Yohann Formont serves as Senior Finance Advisor for USAID Green Invest Asia. A staff member of Mekong Strategic Partners, he has worked for more than a decade with banks, insurance companies, microfinance institutions, and development finance institutions in over 15 countries in sub-Saharan Africa and Asia. His finance expertise covers agriculture, renewable energy and micro, small, and medium enterprises. Mekong Strategic Partners is an investment management and advisory services firm specializing in the Mekong Region.
How Private-Sector Approaches Succeed
A blanket approach to private-sector engagement is bound to fail without informed market segmentation
May 21, 2020
A pivotal insight emerging from three years of co-creating climate-smart business models with companies—both investors and those seeking investment—is that there is not one private sector, but a multitude of actors with varied incentives, timelines, and decision processes. Each requires a targeted approach; any strategy that assumes one homogeneous private sector—or one investor profile—will struggle to gain traction. We are often asked, “What do investors seek?” to which we answer, “Which ones?”
Commercial agriculture and forestry are responsible for at least 40 percent of greenhouse gas emissions in Asia. With global food demand expected to increase by as much as 40 percent by 2050, investment in Asia’s agriculture and forestry companies presents high climate risk, but also promises high climate returns due to the potential reduction in greenhouse gas emissions.
Any enterprise-driven approach requires market segmentation, or dividing a sector into subgroups and actively targeting the segments that are most aligned with a project or organization’s mission. In the case of USAID Green Invest Asia, that is facilitating investments into sustainable and low-carbon agriculture and forestry companies in Southeast Asia.
USAID Green Invest Asia supports agriculture and forestry companies with at least $2 million in capital needs with financial advisory and technical assistance to scale sustainable commodity production. We are reviewing deals in six countries that include cacao in the Philippines, teak in Cambodia, rubber in Indonesia, and coffee in Vietnam. We shift markets by linking investors with financing opportunities in low-emission agriculture and forestry companies, while improving companies’ environmental risk management, which lowers risk for financiers.
How USAID Green Invest Asia supports market-oriented solutions
Our two target audiences are environmentally and socially responsible (sustainable) investors and agriculture/forestry companies.
When approaching investors, USAID Green Invest Asia identified key segments, namely banks, impact investors, equity funds, development finance institutions (DFIs), carbon credit funds that invest in projects delivering carbon credits/emission offsets, and blended finance funds.
Banks typically consider first a company’s cash flow and securities, providing loans up to five years. Impact investors seek to scale up businesses with growth potential and a strong impact story and generally invest less than $2 million. Equity funds may look for solid businesses with a proven track-record and potential to increase profitability. DFIs have a broad range of funding, prioritize companies with strong environmental and social governance (ESG) commitments and financial returns, and invest upwards of $5 million. Carbon credit funds invest in companies with a strong carbon reduction, sequestration, or avoidance potential. Dedicated blended finance funds may offer favorable terms for companies fitting their specific mandates, such as sustainable forestry management or positive biodiversity impact.
Similarly, agriculture and forestry sectors require segmentation. Compared to agriculture investments, those in forestry tend to require a much longer investment horizon, a characteristic called tenor. Small and medium enterprises may need financial advisory to help them connect with equity investors. Agriculture multinationals focus on strengthening their value chains and designing ESG-compliant approaches. Smallholder farmers often require aggregation (i.e., into cooperatives) and low collateral requirement medium-term investment finance.
While segmentation risks oversimplifying a complex, nuanced marketplace, it can help enterprise-driven programs engaging with the private sector refine their outreach and deploy technical assistance that truly fits market demand.
To match companies with appropriate investors, USAID Green Invest Asia has analyzed clients' motives, needs, and business drivers to tailor technical assistance, gain traction, and find shared value that meets investor and/or company goals. The result is growth in the sustainable agriculture/forestry marketplace and an increase in USAID's impact on scaling low-emission business models in Southeast Asia.
For more information about USAID Green Invest Asia’s private sector-facing sustainable land use programming, please contact [email protected].