Unlocking CapitalMay-June 2016

Report from the Capital Landscape Roundtables

Expert Participants in the Capital Landscape Roundtables

Renee MichaelsKinship Foundation

Sarah KnoblochKinship Foundation

Production Experts

Chris LarsonPresident and CEONew Island Capital

Brad LiebovPresident and CEOLiberty Prairie Foundation

Terry Hinds*Chief Lending Officer-Diversified Markets1st Farm Credit Services

DD BurlinAngel Investor, SLoFIG

Michael DavidsonThe Chicago Community Trust

Malini Ram MoraghanFacilitator and Advisor

Food:Land:Opportunity

Distribution Experts

Shelly HermanOwnerIrv & Shelly’s Fresh Picks

Teri LowingerAngel Investor, SLoFIG, Hyde Park Angels

Darin HofbauerVP Agribusiness1st Farm Credit Services

Kate DanaherSenior ManagerSocial Enterprise Lending & Integrated Capital, RSF

*Both a production and distribution expert.

About the Capital Landscape Roundtables

Food:Land:Opportunity—Localizing the Chicago Foodshed (FLO) is committed to strengthening our region’s supply of local and sustainable food. To truly understand the challenges and opportunities of the sector, we engage in regular learning and evaluation activities. This report is one outcome in our ongoing effort to understand the fundamentals of how capital flows (or not) onto the balance sheets of food business practitioners—be they farmers or wholesale providers.

In summer 2016, we hosted two conversations with experts in local food and agriculture finance and investing. We were fortunate to get a diverse set of experts, drawn from both new and existing relationships. To anchor the discussions, Food:Land:Opportunity provided our mission and strategies and the scope: a 250-mile foodshed radius, a seven-county Chicago market, and an investment time horizon of three to seven years.

The first conversation focused on production (i.e., farming), and the second conversation was about processing and distribution. Our questions were simple: • What are the capital needs? • Who are the current providers and tools? • Where is capital missing? • What tools, structures, or providers could fill the gap?

The answers, summarized in this report, are less simple. Still, they serve as a valuable guide to Food:Land:Opportunity. We are enormously grateful for the expertise, insights, and passions of our experts. We hope you will find these findings and recommendations helpful as we attempt to address these complex challenges.

Theory of Change

Roundtable Key Discoveries: Production

There is a lack of efficiency in the methods used to deploy capital to smaller, sustainable and/or unconventional producers (Food:Land:Opportunity’s target producer base). All experts concurred on a lack of efficiency in the activities such as underwriting, securing, monitoring (including reporting and accounting), and investment management/technical assistance necessary to help borrowers successfully meet investment expectations or requirements.

A key to successful investment is to pro-actively understand and match producer business skills, will and savvy with investor liquidity needs and capital tool requirements. The alignment of investor needs with the farmer’s business stage and business goals are critical. For example, angel investors require liquidity and are better matched with savvy farmers with growing or established enterprises. Program-related investment and 1st Farm Credit may have less or flexible liquidity needs and can be matched with newer, less-established producers.

Capital is readily available, but deployment barriers exist. For example, 1st Farm Credit’s $5.6 billion portfolio is available to local sustainable producers, but has a negligible percentage of sustainable producer borrowers. 1st Farm Credit cites challenges with securing loans to new producers, monitoring investments and connecting with diversified borrowers. Eligibility requirements can also pose barriers.

Emergent tools and partnerships are trying to bridge the eligibility gaps: New Island Capital’s new hybrid loan-equity structure acts like an “on-ramp” to a 1st Farm Credit loan. Downstate Illinois is seeing “rent-to-own” models. Liberty Prairie Foundation’s coordination activities could help 1st Farm Credit connect with target farmers/producers. Assets of combined partners (Food:Land:Opportunity, 1st Farm Credit, and Liberty Prairie Foundation) could develop more tools and a pipeline of appropriate borrowers to bridge the gap between sustainable producers and existing capital pools.

There is a strong, continued need to provide farmers with guidance/technical assistance to navigate the capital landscape. As a result, some organizations, such as Liberty Prairie Foundation, are taking a case management approach.

The wide variety of capital options across government, private and philanthropic sources is overwhelming for farmers. Producers benefit from “hand holding” throughout the process of understanding and accessing capital. Currently, very few organizations focus on helping the farmer develop an appropriate financing strategy.

