In a move that could significantly alter the landscape of American agriculture, specialty finance shop Mad Capital has introduced its Perennial Fund II, a financial vehicle designed to support U.S. farmers in their transition to regenerative and organic farming practices. This fund has garnered early commitments from a number of high-profile investors, including The Rockefeller Foundation, Builders Vision, the Schmidt Family Foundation, Lacebark Investments, and others. With a target of $50 million, the fund has already completed two closes and is in the process of “actively” deploying capital to farmers, according to co-founder and CEO Brandon Welch.
**Bridging the Gap in Organic Agriculture Financing**
The initiative comes at a time when there is “no shortage” of farmers eager to shift towards regenerative-organic methods, as Welch shared with AgFunderNews. However, the scarcity lies in the availability of capital and the right financial partners to back such transitions. Private credit firms like Mad Capital have emerged to bridge this gap, offering an alternative to traditional lending which often falls short in accommodating the unique needs of organic agriculture.
Private credit is a burgeoning industry, currently valued at approximately $1.7 trillion and projected to expand to $3.5 trillion by 2028. These firms, including Mad Capital, tend to have a deeper understanding of the specific markets their borrowers operate in, as opposed to traditional lenders. Mad Capital, with its sister organization Mad Agriculture, not only provides financing but also strategic and community-building support to farmers adopting certified organic and regenerative practices.
**The Challenge with Traditional Lending**
Welch points out that traditional lending structures are primarily designed for conventional agriculture operations. Given that only about 1% of all U.S. agricultural land is certified organic, most financial institutions are calibrated to service the remaining 99% who are engaged in conventional farming with traditional commodities. Consequently, organic farmers are often perceived as a higher risk by banks, despite the fact that the actual risk associated with organic farming may be comparable to conventional operations. This misalignment of perceived versus actual risk underscores the need for greater education within traditional lending institutions to better understand and manage the risks associated with organic transitions.
**Innovative Financing Through Blended Finance**
The Perennial Fund II employs a blended finance structure, which Welch describes as a convergence of “two wildly different types of investors” into a single fund aimed at facilitating the transition to organic farming. The fund consists of two classes of investors: preferred and impact. Preferred investors are typically institutional and return-oriented but still interested in impact, and they receive double the return of impact investors. Impact investors, on the other hand, accept a lower, riskier return and are only paid after the preferred investors. This structure allows impact investors to shoulder more risk, thereby enhancing the returns for preferred investors. Initial data from Perennial Fund I suggests that the risks can be mitigated within the regenerative-organic farming sector, particularly due to the higher on-farm revenue stemming from organic premiums.
**Scaling Up for the Future**
Looking ahead, Welch reveals that approximately a third of the $50 million target for Perennial Fund II has been raised, with significant farmer demand driving the pace of capital deployment. The success of this fund is seen as a stepping stone towards establishing a much larger $250 million Fund III. To attract more investors, particularly institutional endowments, Mad Capital aims to present robust data and statistics on loan performance and organic transitions, thereby proving that the actual risks are lower than perceived.
Education remains a crucial component in this endeavor, as bridging the knowledge gap around organic farming and regenerative agriculture is key to unlocking billions of dollars in investments. As relationships with investors are forged and strengthened, the model championed by Mad Capital could become a standard approach to financing in the agricultural sector, paving the way for a more sustainable and environmentally friendly future in farming.