international impact investing challenge april 8, 2011 team b3
TRANSCRIPT
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.