International Impact Investing Challenge

April 8, 2011Team B3

They must be nuts…

Kala founded Sai Agro Industries, a cashew manufacturing and distribution company, 5 years ago in Pune, India.

Sai Agro has $5M in revenues, employs 50 workers, and has the potential to scale even further—creating more jobs and community benefits.

But Kala lacks access to the $1.25M needed to invest in a new processing facility to facilitate that growth.

What we can learn from a cashew producer in India.

Sai Agro is not alone

SOURCE: Beyond Profit

The value of the gap in South and East Asia is $280-350 billion.

The value of the gap in South and East Asia is $280-350 billion.

45-55% of formal SMEs in emerging markets do not have a loan but need credit.

45-55% of formal SMEs in emerging markets do not have a loan but need credit.

The “Missing Middle” presents a financial and social opportunity.

Existing SME Funders

Below Market Returns Market Rate

Sm

all

S

cale

La

rge

EMCO will build on the success of existing SME investors, integrating best practices to achieve greater scale.

EMCO Fund I OverviewTiered capital structure enables institutional investors to achieve market rate returns.

Benchmark: Emerging Markets Corporate Debt, 9%* Benchmark: Emerging Markets Corporate Debt, 9%*

11Institutional investors beat the benchmark by achieving

10% returnsInstitutional investors beat the benchmark by achieving

10% returns

22

33

Foundations can leverage their capital more than 5 to 1Foundations can leverage their capital more than 5 to 1

Development organizations can leverage their capital more than 4 to 1

Development organizations can leverage their capital more than 4 to 1

BENEFITS

BENEFITS

*From JP Morgan Impact Investing Report

Performance

Institutional Investor IRR

Institutional investor returns can be achieved even in the case of significant loan losses.

10% 20% 30% 40% 50% 60% 70% 80% 90% 100%10% 10% 10% 10% 10% 10% 10% 10% 10% 10% 10%20% 10% 10% 10% 10% 10% 10% 10% 10% 10% 10%30% 10% 10% 10% 10% 10% 10% 10% 10% 10% 10%40% 10% 10% 10% 10% 10% 10% 10% 10% 10% 10%50% 10% 10% 10% 10% 10% 10% 10% 10% 10% 9.9%60% 10% 10% 10% 10% 10% 10% 10% 10% 8% 4%70% 10% 10% 10% 10% 10% 10% 10% 6% 1% -4%80% 10% 10% 10% 10% 10% 10% 6% 1% -5% -9%90% 10% 10% 10% 10% 10% 8% 1% -5% -9% -16%

100% 10% 10% 10% 10% 9.9% 4% -4% -9% -16% -

Severity of Loan Losses

% of Loans that Default

For our FOUNDATION investors: 21% of loan portfolio can sustain 75% losses before Class C returns are not achievedFor our FOUNDATION investors: 21% of loan portfolio can

sustain 75% losses before Class C returns are not achieved

EMCO Organization

EMCO, LP(based in Mumbai)

EMCO, LP(based in Mumbai)

EMCO Fund(for profit)

EMCO Fund(for profit)

EMCO Advisors

(non-profit)

EMCO Advisors

(non-profit)

2 Partner

s

2 Partner

s 3 Associat

es

3 Associat

es

10 Analyst

s

10 Analyst

s

4 Impact Officers

4 Impact Officers 4

Network Officers

4 Network Officers

Robust, on the ground presence to support deal selection, impact measurement, and network services.

5 support

staff

5 support

staff

Operating expenses covered by an average annual management fee of 0.9%

Non-profit advisors funded by grant money

Operating expenses covered by an average annual management fee of 0.9%

Non-profit advisors funded by grant money

Banks and other partners enable scalingLocal partners are critical for deal flow, due diligence, local business insights, and follow-on support

SMESME

Microfinance

Institutions

Microfinance

Institutions

Entrepreneur Support Networks

Entrepreneur Support Networks

SMESME SMESME SMESME SMESME SMESME

EMCOEMCO

Commercial Banks

Commercial Banks

High Potential

Top 5% “Pre-Certified”

Impact InvestorsImpact

Investors

Debt leverage

What do our partners bring?

