“There are entire agricultural provinces in Spain facing complete desertification by 2030. We have to think about what else we could grow on them.”
President of Atlanterra Agriculture Durable, Jean-Louis Mercier, speaks to Euromoney on his way from the Breton city of Rennes down to the southwest region of France. The sustainable agriculture consultant group is headquartered in Paris but advises companies who acquire land across France, Spain and Portugal to grow new crops in regenerative way that will survive in a dryer climate.
Atlanterra’s clients are diverse in size, from small-scale farms to large agri-food, cosmetology and pharmaceutical corporates. But they are all facing the same pressure to meet consumer demand for cheap and environmentally harmless produce, while adapting to the consequences of climate change for agricultural production.
Already burdened with rising input costs, farmers are facing a cashflow squeeze and rely on their relationship banks to access short-term capital financing. The willingness to become more sustainable is there, but with most climate-smart technologies still in the early stages of development, long-term transition looks expensive.
Risk and disruption
Tech-driven solutions have attracted private equity investors with an appetite for risky and disruptive ventures into the agricultural landscape since the pandemic. According to Pitchbook data, venture capital investments in agritech rose by 58% year on year in 2021, to $10.5 billion, while deal values were up 15.5% quarter on quarter in the first quarter of this year.
Sustainable and regenerative investments can generate double-digit returns for their increasingly climate-conscious client base.
Atlanterra advises corporates with the capacity to acquire existing agricultural land and invest the necessary capital to ‘extensify’ production.
“We identify the produce that are in higher demand from consumers in Europe,” Mercier explains, "and select the ones with a greater supply risk that we could grow locally, while preserving the ecosystem by increasing the local biodiversity of the land."
Funding sub-Saharan Africa’s agritech ecosystem
The financial consequences of climate change in the agricultural sector are likely to be particularly severe for small players in emerging markets.
In sub-Saharan Africa, agriculture funding needs are driven by a desire to both protect yields from climate change and increase them to meet higher demand. The African continent holds 60% of global arable land, but the sector is dominated by small-scale farms that are vulnerable to external shocks.
The region has nevertheless seen an increase in foreign capital flows. According to Disrupt Africa’s annual tech startup funding report, African tech startups raised more than $1 billion in the first two months of 2022, more than 50% of the amount raised in the entirety of 2021.
Last year, African agritech accounted for 4.4% of total funding for African tech startups. Nairobi-based startup Apollo Agriculture uses satellite data and machine learning to advise small-scale farmers on credit decisions. The startup secured $40 million in Series-B funding in March 2022.
Foreign capital
For Leapfrog Investments’ head of African financial services investment team Karima Ola, the climate adaptation agenda is attracting foreign capital into the region. Equity investors with a larger appetite for risk are filling the financing gap left by local banks, driven by the desire to allocate more capital to sustainable ventures.
“Since investors have begun setting net-zero targets, equity impact funds in emerging markets are more popular because they enable them to allocate some of the committed capital to low-emitting vehicles,” Ola says.
As an impact fund, Leapfrog also invests in local banks to establish sustainability principles through loan underwriting and lowering the cost of capital for climate-smart technologies. Specifically, the fund is interested in companies using agronomic methods to increase yields while reducing the use of energy and water, helping farms become more resilient to draught.
Many of these climate-smart technologies are developed in the West, which explains why private equity flows in agritech are predominantly European.
“The key is how you then scale up and deploy it across the continent,” says Ola. She adds that Western investors need to become better educated on the specific adaptation needs of the region to ensure the right technology is developed.
In other words, the climate mitigation agenda of the West, which favours agricultural efficiency among other strategies, could help fund climate adaptation needs in the global south. It is an ambitious goal, however, and one that will require the banking sector to step up with accessible financing.
Soil degradation and crop replacement is a reality that governments must confront: the agricultural commodity mix of European markets will have to change, as entire regions that were once ripe for water-intensive crops such as wheat and corn are now more suitable for nuts and olive trees.
There are macroeconomic incentives too. The Covid pandemic and the war in Ukraine have threatened global food supply chains with disruptions both upstream with increased fertiliser prices, and downstream as transportation costs rise.
