Market background

The global economy is facing a historic shock in the availability of commodities, which combined with the breakdown of traditional supply chains, the lack of trade finance, and soaring market prices, puts the economic prospects of importing countries at risk. This could result in dramatic food security crises, some of the early signs having already become evident.

Trade and supply chain finance – representing 80 to 90% of global trade, and worth $10 trillion per year – focuses on supporting the physical flow of goods across borders and it primarily uses the merchandise, receivables and cash generated from the trade as the principal security. This market-based mechanism, which normally aligns supply and demand highly effectively, is under immense strain since the Covid crisis.

At the same time, financial institutions – experiencing a stricter regulatory environment, which is leading to a consolidation of their core activities – are moving away from the funding of commodities, creating a global liquidity gap estimated at $3.4 billion in 2021. The smaller deals required by the mid-market operators are now vastly unattended by the traditional financiers, especially on the agribusiness side.

Furthermore, the recent commodity supply shock resulting from the Russia Ukraine conflict (grain, fertilizer, oil, gas) is anticipated to become a new normal, certainly over the medium term due to a variety of macro factors such as global instability, increased trade barriers, catastrophic events arising from climate change, population growth, new diets, onerous de-carbonization agreements, etc. This is expected to continue to impact the commodity prices complex and will extend the duration of the super-cycle.

The opportunity

This private credit and commodity liquidity squeeze is offering opportunities to invest in risk-adjusted financing and trading transactions to unlock value in commodity supply chains – by targeting the underserved market segment of agribusiness SME’s – and to build alternative food distribution channels between exporting and importing countries.

The Agricultural Merchant Fund is an unique investment vehicle which doesn’t operate as a traditional lender, but as a commodity merchant, financing and executing pre -approved transactions on behalf of the borrower by taking ownership of the commodity collateral, managing the logistics as well as securing the cession of the off-take contracts.

The Fund:

Focuses on Africa: Import / export transactions between Africa and the world.

Concentrates on non-perishable agri-commodities: Grain, oilseeds, pulses, cocoa, coffee, cotton, nuts, sugar, fertilizers, veg-oils, etc.

Does not lend: it acts as the main counterparty and executes commercial transactions on behalf of the client.

Takes no credit exposure: the goods remain the property of the fund and are only delivered after payment has been guaranteed.

Manages the operational risks: the logistics are under the control of the fund and the structure of the transaction is transparent.

Controls the market volatility: the transactions are short-term and the goods are pre-sold to existing customers.

Selects quick turn-around transactions: short tenors, revolving self-liquidating deals generating high rotations of working capital.

Does not assume country risk and FX exposures: transactions are mid-stream and denominated in USD.

Owns the collateral securities: no third-party liability issues.

Secures the investors’ deposits: the mandate and structure of the registered fund protect the investments.

An innovative approach

The remarkable and unrivalled structure of this fund extends the traditional funding models and allows for the creation of a new, secure, regulated institutional instrument – similar to an asset-backed commodity participation program – to facilitate access and movement of agricultural commodity stocks within tight supply chains.

The business model of the Agricultural Merchant Fund in essence consists of the raising of funding through the subscription to equity instruments by private and institutional investors. These funds are placed into pre-selected, short -term, secured, revolving commodity trade finance transactions. The Agricultural Merchant Fund charges these borrowers the appropriate risk weighted interest rates plus a profit share participation commission for the execution of the transaction. Once repaid by the client, the fund retains a standard 2% management fee and a 20% performance fee, before releasing the net performance to the original investors. This new asset class offers investors a secured and attractive return by targeting USD yields in excess of 10% per annum net, whilst providing a diversification opportunity not currently available in global financial markets.

In addition, investors are able to participate directly in the physical flows of agricultural commodities – a privilege hitherto reserved only for shareholders of large international traders – and help in the development of emerging farmers by supporting alternative trade routes upstream of the agricultural value chain. This is another core differentiator of the Agricultural Merchant Fund.

Building on a proven solution

The Agricultural Merchant Fund is built on the legacy of an existing successful trade finance fund – which combines short-term secured finance, and trading participation – that has a proven performance record with investors and a successful track-record in Agri-commodities in Africa.

The team of highly qualified professionals brings three decades of experience in commodity trading, transaction structuring, fund management and trade finance as CEO/senior executive for major global agricultural traders and financial institutions in Africa (Louis Dreyfus Commodities, Ameropa, BTG Pactual Bank, Barak Fund Management).

Investment offering

The Agricultural Merchant Fund is looking for an anchor investor to spearhead the initiative; given the strategic food security component of the fund, an ideal candidate would be a sovereign fund and/or a development institution. We believe that time to market is essential and this partnering model will achieve that.

The fund is seeking to raise funding for the establishment and the launch, with an initial investment required of minimum $10 million – but ideally +$20 million – split between debt and equity. The debt component would enjoy a preferential fee structure. The unique modus-operandi of the Agricultural Merchant Fund will allow the fund to gradually build a proprietary balance sheet, a strong financial argument for the equity investor.

The objective of the Agricultural Merchant Fund is to raise in excess of $100 million asset under management over the next 18 months but is essentially uncapped. The fund could diversify into industrial commodities (metals, energy) at a later stage. The fund is currently in discussion with various institutional investors, as well as government institutions.