Sophisticated national banks, such as ICICI and State Bank of India, already have banking relationships and dedicated SME units that see a huge volume of loan opportunities.

MFIs create a steady pipeline of growing businesses, with a supportive network

Impact Investors, such as Acumen, seek to leverage up their investments.

Entrepreneur networks such as Intellecap, BID Network, & Endeavor enable businesses to be investment-ready

What do our partners bring?

Sophisticated national banks, such as ICICI and State Bank of India, already have banking relationships and dedicated SME units that see a huge volume of loan opportunities.

MFIs create a steady pipeline of growing businesses, with a supportive network

Impact Investors, such as Acumen, seek to leverage up their investments.

Entrepreneur networks such as Intellecap, BID Network, & Endeavor enable businesses to be investment-ready

Investment Process

• Medium-sized enterprises

• Expansion-stage companies, poised at an inflection point

• High potential for growth and job creation, aligned with macro trends, differentiated strategies, strong management teams

• Loan amounts: $500K - $2M

• Average loan size: $1.25M

• Interest rates: Prime+4%

• Loan term: 5-year, fully amortizing

• All deals syndicated with local banks.

Target InvestmentsTarget Investments

EMCO loans target borrowers that are just below the bank’s existing risk threshold.

Loan Structure and Subordination

Loan Structure and Subordination

1st Loss Reserves & subsidies: 24%

1st Loss Reserves & subsidies: 24%

Local Bank (junior co-invest): 20%

Local Bank (junior co-invest): 20%

Class A (senior co-invest): 56%

Class A (senior co-invest): 56%

• Deals flow to EMCO through local partners, with preference given to “pre-certified” businesses

• EMCO analysts review business fundamentals, risks, and growth potential, and pre-approve loss guarantees up to 24%

• Syndication deal offered back to local banks for their approval

• Banks and EMCO share responsibility for ongoing monitoring

Due DiligenceDue Diligence

Kala’s loan

Loan Sources

EMCO Class C (Foundations) 12% $150,000

EMCO Class B (Gov't & Aid orgs) 12%

$150,000

Local bank (junior co-invest) 20% $250,000

EMCO Class A (senior co-invest) 56%

$700,000

Sum 100% $1,250,000

Monthly Annual

Payment Required: $32,185

$386,224

As a % of Sai Agro Revenue: 7.7%Fees

One-Time Loan Fees Charged (2%) $25,000

Subordinated to bank

Senior to bank

What this structure means for Kala.

EMCO Advisors(non-profit)• Form strategic

relationships with existing service providers

• Offer a “one-stop shop” for SME owners

• Track and measure impact of portfolio SMEs

through quarterly reporting structures

EMCO Advisors(non-profit)• Form strategic

relationships with existing service providers

• Offer a “one-stop shop” for SME owners

• Track and measure impact of portfolio SMEs

through quarterly reporting structures

Creating an Ecosystem

Annual operating budget of$993K covered by grant partners

Borrowers in the Network are required to submit impact and financial reports quarterly with annual audits

Borrowers are encouraged to use the EMCO Network Certified business support services

SMEs need more than just capital. They need management expertise and business support services to help them grow and thrive.

Measuring the Impact

SOURCES: SEAF methodology & http://www.opic.gov/doing-business/investor-screener#4

EMCO will only lend to businesses that are environmentally and socially sound, consistent with IFC/OPIC standards.

Identifying Responsible Borrowers

Identifying Responsible Borrowers

The EMCO Advisors will track and measure economic development through quality job creation and wage increases.

Financial and social incentives are aligned. Impact Tracking for Portfolio

CompaniesImpact Tracking for Portfolio

Companies

10,000 new jobs created10,000 new jobs created

Projected Impact of EMCO Fund I Projected Impact of EMCO Fund I

19% increase in annual wages19% increase in annual wages

69% employees with health/pension benefits69% employees with health/pension benefits

Multiplier effect for local economiesMultiplier effect for local economies

EMCO will aim to be a 4-5 star GIIRS rated fund, with a focus on a strong “workers” and “governance” score

Risks

Standard risks of doing business in emerging markets exist, but can be mitigated.