According to a recent Reuters whitepaper on food inflation, these disruptions are already impacting emerging markets who rely on European food commodity exports.
“Disruptions [...] have already affected several importing countries, especially in the Middle East and North Africa, including Egypt and Lebanon,” it states.
Whether political or environmental, supply-chain disruptions accentuate the need to invest in adaptation strategies in the agriculture and aquaculture sectors to ensure global food security.
Adaptation strategies to more frequent and destructive climate shocks have been a focal point running up to COP27. This year’s COP is prioritizing emerging-market interests, including capital needs to cover loss and damage (L&D) and to fund investments in protective solutions that respond to climate reality.
Global private equity assets under management grew to $6.3 trillion in 2021, according to McKinsey’s global private markets review.
Companies developing climate-smart technologies for agriculture are ideal targets for both private equity and venture capital – disruptive but not yet profitable, and often still looking to secure early-stage equity funding.
Their high velocity and shallow capital base may be too risky for banks, but it can be very attractive to these types of funds.
There have been a number of fund launches this year targeting this sector. Dubai-based PE firm Investbridge Capital launched a specialised agri tech VC fund in February, while Czech-based food and life-science PE firm McWin came to market with a €250 million food-tech fund in June.
In Australia, Cultiv8 fund management and investment manager Fidante have partnered to launch the country’s first agri tech fund with A$100 million ($64.7 million) of committed capital.
These firms are betting on the need for AI and automation technologies to solve global food security issues, and to generate attractive returns.
“There is a funding gap upstream,” says Johnny El Hachem, chief executive of Edmond de Rothschild Private Equity. "A lot of capital is flowing downwards to tackle issues with packaging, branding and marketing, but it is the innovations coming from universities and incubators that need financing."
The scalability can be achieved by bringing these innovations to major players in the agri-food industry who are forced to evolve
Edmund de Rothschild partnered with VC firm Peakbridge to launch a €250 million agritech and food innovation fund in December 2021. The fund targets companies focusing on ingredient innovation, digitization, alternative proteins, farming technology, and nutrition and health in Europe, the USA and Israel.
Companies in the portfolio include Israeli synthetic vanilla production Vanilla Vida, which uses metabolic solutions to enhance the aroma, and animal-free dairy company Imagindairy, which uses AI tech and cellular agriculture techniques for its production. In both cases, the aim is to produce more with less.
For El Hachem, these companies make strategic sense because the urgent need for innovation plays in their favour.
“The scalability can be achieved by bringing these innovations to major players in the agri-food industry who are forced to evolve,” he says.
PE investors can then come in at the earliest stage of development of these startups before exiting via secondary sale to strategic investors rather than the stock market.
“The risk/return profile of these companies is interesting, and we partner with people with the right skills who know the sector and understand the risk,” adds El Hashem.
Larger tickets
Scaling up sustainable agriculture solutions to feed the projected 10 billion people in 2050 requires looking beyond the startup ecosystem.
Institutional investors with an appetite for larger ticket sizes are taking a more pragmatic approach to the sector and target what i’s already there.
We see a lot of investment attention going towards breakthrough technologies: things that don’t exist yet and could disrupt the system at some point, when the emergency is to transition the existing system now
“We see a lot of investment attention going towards breakthrough technologies: things that don’t exist yet and could disrupt the system at some point, when the emergency is to transition the existing system now,” says Pierre Abadie, climate director at Tikehau Capital.
For him, the IPCC report is clear enough: climate adaptation requires us to relieve the pressure that our economy has on the biosphere, starting immediately.
In the agriculture sector, the key strategy is to transition operations that already exist through regenerative practices, including minimising soil disturbance by reducing tillage, keeping the soil covered to maintain nutriments, maximising crop diversity and integrating livestock to arable land.
There are social implications too, as regenerative agriculture advocates seek to improve working conditions for farmers, alleviate some of the administrative burden, and invest in the right training programs to facilitate staffing.
Tikehau launched a €1 billion regenerative agriculture fund last May, alongside Axa Climate and Unilever. Having a corporate partner helps to de-risk the strategy by securing long-term demand.
