Lemons ripen faster than plums

Towards the end of July 2005, I moved from the UK to Uganda to start Africa’s first impact investment fund focused on early-stage agriculture-related businesses in East Africa. Agriculture was not new to me (earlier in my career, I had spent time working on CDC’s portfolio of agriculture businesses across Africa) but starting up an investment business was a leap in the dark.

Photo credit: Palladium


The Gatsby Charitable Foundation and Rockefeller foundation established African Agriculture Capital (AAC) to invest in agriculture-related small and medium-sized enterprises (SMEs), which provided smallholder farmers with improved products, services, or access to markets. AAC was very much a pilot initiative, with initial capital of only USD 7 million, and intended by its founding investors to test the market for risk capital and pave the way for future investment.


As AAC’s first CEO, I was recruited to develop its detailed investment strategy, build a management team, and attract new investors to the fund. AAC invested in 16 early-stage businesses and in 2019, exited its final investment and fully closed in 2020.


Fast forward 15 years, and the Uganda-based impact investment fund manager Pearl Capital Partners (“Pearl”) has published a summary “cradle-to-grave” report of AAC.


The report concludes that AAC was highly successful. Besides delivering a positive gross investment return on capital invested, my colleagues and I established Pearl, which has gone on to raise three separate impact investment funds with total investment commitments of almost USD 60 million from a variety of high-profile international investors. Of AAC’s 16 investee businesses, only four failed, and many of the 12 surviving companies have grown substantially in size and impact since AAC’s investment.

So, what can we learn for designing and managing this kind of vehicle in the future?


Lemons ripen faster than plums


Building profitable businesses takes time and requires patient investment. It is tough to build businesses on short to medium-term debt finance. Growing businesses usually require several rounds of incoming investment and are typically unable to finance debt repayments. In designing investments for early-stage businesses, investors should first consider the best interests of the company and design their investment to meet those requirements.


Investors frequently talk about the critical importance of aligning interests and ensuring that investors, owners, and managers of the business share a common goal and incentive structure. Typically, this means making equity, or equity-like, investments – high-risk products for the investor, but low risk for the business.


It also means that limited-life fund structures are not appropriate as early-stage investment vehicles. Many of AAC’s best-performing investments took many years to develop to the point of profitability. Had AAC been structured as a limited-life investment fund, it would have been difficult to invest in early-stage businesses with any real expectation of achieving a profitable investment exit within a 5-to-6-year timeframe.


Develop local presence and teams


The AAC founding investors made an early decision to build a supervisory board in East Africa chaired by and largely composed of experienced East African leaders. Its first chairman, Hatim Karimjee, was Tanzanian and his successor in 2011, William Kalema, is Ugandan. In building the AAC team, I recruited a high potential young team drawn from talent within the region. AAC was, in essence, a genuinely East African venture managed and governed from its offices in Kampala, Uganda – a far cry from the many impact investing funds focused on Africa, led and staffed by expatriates, often with little direct experience of the region, and governed by remote Boards and Investment Committees.


This ‘fly-in fly-out’ management model has four major deficiencies that we were attempting to avoid by building our local team:

  • It does little or nothing to build local and regional investment management capacity.

  • It does not address unconscious (or conscious) investment biases; one enduring complaint in East Africa is that impact investors prefer to invest in expatriate founders over local businesses.

  • It fails to earn the confidence and trust of potential investee businesses in the good intentions of the investor.

  • It limits the ability of the investor to supervise its investment portfolio and continue to build the investor/investee relationship.

Build on strong foundations