Looking Forward

The success of this fund will create a new platform for SME investments in emerging markets.

APPENDIX

Local Bank IRR with Various Loss

Scenarios

Class B IRR with Various Loss

Scenarios

Class C IRR with Various Loss

Scenarios

% of Loans that Default12.5% 10.0% 20.0% 30.0% 40.0% 50.0% 60.0% 70.0% 80.0% 90.0% 100.0%10.0% 12.5% 12.5% 12.5% 12.5% 12.5% 12.5% 12.5% 12.5% 12.5% 12.5%20.0% 12.5% 12.5% 12.5% 12.5% 12.5% 12.5% 12.5% 12.5% 12.5% 12.5%30.0% 12.5% 12.5% 12.5% 12.5% 12.5% 12.5% 12.5% 12.5% 12.5% 12.5%

Severity 40.0% 12.5% 12.5% 12.5% 12.5% 12.5% 12.5% 12.5% 12.5% 11.5% 7.4%of Loan 50.0% 12.5% 12.5% 12.5% 12.5% 12.5% 12.5% 12.4% 7.4% 1.0% -8.7%Losses 60.0% 12.5% 12.5% 12.5% 12.5% 12.5% 11.5% 5.0% -4.3% -8.7% -8.7%

70.0% 12.5% 12.5% 12.5% 12.5% 12.4% 5.0% -6.7% -8.7% -8.7% -9.4%80.0% 12.5% 12.5% 12.5% 12.5% 7.4% -4.3% -8.7% -8.7% -10.7% -90.0% 12.5% 12.5% 12.5% 11.5% 1.0% -8.7% -8.7% -10.7% - -

100.0% 12.5% 12.5% 12.5% 7.4% -8.7% -8.7% -9.4% - - -% of Loans that Default

10% 20% 30% 40% 50% 60% 70% 80% 90% 100%10% 5% 5% 5% 5% 5% 5% 5% 5% 5% 5%20% 5% 5% 5% 5% 5% 5% 5% 5% 5% 5%30% 5% 5% 5% 5% 5% 5% 5% 5% 3% -4%

Severity 40% 5% 5% 5% 5% 5% 5% 1% -10% - -of Loan 50% 5% 5% 5% 5% 5% -4% - - - -Losses 60% 5% 5% 5% 5% -4% - - - - -

70% 5% 5% 5% 1% - - - - - -80% 5% 5% 5% -10% - - - - - -90% 5% 5% 3% - - - - - - -

100% 5% 5% -4% - - - - - - -% of Loans that Default

10% 20% 30% 40% 50% 60% 70% 80% 90% 100%10% 1% 1% 1% 1% 1% 1% 1% 1% 1% 1%20% 1% 1% 1% 1% 1% 1% 1% 1% -3% -8%30% 1% 1% 1% 1% 1% -3% -11% - - -

Severity 40% 1% 1% 1% 1% -8% - - - - -of Loan 50% 1% 1% 1% -8% - - - - - -Losses 60% 1% 1% -3% - - - - - - -

70% 1% 1% -11% - - - - - - -80% 1% 1% - - - - - - - -90% 1% -3% - - - - - - - -

100% 1% -8% - - - - - - - -

Market Opportunity

SMEs in Emerging Markets present a sizeable opportunity for both financial and social impact.

SOURCE: McKinsey and IFC Report, “Two Trillion and Counting”

# of businesses

Formal SMEs in developing countries provide about 45% of employment and 33% of GDP.

Formal SMEs in developing countries provide about 45% of employment and 33% of GDP.

The value of the gap in South and East Asia is $280-350 billion.The value of the gap in South and East Asia is $280-350 billion.

%

45-55% of formal SMEs in emerging markets do not have a loan but need credit.

45-55% of formal SMEs in emerging markets do not have a loan but need credit.