A handful of large food corporations, such as Unilever, PepsiCo and Nestlé, have pledged to decarbonize their value chain to reduce Scope 3 emissions. For them, regenerative agriculture strategies could be a big part of the solution to reduce methane emissions and stock carbon.
Tikehau has analysed a sample of 10 large corporates that have made climate commitments.
“To meet those pledges,” says Abadie, "22 million hectares in their agriculture supply chain will have to shift into regenerative practices by 2030, it is equivalent to 80% of French arable land."
Their market share means that these big companies can drive upstream operational changes. If Unilever says it wants to cut palm oil from all its production, the incentive to come up with an alternative is high.
“Thanks to our partnerships,” says Abadie, "niche alternative strategies that could have been categorised as VC investments can be scaled up through our fund and de-risked because we can be backed up by major corporates that would be willing to sign long-term contracts and we could also insure those projects against climate risks."
Regenerative agriculture practices can also attract larger capital flows by tapping into the financial sector’s burgeoning interest in biodiversity and water scarcity. As the global conversation around environmental, social and governance becomes more granular, investors are keen to move beyond carbon emissions reduction targets and allocate capital towards more ambitious projects.
It is challenging for banks to provide debt when companies are at such an early stage of development and still at Series A or B
PE funds are driving much-needed capital into the young agritech industry.
“It is challenging for banks to provide debt when companies are at such an early stage of development and still at Series A or B,” says Abyd Karmali, Bank of America’s managing director for ESG and sustainable finance.
Global macroeconomic and regulatory pressures have made it particularly difficult for banks to increase financing the agricultural sector. The energy crisis is driving cost of fossil-fuel fertilisers and synthetic pesticides upwards, while disclosure regulations such as those from the Taskforce on Nature-related Financial Disclosures (TNFD) are forcing companies to investigate the impact of their business on natural capital.
In some jurisdictions, banks have been slowly retrenching from the agricultural sector for some time.
“Since the financial crisis, short term debt to primary producers has reduced by 30%,” says Tim Coates, co-founder and chief customer officer of UK agricultural bank Oxbury.
Oxbury offers credit and lending solutions to farmers in England. The commercial bank provides short-term capital funding to farmers, with the intention of alleviating some of the pressure of rising input costs.
Farmers can access advantageous credit solutions where repayments are adapted to seasonal revenue income.
Oxbury wants to create incentives for farmers to invest in their sustainable transition, with better rates available for those trying to reduce emissions and protect natural capital.
“There is a demand for long-term investments, driven by policy changes that are pushing the agricultural sector to become regenerative rather than extractive” says Coates.
Farmers are engaging in the conversation around efficiency. They want to cut costs and produce more
Oxbury has raised a total of £68 million in capital, following a £20 million equity funding round this summer from new and existing investors Frontier Agriculture, Grosvenor Food & Agtech, Hambro Perks and Hutchinsons.
In the UK and Europe, the agricultural sector has become increasingly consolidated, with fewer, larger production units. For a long time that trend was seen as more economically efficient, but it has also made environmental externalities more acute.
The transition towards more regenerative farming means that small farms are increasingly demanding innovative solutions such as plant biotech, vertical farming, farm automation and the application of nanotechnologies for crop protection. But such investments only make sense from a transition perspective if the farmers themselves find it advantageous to make the switch.
“Farmers are engaging in the conversation around efficiency, whether it’s the energy use of their buildings, or the amount of fertiliser,” says Coates. "They want to cut costs and produce more."
This is where lenders can step in. Barclays has a £250 million agriculture sustainability fund dedicated to helping farmers transition towards an environmentally sustainable and energy-efficient business model. The bank also offers an asset financing service and rural project loans.
Other investment banks have opted to launch their own PE vehicles for the sector. Rabobank launched a food and agriculture innovation fund in 2017, a seed-to-Series B vehicle with 13 portfolio companies under its belt.
Small strategies
As investors, banks have the capital to effectively partner with experienced impact managers. BofA is an investor in the InsuResilience investment fund, a public-private partnership vehicle that provides micro-insurance products for small agricultural communities in emerging markets.
