, Palladium interviewed key market actors, including impact investors, high net worth individuals (HNWI), large corporations and intermediaries to understand their constraints to investing in innovative SME agribusinesses.

At the end of 2015, Palladium presented their findings to Grow Asia, a subsidiary organisation of the World Economic Forum. Grow Asia subsequently asked Palladium to explore how a potential Innovation Facility could address the variety of constraints that inhibit SME agribusinesses growth in the region.

Our findings: setting the stage for an Innovation Facility
Agriculture comprises nearly 20% of GDP across the region, and with more than half of Southeast Asia’s population dependent on farming for their incomes, the scale up of innovative agribusiness is crucial to stimulate growth and achieve pro-poor outcomes. However, despite the sector’s relative importance to further development of the region, very little supporting investment for innovative SME agribusinesses is occurring.

SME agribusinesses are seen as riskier investments as many are still early stage companies who have conducted some initial testing of their business model but have yet to prove their commercial viability. Additionally, due to inaccurate records, SMEs often overstate their performance and understate any risk. Even if they are investment ready, their rate of returns generally hover at 3-4% whereas investors seek 12-25% IRR

These constraints create an ‘investment gap’ between innovative SMEs and investors. This gap refers to the lack of investment capital available for SME agribusinesses who are looking for early stage funding between $250,000- $3 million. Without this funding, these agribusinesses stagnate as they are unable to invest in their capability or reach broader markets. Investors instead look for proven business who produce larger returns and are ultimately easier, and safer, investments.

From left: Alwyn Chilver (Palladium), Andrew Hall (CSIRO) and Virginia Schippers (Palladium)

Workshop takeaways
The workshop dialogue focused heavily on Palladium’s presentation of an Innovation Facility and how it could help close this investment gap by addressing the underlying constraints to growth faced by both impact investors and SME agribusinesses. Properly resourced, the Facility would be an intelligent mechanism that could deploy funds and technical assistance to help develop and strengthen market actors’ ability to address larger systemic failures. This could include building the capacity of local business incubators to help SME agribusinesses become ‘investment ready,’ helping to decrease due-diligence and transaction costs for investors, brokering deals between market actors, and working to improve the business enabling environments to encourage more private investors to enter the market.

DFAT asked poignant questions about the reach of the Facility and how it could leverage and support the work that similar platforms are already doing. They also expressed the importance for the Facility to have a strong country-level presence, acknowledging the unique constraints of individual countries in the region and the need for national-level knowledge. Overall, Palladium received positive feedback and praise for their collaborative work.

To learn more about the work of our Asia Pacific Economic Growth Practice, please contact Alwyn Chilver at Alwyn.Chilver@thepalladiumgroup.com.