Good morning, James-Scott, and welcome to Commodity Conversations. Please tell me a little about yourself.
I’m both British and American. I grew up in the States, primarily in New Jersey and summers in California, where we had extended family. I went to university in New York. I worked in New York, then went to London. That’s pretty much it.
I am a private person. That’s always been my mentality. Opening and sharing are foreign to me. My father used to tell me that if you lay low in the weeds, people never know where to attack. That’s served me well my whole life. But my friends tell me I need to tell my story.
How did you get into ags?
I came from an investment banking and trading background focused on distressed and restructuring. I joined ED&F Man in 2012 as Head of Fixed Income Credit.
The most refreshing thing about moving from investment banking into commodities is that commodities are more about relationships. You develop a deep relationship with your customers. You break bread with them on their farms. You need to be there in person. In 2013, while with ED&F Man, I flew to 40 countries in six months.
You set up AlmaStone in 2017. What prompted you to do that?
I left for two reasons. First, I was in the investment business in a trading firm. I’m naturally long- rather than short-term-oriented. My business was about investing and making loans.
Second, I outgrew the relationships. I started financing beyond ED&F Man’s core commodities and geographies. So, it made sense. In 2017, I spun out with the backing of Warwick Capital, a $2.5 billion private equity fund.
I worked with the fund’s two founders two decades ago at Credit Suisse, so our relationship has a lot of history and alignment. So, beyond the corporate story of being backed by a large private equity fund, I’m a big believer in following relationships.
What is your elevator speech for Alma Stone?
We do direct, senior-secured lending to middle-market agribusinesses. We’re a combination of three businesses in one.
In one way, we’re no different from a classic private credit shop, where it’s heavy desktop analysis, looking at the borrower’s creditworthiness (e.g., historical financial ratios and forecasts.) Where we differ – because of my background in distressed and restructuring – is that we take an intrusive M&A approach every time we look at a company.
Second, we’re no different than an asset-backed lender. We always look at downside protection. We try to factor in worst-case scenarios. We structure against enforceable collateral. We might do pre-crop, starting upstream with primarily producers and processors. If we are talking sugar, we follow the chain from when the sugarcane goes in the ground through the factory that processes it into raw sugar or ethanol and down the supply chain to the soft drink manufacturer.
Third, although we masquerade as financiers, we think and act like merchants. We have a combination of talents on the team. My colleague in Brazil was the former CEO of the third-largest grain trader in Brazil. My COO was the head of market risk at ED&F Man. We know a little bit about how to move stuff.
We take a partnership approach in our business. We come in as informal advisors and are proactive in helping the client. We look at the agricultural and operational aspects and assist with pricing and hedging. It gives us a comprehensive preview of the business from upstream to downstream. We see the flow of goods. It gives us a holistic perspective.
How many people are you now?
There are nine of us in the team.
Rabobank told me a few years back that they only finance the big trade houses because of the weight of the financial and ESG due diligence. They don’t fund the smaller players. Do you look to fill that gap?
Banks and trade houses dominate the finance within the supply chain. Traders would typically secure a five-year agreement and give a prepayment. The conditions of that prepayment are often better than a bank’s terms, but the traders make it back through their trading.
Due to Basel 3, the major banks tend to gravitate towards investment-grade counterparties and concentrate their risk. They must do the same due diligence, whether it is a $5 million or $200 million loan. However, every time the cycle shifts and things improve, they come down the curve towards the middle market.
We don’t compete with the banks for the big company business because bank financing is cheaper than ours. Likewise, we don’t focus on SMEs (Small and Medium Enterprises) because of their level of corporate governance and client sophistication. We focus on middle-market counterparties, where you’re beginning to transition to a better governance structure and more transparency. It’s just trying to find that sweet spot in the middle.
When I first started the business, I wanted to finance the Guatemalan coffee producers, but they are smaller leasehold farmers, and the risk is significant. We now focus on processor-producers like sugar mills or soybean crushers. They act as informal banks at the start of the supply chain. They finance the farmers, take that risk, mitigate it, and then create the value conversion.
When we do transactions to mitigate performance risk, we approach it partly like a bank with a credit agreement and contractual remedies, partly like a trader following the flow and goods, and often inserting a third-party collateral manager. Then, to mitigate payment risk, we usually take assignments over offtake agreements of friendly traders. In that way, we follow the cash payments and logistical movements. It gives us a lot of levers to pull.
The nice thing with crops is that you can follow the cycle. The nice thing with logistics is you can see when things get stuck. The last challenge always starts with the people and relationships. You want to finance people you know, people with a similar philosophy and alignment, and you grow with them.
Where do you get the finance from? You mentioned the fund that invests in you, but does all the finance come from them, or do you finance it any way you can?
Warwick Capital is our equity sponsor. In addition, a large, blue-chip pension fund provides our term loan capital.
What keeps you awake at night?
It is easy to make a loan, but getting the money back is not always easy. It’s a delicate balance between control and influence.
I don’t kid myself about the countries we’re in. Most of our business is in Latin America, Africa, the Black Sea, and the Middle East. We constantly evaluate probabilities. Risk is always apparent.
Have you had any defaults in the six years since you started?
