Cultivating capital for smallholder finance

The IDH Farmfit Fund (the Fund) is a EUR 100 million, closed-end blended finance vehicle that combines public and private capital to attract corporate and institutional investors into high-impact, underserved segments of smallholder value chains.  

Its mandate is intentionally broad. The Fund invests across agri-SMEs, MFIs, agtechs, fintechs and other value chain actors that serve smallholders, using tailored financial instruments, ranging from debt and mezzanine finance to guarantees and equity. Longer tenors, flexible repayment profiles and grace periods are built in, reflecting agricultural realities. 

This flexibility was not accidental. It reflects the recognition that conventional products - short-term, rigid and collateral-heavy - rarely work for businesses that serve smallholders. 

Over the past six years, the Fund has deployed more than EUR 50 million, mobilised over EUR 150 million in co-investment, and supported business models expected to reach millions of farmers. The journey, however, has been complex, resource-intensive and full of trade-offs.  

These realities sit at the heart of this publication: Cultivating Capital for Smallholder Finance.

Demand: Capital is needed, but access remains constrained

The Fund’s experience confirms that demand for smallholder-inclusive capital is strong across geographies and value chains but varies significantly between them. Despite this demand, many agri-SMEs lack strong governance, systems and financial maturity to absorb investment. Structural undercapitalisation limits access to finance, as most financiers prioritise balance-sheet strength over cash-flow generation. 

Traditional financial institutions and traders remain hesitant due to complexity, regulatory barriers and risk exposure. Fintechs have emerged as a powerful and innovative channel for expanding financial access among smallholder farmers. However, their potential is shaped by a persistent trade-off between fully digital models and hybrid digital-physical approaches. The latter, while often more inclusive and comprehensive, carries higher operational costs that challenge scalability and sustainability. As a result, demand is particularly high for flexible, long-term capital, especially equity, which remains scarce. 

This results in persistent unmet financing needs across agri- and smallholder value chains, leaving smallholders exposed, underserved and bearing the highest climate, price and operational risks. 

Supply: Why fit-for-purpose capital matters

On the supply side, the Fund’s experience mirrors broader sector challenges. Capital may be available, but it is often misaligned with the needs of organisations working in smallholder value chains. These organisations may require long tenors of 5–10 years, flexible repayment profiles suited to seasonal cash flows, and a mix of debt, equity or quasi-equity instruments and sometimes smaller ticket sizes. Yet many investors are unable to offer such long-term, tailored financing. Such transactions are costly to originate, structure and manage. Equity and quasi-equity play a critical role in supporting growth and resilience yet remain difficult to structure and exit. 

The Fund’s ability to tailor instruments and terms has been one of its strongest sources of additionality. By providing flexible, long-term capital that is otherwise unavailable, the Fund has been able to invest in businesses that would not be served by conventional finance. At the same time, this flexibility has been among the most resource-intensive aspects of the model.  

Viewing financial structuring as a standalone cost driver can be misleading. Under the Fund’s mandate, structuring is inseparable from impact ambition. It requires dedicated resources for impact design, environmental and social risk management, and learning. These elements are core to the model, but they add both direct costs and time to transactions, as requirements must be designed, negotiated, agreed and monitored alongside commercial terms. Flexibility creates impact, but it comes at a cost that must be recognised in fund design, fee structures and investor expectations. 

Design dilemmas: Where impact and finance intersect

 In this publication, we are deliberately explicit about the design dilemmas we encountered: The tensions between impact ambition with cash flow needs for the Fund’s operations and risk considerations.  

These include: 

• Risk-sharing vs Flexibility. The Fund’s requirement for co-investment enhanced risk sharing and mobilisation by taking higher-risk positions, but also delayed smaller or complex deals, as aligning co-investors in a high-risk sector proved challenging, pointing to portfolio-level mobilisation targets as a more flexible approach. 
• Traditional TA vs Investor Requirements. Current TA prioritises impact or post-investment support rather than investment readiness, creating misalignment with investor needs; bridging this gap requires integrated TA–investment models and dedicated funding for pre-investment engagement where commercial incentives are insufficient. 
• Impact Depth vs Operational Efficiency. Impact-centric flexibility enables deep change but is resource intensive; balancing depth and efficiency requires fund structures that support high-touch engagement, including adjusted fee models and complementary grant funding for post-investment technical assistance. 
• Smallholder-Centric Models vs Institutional Finance. Agri-SMEs enable deep smallholder engagement despite lower readiness and returns, while tech-enabled MFIs and fintechs scale faster with stronger upside; the Fund is less suited to traditional financial institutions, which require different tools, vehicles and regulatory interventions to unlock impact. 
• Risk Diversification vs Systemic Change. Diversifying across sectors and geographies strengthened portfolio resilience and created opportunities in underfinanced areas, but may dilute depth. More concentrated strategies could enable the Fund to drive a more systemic change, but may increase concentration risk and reduce flexibility.  These dilemmas do not have neat solutions. Naming them will help future fund managers, investors and donors make more informed choices.

Strengthening the ecosystem, not just the transaction.  

The Fund’s experience reinforces a central insight: Access to affordable finance for organisations operating and working in smallholder value chains ultimately requires better alignment across the ecosystem. 

• Senior investors and limited partners can support this by considering structures and fee models that better reflect impact horizons.  
• Impact investors can help by offering flexible, long-term capital, collaborating on co-investments and sharing lessons openly.  
• Donors and governments can reinforce these efforts by integrating investment readiness into programmes, supporting pre-investment TA and strengthening enabling policy and regulatory environments.  
• Support organisations and TA providers play a key role by strengthening investment readiness—particularly in financial systems, governance and reporting.  

Collaboration beyond co-investment 

One lesson cuts across all actors: Collaboration does not always require shared balance sheets. Even without direct co-investment, coordinated strategies across funds, investors, donors, TA providers and value chain actors can improve pipeline quality, reduce transaction costs, align incentives around farmer outcomes and deliver more holistic and resilient solutions for smallholder farmers. 

Smallholder resilience is a system outcome. It cannot be financed transaction by transaction, or actor by actor.