Equity investment in rural Armenia: A business model with a development impact
When is an equity investment fund more than just a money machine? When it focuses on development rather than quick riches.
That’s exactly what a unique IFAD project has been doing in Armenia since 2009, with investments in the country’s food-processing sector designed to expand markets and improve the economic prospects of smallholder farmers. Known as the Fund for Rural Economic Development in Armenia (FREDA), the initiative combines elements of both development assistance and banking.
In effect, FREDA uses the financial instrument of equity funding not to trigger short-term profits but, instead, to build sustainable agricultural livelihoods.
At IFAD headquarters in Rome yesterday, Dr. Tigran Khanikyan, CEO of FREDA, and Dr. Jorma Ruotsi, IFAD Senior Finance Specialist, presented a report on the fund’s performance and impact during its first two years of operation. Their findings suggested that equity investments can be a viable tool for reducing rural poverty.
‘Engines of rural development’
“If you want to do a serious job of rural poverty reduction, you have to use new, innovative methods of finance and development,” said Dr. Ruotsi. To that end, he explained, FREDA invests in “engines of rural development” – including dairy, canning, wine-making, and fish and poultry processing companies.
IFAD and the Government of Armenia established FREDA in January 2009, with additional funding from the Government of Denmark. At the same time, a twinning arrangement was set up with the Danish equity firm IFU to build the fund’s capacity. Operations commenced the following September.
Dr. Ruotsi said the FREDA concept arose out of a lack of agricultural lending after the financial crisis of 2008. Banks were demanding extremely high collateral for loans, and small- and medium-sized rural enterprises urgently needed an alternative source of financing and leverage. In Armenia’s transitional economy, where agriculture is mostly smallholder-based, IFAD and its partners stepped in to test the equity investment model.
Today, FREDA has a portfolio comprising nearly $3 million invested in seven agro-producers, with another eight in the pipeline.
Financial and technical support
Unlike most equity funds, which concentrate only on achieving high financial returns, FREDA targets companies that are strategically placed within the food value chain. Because these businesses must procure high-quality crops and other supplies from local smallholders, their success or failure directly affects the well-being of poor rural households. So FREDA bases each investment decision on both the firm’s business plan and its projected contribution to local economic development.
Dr. Khanikyan, the FREDA chief, noted that the fund provides financing for new technology and equipment, as well as working capital, to the companies in which it invests. What’s more, he said, FREDA provides them with non-financial support to strengthen business systems and management practices.
This technical support includes an independent valuation of each company prior to investment, plus help with marketing, accounting and management practices. Crucially, FREDA also ensures the producers’ compliance with international food safety standards, a prerequisite for expanding their export markets.
Armenia and beyond
“We’ve found that these are very efficient investments,” said Dr. Khanikyan – and indeed, he and Dr. Ruotsi presented some impressive results. A FREDA-invested winery has increased its production capacity by 500 per cent since 2009, for example, while a fish factory with equity funding has multiplied its exports by a factor or 10.
“Equity investment is a logical extension of the kind of work that IFAD does in many countries,” said IFAD Country Programme Manager Henning Pedersen, who moderated the presentation and was a key figure in FREDA’s launch. “This is just one instrument that is appropriate in certain circumstances,” he added.
So far, it seems to be an effective instrument in Armenia. If FREDA meets current targets for 2015, it will have investments in 30 food-processing enterprises providing market outlets for thousands of the country’s smallholder farmers.
The next logical question is whether the equity investment model can be replicated in other transitional and developing countries. Armenia’s experience suggests that it may well be worth a try.