how our debt and equity models work final
TRANSCRIPT
What is Different about Running with a Cheetah?
Our Debt, Equity and Smallholder Management Models
Mission Summary
CropsInvestments
(Markets and Finance)Cash
Agriculture & Food
Markets
Finance
Focus on markets and finance
because they are lacking in
traditional development
approaches
Farmers produce little for sale• So no commercial loans• So no reliable market causing much
waste
Food businesses lack crop inputs• So limited growth and investment• So they import needed volume
competing with nearby farmers
UnderlyingProblems
Dysfunction in the Value ChainCheetah must work on both halves because the problems are linked in a
vicious cycle that damages investments.
UnderlyingProblems
3 innovations needed: Finance solutions
for farmers, and SMEs,
and farmers must become investable
3 Dimensions,9 Aspects of the Cheetah Model for Ending Smallholder Poverty& CreatingProfitability
SolutionSummary
From MIT group that made the first major review of microfinance:
“… the structure of [microfinance’s] success in lending to the poor is such that we cannot count on it to be a stepping-stone for larger businesses to be created and financed. Finding ways to finance medium scale enterprise is the next big challenge for finance in developing countries.”
Microfinance
Small loans averaging $300 filling
microfinance space
Less successful and smaller in rural areas
and for agriculture
Best suited to micro enterprises with no
usage control
Credit often based upon peer pressure or
average risk factors
Cheetah’s Finance Innovations
Loans (and equity) $5000-$500,000 filling “Missing Middle” gap
Designed for communities or
midsized businesses
Requires strict structural control,
which is built in
Credit based on production capability
Africa Farmers
Collateral Fund
Business (Farmer’s
Group)
Markets (Economic
Benefit)
Lending Bank (Capital)
Partners with Cheetah company to assure proper use of loan
proceeds and access to markets
Cheetah company guarantees first 10% of loan and manages
markets and logistics
Bank issues and enforces commercial grade loan
Provides loan collateral
Cheetah Innovation: Metafinance• Provides needed debt
to finance farmers for higher yields
• Reconnects loans to commercial benefits
• Provides needed equity to finance ag-food value chain businesses (SMEs linking to farmers)
Africa Agriculture Equity Fund
Inve
stab
le
Cheetah Innovation:
Micro Venture Capital
Achieving Commercial AcceptanceDebt / MetafinanceBanks rarely give serious loans to smallholders because of high failure rates. 5 solutions:
Collateral:• Farmers have few assets so banks need
guarantor to give loan. • Cheetah puts collateral on deposit in USD (no
currency risk).
Bank Enforcement:• With Cheetah’s coordination, bank makes and
manages loan.• Farmers know local banks have more ability to
collect loans.
No Cash:• Loan is placed directly with farmer group by
Cheetah. • They get the ag inputs or equipment rather than
cash.
Cross Collateralization:
• Proceeds distributed to small groups as in the microloan model. If a small group fails to repay, the larger group is still must.
Market Managed: • Cheetah provides a market for the crops• Bank gets paid first.
Achieving Commercial AcceptanceEquity / Micro Venture CapitalVenture capitalists avoid small investments because too much work needed to get returns. 3 solutions:
Prove Opportunity
•Pilot businesses internally in the nonprofit before placing investments.
Replay Opportunities
•Use a franchise model to replicate success so that future investments have a lower risk and reduced cost of investment management.
Share Opportunity Cost
•Share back-office services companies to lower investment costs, risks, and improve quality.
Cheetah Collateral Fund: Metafinance with Catalytic First Loss Capital
• The Africa Farmer’s Collateral Fund creates manageable layers of risk
• Mission driven investors take highest risk and catalyze additional investment
• Percentages are approximate targets
Sub-Debt 2 (Mission Driven Investors)
Program Absorbed Risk
Possible Government
or Major NGO Shared Risk Program
(45-60%)
Senior Debt(Low Risk; Protected by
Other Investors)
Sub-Debt 1(More Risk but still Protected by Other
Investors)
10%
20%
20%
50%
Farmers lack access to crop input & equipment finance
Farmers lack access to markets & value chain
Africa Farmers Collateral Fund
Africa Agriculture Equity Fund
Financing Solutions with Companies, Foundations, Governments and Accredited Investors
Africa Farmers
Collateral Fund I
Economic and Social Returns
Africa Agricultural
Equity Fund I
Economic and Social Returns
Africa Farmers Collateral Fund I
•Farmers turn in crops, they are sold, loan is paid•If crop does poorly, crops produced are sold, farmers achieve no profit, loan is paid•If farmers do not pay, other farmers cover costs, loan is paid•If group fails, bank enforces loan and farmers make payments over time•Supplier (usually investee of AAEF Equity Fund) of crop inputs or equipment covers a minimum of 10% of first loan losses, including profits from other groups, loan is paid•Fund investors are in tiered risks A, B, C so losses covered in lower tiers
Africa Agriculture Equity Fund I
•Companies are sold to outside investor•Fund has preferred shares, equity is converted to debt and repaid (this is built into the fund model from outset – for more information see SEAF model)•Future fund buys out current investorsInvestor
Exit Strategies
Investment Steps
Ideate •Identify opportunities•Select
Pilot •Prototype•Validation requirements
Activate •Demonstrate business model•Verify validation requirements met
Propagate •Invest•Grow in origination and new locations
Board approval required to advance to each new step.
