Mad Capital (Mad!)

Summary

Mad Capital provides long-term capital to mid-sized regenerative organic farmers across the US. To date, Mad Capital has launched two Funds; Perennial Fund I and Perennial Fund II to meet a financial gap for farmers wanting to transition their land through regenerative practices. The Funds provide long term flexible loans and holistic farm planning, enabling farmers to access new markets with positive environmental outcomes.

Background

Regenerative farming practices have been gaining momentum in the US as the negative outcomes of intensive or industrial farming are increasingly recognised. In the US, it is estimated, for example, that soil erosion costs about USD 44 billion in productivity losses each year [1]. Other negative impacts from intensive agriculture include the loss of local biodiversity, declining water quality and increased CO₂ emissions from heavy tilling.

Mad! was founded in 2018 to help US farmers in transitioning to regenerative farming. Regenerative farming encompasses organic farming principles (no use of chemicals or genetic engineering), as well as practices such as minimal tillage, cover crops and multi-crop rotations. Mad! delivers this with three companies all part of the Mad! family of brands:

• Mad Agriculture – Business and farm planning – helping farmers develop a five- to 10-year plan of their farm, assisting with knowledge and resource gaps on regenerative practices
• Mad Markets – Accessing new produce markets – brokering crops on behalf of farmers, finding specialty markets and buyers who want to work with farmers to produce food sustainably
• Mad Capital – Accessing financial support – providing long term flexible loans tailored to an individual farmer’s needs.

This last activity stems from the barriers presented by traditional finance options, which are largely only suitable for conventional farming techniques and require yearly returns.

In the transition to organic farming, it takes 36 months for farmers to become eligible for the USDA organic certification and access the new markets that certification affords. While net profits can be up to two-to-three times higher, organic farming carries its own transition costs.

Organic farmers may no longer rely on chemical inputs, but they often face other additional costs, such as labour and machinery, resulting in overall costs that are on par with conventional farming. Additionally, depending on the new crops introduced, farmers can also face yield losses of up to 30% in the transition years. This means that farmers may be in the red for up to three years.

Brandon Welch, co-founder and CEO at Mad Capital, says this is challenging for traditional sources of finance: “Community banks typically provide operating loans on a year-to-year basis, leaving the farmer with little margin for error and no room to make an investment in their soil beyond a year-long time horizon.”

Brandon Welch, Co-Founder and CEO, Mad Capital

In response to this finance gap, Mad Capital launched the Perennial Fund I, which provides long-term operating, term and equipment loans to farmers to support their transition to organic management. Mad Capital helps farmers to develop transition plans across a five- and 10-year horizon, and identifies the financing required, such as purchases of new machinery, process equipment and wages for more farm workers.

Mad Capital’s operating loan, which makes up the bulk of its exposure, works as a revolving facility, with interest payments starting in year one, but with the option for farmers to roll over the principal and reinvest in their farmland up to the eighth year. This creates free cash flow for the farmer to reinvest in their soil during the transition. These terms are determined by the farmer, financial and ecological profiles of the farms, and each loan has two built-in forbearance years to account for weather variability.

Welch says the Fund is selective about the farmers it lends to: “We work with high quality operators, 90% of them already have some organic acres that they know how to work and are looking to extend that to the rest of their farm… They get our mission and they like that we share the same values.”

Business Case

For the Perennial Fund I, Mad Capital had an original target of USD 5 million, but investor interest was above expectation, and in February 2021 the Fund closed at USD 10 million with 42 investors, mostly US-based. These include high net worth individuals, family offices, foundations and corporates. The Fund targets returns of 6-9% per annum based on early farmer feedback and market research.

Confidence in debt repayments is driven by the increased prices that organic and regenerative farmers can command, in addition to Mad Agriculture’s close relationship with the farmers. The US organic food market has grown by 233% [2] in the last 10 years, and organic premiums typically fall in the 100% to 200% range for most commodity grain crops compared to conventional prices [3]. This is partially offset by reduced yields, with reductions up to 30% depending on the crop type.

However, during times of extreme drought or heat, organic systems produce up to 40% higher yields than conventional systems due to improved soil health [4]. This is important as climate change increases both the probability and severity of extreme weather events.

To ascertain the business case across different regenerative farming approaches, Mad Capital primarily runs a cost benefit analysis around yield grown per acre, costs per acre, and market price received per unit, since these drive a farm’s profitability.

As of 2024, Mad Capital supports 34 farmers across 117,947 acres of US farmland, in 17 states. Some 18,470 acres are currently being transitioned to organic farmland. The land is predominantly used as cropland, with farmers employing minimal tillage, cover crops and perennial crops. Some of its farmers also have livestock, with around 25% of the total acreage uses an integrated crop-livestock approach, meaning that livestock are permitted to roam and graze on cropland. This is another regenerative agricultural practice that can offer both environmental and financial benefits, through improved soil health and additional revenue streams.

Lessons Learned

Since the start of the Fund, Welch says several adjustments have had to be made. For example, the Fund initially offered a revenue share repayment option of 10-50% revenues after a three-year period. The Fund’s team predicted that this would appeal to farmers based on its risk-free component in the case of no returns. However, the farmers so far have all opted for fixed interest repayments. “Because of crop insurance, farmers are protected at about 85% revenue level on yield or price loss…they would rather have the certainty of paying that smaller gap in the downside scenario, over an uncertain amount of revenue in the upside scenario,” says Welch.

Another component originally offered was a per-acre transition loan instead of a whole-farm approach. However, in practice, this was a laborious process, needing to coordinate collateral requirements between other lenders, and it didn’t necessarily lead to better farm outcomes. Welch says: “It complicated the financial agreements when the farmers had other financiers, leaving us to compete for who had first lien.” Instead, the Perennial Fund now takes a whole-farm approach on its lending, and conventional acres make up about 15% of its farm portfolio (which are soon to begin transition).

Data and Measurement 

The Perennial Fund I tracks acreage use across its portfolio, and Welch acknowledges the need for a deeper level of data-driven evidence, in order to grow the movement and appeal to investors seeking environmental returns.

Across the Fund’s portfolio, Mad Capital is running a research project that tracks ecological outcomes, such as pollinator population, soil health, crop and livestock quality, alongside traditional financial indicators such as whole farm financial performance and resilience, which the team hopes will prove the benefits of regenerative practices and draw in more investment.

What’s Next?

Building on the success of the first Fund, Mad Capital began raising for Perennial Fund II in 2024. This larger Fund will be a USD 50 million private credit fund focused on generating current yield from operating, real estate, equipment, and infrastructure loans — designed for the low-risk, fixed-income portion of a portfolio. The Fund will have a blended finance structure with a first loss tranche. This means the philanthropic capital will take a first loss position, putting it behind senior debt providers in the repayment order if the farmer defaults. By utilising a blended finance structure, the Fund can attract and crowd in additional private capital. As of October 2024, the has Fund closed at USD 18.7 million, including USD 10 million for the junior position from the Rockefeller Foundation, Builder’s Vision, Schmidt Foundation, and a dozen other philanthropic donors [5]. Mad! is planning a USD 50 million close in May of 2025.

Updated as of October 2024

Sources:

1. Farm Progress (2017) The high cost of soil erosion
2. Statista (2024) Organic food sales in the United States from 2005 to 2023
3. US Department of Agriculture (2016) Investigating Retail Price Premiums for Organic Foods
4. Rodale Institute (2024) Farming Systems Trial
5. Forbes (2024) Leading Investors Back New Regenerative Organic Agriculture Fund
6. Interview with Brandon Welch, co-founder and CEO at Mad Capital