Supporting Smallholder Farmers against Big Agriculture

On the website of Steenburg’s, an online British grocer that specializes in supplying customers with organic herbs and spices, a 25-gram jar of Birds Eye chili from Uganda currently costs £2.60. The page notes that the small, fiery, red chili “should be used with caution, packing a punch at around 100,000 Scoville Heat Units.”

The presence of this Ugandan chili, or other Ugandan products such as groundnuts and okra, on the shelves of British markets, is a reflection of the power that exports to Europe offer Uganda’s agricultural sector. But it also raises a question: How can smallholder farmers benefit from these new opportunities? 

Food and Agriculture Organization figures from 2012 estimated that Uganda had over 3.6 million small farms averaging less than 2.5 acres in size. Agriculture is also the backbone of Uganda’s economy, employing 70 percent of the population, and contributing half of Uganda’s export earnings as well as a quarter of the country’s gross domestic product. 

Since most Ugandans live in rural areas, raising agriculture incomes is critical to reducing poverty, boosting prosperity and creating jobs, especially for women and youth.

This has led to some level of investment being aimed at smallholder-based agriculture—farming on a plot around two acres in size or less—rather than the safer investment bet of industrial agriculture. But much of this investment still does not take account of how exposed to risk the small holder farmers are in dealing with the logistics and processing businesses that are generally the target for investment. 

In the face of this problem, how can we shift the balance of power in the agriculture sector in sub-Saharan Africa? How can we enable smallholder farmers to capture more of the gains? Is impact possible beyond economic gains? 

In search of an answer, our Soros Economic Development Fund is partnering with Pearl Capital Partners, a Ugandan, Kampala-based fund manager, alongside co-investors that also have chosen to put smallholders at the center of a €20 million debt and equity fund that invests in small and growing agribusinesses in Uganda. 

Our co-investors in Pearl’s Yield Uganda Fund are the International Fund for Agricultural Development (an agency of the United Nations), the Ugandan National Social Security Fund, and FCA Investments. 

In many ways, the portfolio is similar to other agriculture-focused impact funds; in other ways, it is not. First, on the similarities: it’s targeting fairly small investments, or an average of around €1 million per investment. It’s managed by a team that has invested in agriculture for many years, and that has the wounds, as well as financial and impact successes, to show for it. It’s targeting financial returns and social impact.

What’s different, then? A few things. 

The Yield Uganda Fund is only investing in agribusinesses, only in Uganda.

This fund is going against traditional investment principles of diversification in order to make sure the funds go to underfunded local agribusinesses, rather than easier or more financially attractive deals in other sectors such as manufacturing, or other easier and more-established markets. From a traditional investment perspective, this means it is making an already hard problem even harder.

To address what is clearly a higher risk portfolio, the International Fund for Agricultural Development is subordinating its investment of €10 million, meaning it will wait for other investors to recover their investment (totaling €10 million) before it does. This arrangement recognizes that the standard way of doing this kind of impact investing has not been working. 

The Fund managers will be rigorously assessing impact.

The Yield Uganda Fund will benefit from the International Fund for Agricultural Development’s expertise in agriculture matters, and its expertise in research and evaluation. The monitoring and evaluation plan aims to enable the fund to assess the actual benefits to small holders arising from the investments it makes in its portfolio companies. This can inform investors how to better invest to benefit smallholder farmers, both operationally, at the fund level, and in designing the structure of the investment vehicle itself to suit the intended purpose.

The project is very local.

Not only is the team fully led and staffed by Ugandan and Kenyan nationals, but the fund is also deploying capital from Uganda’s National Social Security Fund to test whether this type of capital (the retirement funds of Ugandans), rather than funds from traditional sources like foundations and development finance institutions, can also catalyze impact.

The Yield UgandaFund has already made a handful of investments since it was launched as a €12 million investment fund in 2017, with €10 million of the funding coming from the European Union. Its existing portfolio includes a locally focused soy products maker, a coffee company, and an internationally accredited testing laboratory, for ensuring the quality of food and agricultural products. With its expansion to its final size of €20 million, it is expected to benefit an estimated 100,000 rural household livelihoods, and improve access to markets for an estimated 26,000 farmers.