Target Investment Criteria
ProfitableHigh impact –
change livelihoods significantly
Ag or ag value chain
Replicable – can be replayed and
cross cultures
Scalable and able to grow quickly
meeting the needs of many
High need, fills a critical gap, ‘last mile’ to farmers
High leverage – few employees or low
investment changes many lives
Cluster – fit with other investments to multiply effect
Red: priority preference
Green: important preference
A Disciplined Model to Move From Pilots to Scale
Innovation: Making Farmers Investable Why have cooperatives failed?
Coops are the answer:
•Cooperatives have worked to lift farmers for over 200 years in all cultures•Coops succeed with joint marketing, financing and purchasing and sharing other costs and investments.
Coops fail in Africa for three primary
reasons:
•Shortage of finance
•Lack of trust – corruption
•Unreliable market access dominated by middlemen
Cheetah’s solutions to the problems:
•New finance models
•Make all farmer activities accountable and enforceable
•Partner on markets, owning all logistics
Example of Structure for Organizing SmallholdersF
AR
MIN
G ,
MA
RK
ET
S A
ND
FIN
AN
CE
Farmer Group
Farmer Group
Accountability and mgmt with Teams of 5-15 self-selected farmers
Structure is a combination between savings/microloan groups and coops
Pearl Foods partners with farmers on markets and other opportunities.
Pearl is unifying point for coop marketing. Controlling crops secures investments
Timu
Wakalimu
Team
Farmers
Farmer Group
Team
Farmers
Pearl Foods
Cheetah (& Loan
Guarantors)
Masoko, Markets
Benki, Bank Finance and
Accounts
Wateja Customers (Buyers of Crops)
Step
-by-
Step
Sca
ling
Proc
ess
Goi
ng to
Sca
le:
Wha
t is
Built
Current State of Fund Needs
Curr
ent S
tate
of
Fund
Nee
ds
Risk MitigationAfrica Farmers Collateral Fund I Africa Agriculture Equity Fund I
On-the-ground presence, active management in portfolio companiesCheetah keeps control of accounting, reducing likelihood of corruption
Shared back office services and location reduces startup costsPreferred share position for investors in many cases
Local village leadership for most activities bridges cultural gapsLoans made by local commercial banks that have rights of loan enforcement
Usually have controlling interest in companies
Money stays in US dollars to avoid currency exchange
Prototype many company activities before receiving investment
Farmers cross-guarantee loans between members of groups
Partnering when possible reduces investment required
Farmers receive crop inputs or equipment rather than cash; loan is paid by delivering crops
Keeping companies small and scale achieved through franchising reduces risks of concentrated capital
Diverse crops and climates Franchising approach creates a higher dedication to standardized procedures, thus more predictable outcomes
Equity Fund Debt Exit Strategy
Created by SEAF (30 yr. proven experience, impact investment model)
Local Investors, Employees
Common Shares
Cheetah investment –
preferred shares
1. Cheetah raises needed investment and has board control
Common Shares
3. Loans are repaid, shares divided pro rata by others
Common Shares Cheetah shares
4. Company is revalued by pre-agreed formula
Local investors equity – common shares. However by contract Cheetah controls accounting function to guarantee
transparency. Sale of shares is restricted by agreement.
Cheetah Preferred (15% minimum), dividing repaid Preferred Shares with Common, (optionally, Cheetah
may be repaid while retaining equity)
6. Equity and control revert to local shareholders
Fund investment –preferred shares A & B
Common SharesEquity to
Debt Round 1
Cheetah shares
2. Preferred shares divided into loan and equity
Preferred shares
Loans repaid Cheetah sharesPreferred
shares
Preferred shares
Common shares Cheetah equity subordinate to fund debt
5. Remaining preferred shares are converted to debt and repaid (24-36 months)Fund equity – preferred
shares, may be limited by coupon value
7. All shareholders enjoy profit distributions pro rata with ownership
Exit Strategy: the Process for Fund Liquidity
Terms Africa Farmers Collateral Fund I LLC
Africa Agriculture Equity Fund I LP
Manager or General Partner
Cheetah Development, Inc., a 501(c)(3)
Size Up to $3.5 million by 31 Dec 2015 Up to $20 million by 31 Dec 2015
Target Return 2% 12% – 15%
Term 18 months, one 6-month extension. Multiple series with rollovers.
7 years, 2 one year extensions.
Target investors Governments, Corporations involved in agriculture or food, foundations, NGOs.
Commitment Minimum 10 units or $100,000.
Fees & Expenses
1.5% per annum of total Commitments. Fund pays its operating expenses.
3% per annum of total commitments, partially paid up front for incubation and R&D. Fund pays its operating expenses.
Legal Counsel Dorsey & Whitney LLP
Audit Firm Recognized audit firm(s) to be selected
Summary of General Fund Terms
Securities DisclaimerThis document is for informational purposes only and does not constitute an offer or solicitation to sell shares or securities in the Company or any related or associated company. Any such offer or solicitation will be made only by means of the Company's confidential Offering Memorandum and in accordance with the terms of all applicable securities and other laws. None of the information or analyses presented are intended to form the basis for any investment decision, and no specific recommendations are intended. Accordingly this document does not constitute investment advice or counsel or solicitation for investment in any security. This document does not constitute or form part of, and should not be construed as, any offer for sale or subscription of, or any invitation to offer to buy or subscribe for, any securities, nor should it or any part of it form the basis of, or be relied on in any connection with, any contract or commitment whatsoever. The Company expressly disclaims any and all responsibility for any direct or consequential loss or damage of any kind whatsoever arising directly or indirectly from: (i) reliance on any information contained herein, (ii) any error, omission or inaccuracy in any such information or (iii) any action resulting therefrom.
Thank you!
www.CheetahDevelopment.org