Enabling investment readiness on pre-investment projects
Sustainable land use projects may offer low and volatile financial returns relative to the risk and complexity involved. The projects invested in by the LDN Fund typically overcome this challenge by combining different revenue streams (e.g., cash crops and carbon finance), sustainably increasing yields/ quality, and adding value through processing. In some cases, this is aided by technical assistance. Such diversification has a stabilizing effect on the returns.
Land restoration projects often require long time horizons, especially when operations are being scaled significantly. Many of the projects invested in by the LDN Fund have therefore found ways to accelerate cashflows. For example, by engaging and sourcing from farmers that have already started producing, by integrating faster-yielding crops into agricultural/agroforestry systems, or by starting operations and building a solid agronomy approach at farm-level before building partnerships with other landowners (e.g., communities or smallholder farmers).
Structuring a large enough project to attract international investors is a challenge in this sector. The projects invested in use innovative structures to engage enough smallholders to have already reached, or have demonstrated the potential to reach, a large enough size to be suitable for private investment. Outgrower schemes in particular are a solid option for engaging with communities and smallholder farmers in a business approach with large scaling potential, as currently being developed by Miro Forestry and Cacao Oro. Building on a proven approach and providing a solid analysis of the potential to scale are a way to make the potential total ticket size large enough to attract private impact investors.
Landowners such as smallholder farmers can be hesitant to enter long-term partnerships and risk long-term debt. To address these concerns, project operators need to have a good understanding of farmers’ needs and often need to put a lot of time and resources into building trusted relationships. Having gathered information/data on smallholders that are being engaged makes it possible to develop innovative approaches to address situation- specific obstacles. For example, to reduce risk of unsurmountable debt, loans can be tailored to farmer cashflows, and land is not used as collateral.
The type of projects the LDN Fund invests in support positive environmental and social outcomes, but often require financing solutions that are not readily available in the market. While this exemplifies the LDN Fund’s additionality, as the Fund provides finance and strategic benefits in ways other investors or banks might not (e.g., longer tenors, longer grace periods, and more flexible repayment schedules), it also often means reaching deal closure takes time (8 months on average).