An equity fund's investments in Armenian food processors could help thousands of small farmers find new markets for their goods. Photo: Rita Willaert (Flickr)

Could equity investment become the newest tool in the fight against poverty? Thanks to an innovative fund in Armenia, we may soon know the answer.

According to the UN Food and Agriculture Organization, Armenia is home to about 340,000 small farmers. But the rural food processors that support the rural economy by purchasing local products such as grapes and milk are struggling to find the capital they need to grow.

So to expand the market opportunities available to these farmers, the U.N.'s International Fund for Agricultural Development (IFAD) helped to create the Fund for Rural Economic Development in Armenia (FREDA).

Just like traditional equity investment funds, FREDA provides promising companies with working capital, financing for new equipment, business advice and technical support.

"We have a standard package for everybody," explained Dr. Tigran Khanikyan, CEO of FREDA. "Like assisting in accounting and reporting, assisting in implementation of international food safety standards, auditing and also expanding export opportunities."

What distinguishes FREDA from other equity funds is how it chooses to invest. Beyond simply looking at a company’s business plan, the fund evaluates the potential impact of its investments on local development. As a result, FREDA is making strategic investments in companies that source their inputs from rural smallholder farmers.

The idea is for FREDA to invest in what it calls "engines of rural development." These are the businesses that process locally grown agricultural products.

Whether or not these businesses will turn out to be such "engines" remains to be seen. But looking at the companies that the fund has invested in, it’s hard to argue with the results: In just three years, one winery has raised its productive capacity by 500 percent, while a fish factory has seen a tenfold increase in exports since receiving equity.

Still, the real measure of success—and what will hopefully distinguish the equity model from traditional development aid—will be whether or not the fund can become profitable and self-sustaining.

Unfortunately, the only financial data available is from FREDA’s first full year of operation, which, of course, paints an incomplete picture. A quick look at their financial statement for 2010 reveals that despite recording a $22,005 profit for the year, $140,409 of their revenues came from grants. This means the fund remains dependent on outside donors. But don’t jump to conclusions just yet:According to Dr. Khanikyan, it may take a few years before the benefits are fully realized.

If the investments do begin to pay off, the future could be bright for FREDA and the development equity model. With an almost $3 million portfolio invested in seven agro-processors—and plans to reach a total of 30 by 2015—the fund has the potential to extend market access to thousands of smallholder farmers in rural Armenia. Should it succeed, it will be further proof that development and profits don’t always have to be competing priorities.