The first fund, which was launched in 2017 by German development bank KfW and managed by Swiss impact manager BlueOrchard, had both PE and private debt investments. Launched in 2022, the second fund has a strong focus on technology to drive affordability of and accessibility to climate insurance.
“With this strategy, we’re addressing the needs of smallholders through blended finance, as an investor in a debt fund rather than a direct lender,” says Karmali at BofA.
He adds that the role of microfinance intermediaries with the right experience is essential for these types of strategies. For him, adaptation in the agriculture sector can also be achieved through developing new lending techniques.
“The innovation here is how we’re packaging microinsurance products through microfinance intermediaries and making them available at the local level,” he says.
The US bank anticipates that growing demand for climate tech solutions from incumbents in the sector will drive interest on the M&A side as well.
Transforming agriculture is a big job.
On the ground, farmers will respond to the environmental and biodiversity agendas if the right financial incentives and support tools are put in place. This involves investors being strategic.
PE funds have largely been securing capital investments and momentum in the sector, but as regenerative and innovative methods of farming grow to scale, banks must step in and enable those companies access to competitive forms of working capital too, as early-stage and seed investors look for their exit.
A niche within a niche: Funding adaptation technologies in aquaculture
As the global blue economy agenda matures, more businesses are looking at the development of sustainable aquaculture or aquafarming, the practice of cultivating and harvesting fish, shellfish, algae, and other aquatic organisms for the global food supply chain.
Ocean-based climate action came to the fore at COP26 last year, with several island states voicing their concerns and commitments to protecting the blue economy, and this theme is again a core focus at COP27 in Sharm El Sheikh, following the UN Ocean Conference that took place in Lisbon in June.
“Portugal has always been a great maritime economy, both in terms of catching and exporting ocean resources, and consuming it,” says Chris Gorell Barns, founding partner of Ocean 14 Capital.
Based in London and Lisbon, Ocean 14 is a private equity investment fund tapping into the $3 trillion global blue economy through early stage and growth equity capital investments in regenerative aquaculture.
“The most important adaptation strategy in our arsenal is to ensure that we have a healthy, thriving marine ecosystem,” says Barns, pointing to the necessity of protecting the world’s largest carbon capture resource.
The decline of ocean fish stocks has precipitated growth in global aquaculture production, which reached a record 122.6 million tonnes in 2020, including 87.5 million tonnes of aquatic animals worth $264.8 billion and 35.1 million tonnes of algae worth $16.5 billion, according to the Food and Agriculture Organization of the United Nations (FAO).
But aquaculture companies are struggling to raise equity.
“Capital flows are still weak because the big institutional investors won’t look at first-time funds, and there are little to no second-time managers in the blue economy space,” says Barns.
The €150 million Ocean Capital Fund includes four transactions covering sustainable tilapia fish farming in Brazil, tech-driven genetics research in shrimp farming, clam farming in the Netherlands and Italy, and plastics inventory venture in Norway.
The fund is one of a handful of pure blue thematic funds available. Other examples include the Portuguese Indico Capital Partners €50 million Blue climate tech fund launched in January 2022, and the UK’s £500 million Blue Planet fund launched last year.
Elsewhere in Europe, French private equity firm Swen Capital Partners launched its Blue Ocean Fund in September 2021 and reached €150 million in October this year, with a close planned for December 2022. The fund’s key investments include biomass measurement solutions startup OptoScale, and biodiversity monitoring data provider Nature Metrics.
The hope is that more opportunities will come to market as regulatory pressures push investors to allocate more capital into impact vehicles.
From a sustainability perspective, aquafarming is subject to some contention around its true environmental impact. The environmental cost of aquaculture can vary according to the species being farmed, the intensity of production and its location. If done well, aquaculture could be the most environmentally friendly way of creating protein, given growing consumer demand for seafood across global markets.
“It is a sector that we’re tracking, given its fast growth, but we are also aware of the debates around sustainability, it really has to be done well,” says Abyd Karmali, managing director for ESG and sustainable finance at Bank of America.