We haven’t had any outright defaults, but anyone in the lending business who survived COVID and who tells you they don’t have any NPLs (Non-Performing Loans) would be lying. It’s the nature of the business.
We finance one of the largest agricultural producers in Ukraine. It’s incredible how they are coping with the war, and they only recently have begun to have issues honouring their obligations to us. That’s the nature of the business, right? It is what it is.
Can you insure some of those credit risks?
Absolutely, but the question is whether the insurance pays.
When we think of risk mitigation, there are four levels of recovery.
If you know the goods are delivered to an off-taker, and given that I have an assignment, the off-taker pays me directly. That’s level one.
I focus on middle-market counterparties because they can pay me out of their liquidity if a crop is delayed or something goes wrong. That’s level two.
The third level is the “Can’t pay, won’t pay” scenario. If there is a $13 million pile of sugar against our $10 million loan, I will enforce against it to seek recovery. We have the mechanisms and know how to do that.
The fourth, as you mentioned, is insurance. We’re probably one of the few non-banks that carry our own dedicated cargo policy. We still actively use Lloyds’s, but that capacity has waned for ags.
Do you deal only in ags?
We can do other commodities but stick to our knitting, which is ags.
Fraud has recently been in the headlines in metals warehousing. Is fraud less prevalent in the ag trade than in metals? And how can you avoid it?
Fraud is everywhere. It’s in commodities, financial markets, crypto, etc. You can’t prevent it. You can build a higher wall, but someone will find a way to get around it. You can introduce more regulation, but fraud is a purposeful evasion of the rules and systems.
There’s a theoretical understanding where things look good on paper, and then there’s the practical side of being on the ground and having a commercial understanding of how things work.
Can you give me an example of a loan that you’ve made?
In LatAm, we provide pre-export financing for sugar mills. In Africa, I tend to start on inventory. I finance stocks in the warehouse and get paid when they leave the warehouse.
We finance tobacco. I know it’s a controversial crop from a Western standpoint, and we do have a phase-out strategy in our ESG documentation, but you look at it differently when you are on the ground and understand its social impact. For example, tobacco in Zimbabwe accounts for approximately 20 per cent of their exports, and it’s the most viable cash crop for many farmers.
I understand there is an issue of child labour in picking tobacco. How do you deal with environmental and social issues in your supply chains?
We do formal investigations regarding land and company registries, but we get a better feel when we’re on the ground, where we hear and see what goes on. It gives us a better overview.
You do as much diligence as possible – it’s part of your process – but there’s a certain level of trust, right?
In no way do we condone child labour, but in crops, issues often arise when a company hires a third party to bring in and manage migrant labour. You try to mitigate it as much as you can from a top-down perspective by choosing a partner who does what they say they do. And then, you try to evaluate the situation on the ground. That’s why I travel so much. You trust, but you must always verify.
Would you lend to somebody without going to visit them?
No, it’s a rule of mine. It’s essential in any business. You can put any metric you want on risk, but there’s no transaction if there’s no relationship.
You call yourself a purpose-driven business – what is a purpose-driven business?
I’m Roman Catholic. This morning, I talked with a friend about the concept of God and Mammon. The Bible teaches us that humans can’t serve two masters: God and money. One is virtuous; one is materialistic. There is, however, always a balance. How do you balance people, planet, and profit?
You can’t have a purpose if you don’t have profit. Profit makes the world go around, but how do you effect purpose once you have profit? We’re blessed in the West because most of us don’t have to worry about sustenance, but there are emerging markets where sustenance is still a factor.
When we started the business in 2017, it was about CSR or corporate social responsibility. Since inception, we have included ESG in our investment process but never formalised an accreditation as I believed it was not genuine and “pay-to-play.” It was a whole new metric for raising capital, but people didn’t necessarily do what they said. And sure enough, at the end of 2022, you saw the tide go out with many greenwashing headlines.
Our metric is always, “Is our intention matching our output?” We believe in ESG and continue to evolve our policies; however, it must be balanced relative to the circumstances.
How do you measure success in a purpose-driven business?
It’s challenging, right? I struggle with it constantly.
There’s a financial metric, and there’s your heart. For me, it’s knowing we were put on Earth for a greater purpose. If I can extend the table for another person, that’s fantastic. If I can enable others to put themselves in a better position, that’s even better.
We are meant to give; we’re meant to serve. But you can’t serve if your vessel is empty.
When you do things of virtue, you only need one witness – yourself.
Do you only work with commodities that have been certified to be sustainable?
No, we prefer to do our own due diligence. Many of the companies we finance are bridges between agriculture and industry. A crop might be certified as sustainable, but you get a different viewpoint when you’re on the ground and see wastewater from the factory flowing untreated into a river.
In a recent interview, you mentioned that culture eats strategy for breakfast. What did you mean by that?
First, I can’t take credit for this quote as my South African colleague always uses this to summarise our business. You can have the best strategy on paper, but if your team doesn’t buy into it and doesn’t feel it, it won’t happen. You need the people around you to have a shared culture and vision to execute.
How do you manage your work/life balance?
I try to lead by example. Building this business has been a great sacrifice for my family. It’s funny. I say I do all this for my family, but I’m not with my family. It is something I am trying to correct.
Thank you, James-Scott, for your time and input.
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Profound, James-Scott