Per expert discussion, areas of lowest capital coverage appear to be around land access and incubation for new and beginning farmers; incentivizing or de-risking diversifying/transitioning farmers; and incubation of new models. These are areas where flexible and new sources of capital could drive impact, innovation and growth activity.

Increase efficiency

Match producer-investor profiles

Bridge to available capital

Navigate capital landscape

Address lowest capital coverage

Roundtable Key Discoveries: Distribution

Companies in the distribution and processing segment of the local food system need capital tools to help bridge through early business phases (post-startup to profitability, aka “pre-scale”). Low margin, slow growth and uncertain exit potential makes many of these enterprises unattractive for even flexible, patient equity.

More creative, better-fitting tools are needed to support mission-aligned distribution and processing enterprises in the post-startup phase (i.e., replace role of equity). For debt investment, reliable collateral remains an issue for many businesses in the early stages of business growth.

Capital is present, but not often in appropriate structures/vehicles and not often with sufficient follow-on technical assistance for distribution and processing businesses. It is still difficult to find the “right [investment] vehicle at the right price matched to the business use.”

The most effective/best technical assistance is anchored in financially consequential relationships, such as investment, sales, and perhaps even asset-based relationships (e.g., land, equipment):

• Pair investment with significant technical assistance for distribution and processing

businesses due to the huge needs. In many cases a grower is either expanding into a non-growing operation outside of their area of expertise, or a business is insufficiently prepared to handle demands of distribution and processing (e.g., seasonality of flow/throughput).

• Technical assistance provided by buyers (mission-oriented companies buying directly from farmers) is imperative to service sales and shore up the supply chain.

Is there a gap in serving the middle? Distribution and processing enterprises that

serve mid-size businesses are missing or too hard to find (in spite of angel investor and 1st Farm Credit appetite to invest, and growth in small- to mid-size producers).

Finding ”investment-ready” enterprises remains a challenge (based on investment tools that are currently available). An emerging profile for a high-potential distribution and processing entrepreneur/operator includes farm and food/crop/product experience; regulatory savvy; and goals and an implementation plan to operate at a higher margin.

Very few programs drive and support one of the Midwest’s biggest opportunities: transition to organic acreage.

Find markets to invest in organic acreage transition; expand cooperative support systems which mitigate risk; and explore how 1st Farm Credit can offer more programmatic tools to assist with organic transition.

Bridge through early phases

Innovate on structure and vehicles

Anchor technical assistance in consequence

Assess missing middle

Indentify/cultivate the enterprises

Midwest opportunity: Organic transition

Recommendations

Focus capital efforts on developing tools and programs to address areas of low capital coverage identified through this inquiry.

Explore what capital tools or interventions Food:Land:Opportunity can design to both bridge available capital

to reach appropriate producers and promote better transaction/capital deployment efficiency and remove barriers to eligibility:

• Help sustainable farmers bridge to large pools of available capital like 1st Farm Credit. • How can Food:Land:Opportunity capital be used to address 1st Farm Credit issues of producer eligibility,

security and transaction efficiency?• Support targeted technical assistance or case management to help prepare/assist producers to match

appropriate, available capital with their needs.

Facilitate and provide support for high-potential partnerships uncovered through roundtable discussion between Liberty Prairie Foundation, 1st Farm Credit and New Island Capital.

Support or develop high-impact technical assistance that can ride tandem to investment and/or sales relationships. Assist with formalizing or supporting “informal” technical assistance that already occurs.

Assess Food:Land:Opportunity’s interest in creating innovative investment structures that can help “plug the gap” between post-startup and profitability, partnering with other funders and potentially 1st Farm Credit.

Assess Food:Land:Opportunity’s ability to help design or develop programs to assist organic transitioning farmers with ready markets, and distribution and processing infrastructure support.

Investigate market gaps in mid-scale processing and establishing a cooperative in Illinois.

Food:Land:Opportunity—Localizing the Chicago Foodshed is a multi-year initiative that aims to create a resilient local food economy that protects and conserves land and other natural resources while promoting market innovation and building wealth and assets in the Chicago region’s communities.

Funded through the Searle Funds at The Chicago Community Trust, Food:Land:Opportunity is a collaboration between Kinship Foundation and The Chicago Community Trust.