Investment Supply for SMEs

Ana Marr and Charles Chiwara

June 2011

Content

Overview Instruments

• SMEs - The Missing Middle

• Barriers to Financing SMEs in Africa

• Global Investment Funds

• Innovative Financial Models

• Private Equity

• Credit Guarantee Schemes

• Islamic Banking •Current Funding Sources

“Missing middle” – debt and equity“Missing middle” – debt and equity

Commercial bank debtCommercial bank debt Private EquityPrivate Equity

Family & friends Money lenders

Micro-financeMicro-finance

$25K

InvestmentSize

(US$)

$2M

“Missing middle”

Perpetual Barriers to Financing SMEs in Africa

• Perceived risks• Institutional barriers• Policy and regulations• Skills and training needs

Global Investment Funds Investor Type of product Total amount

available Individual amount per SME project

Target group Investment purpose of SMEs

Intermediary

European Investment Bank

EIB Loans for SMEs

Euros 30 billion (over 2008-2011)

From very small to a maximum €12.5m

SMEs < 250 employees in the 27 EU member states

Tangible (e.g. equipment) and intangible (e.g. distribution networks)

Local commercial banks, guarantee funds, mutual guarantee institutions, microcredit organisations. For some, EIB provides guarantee to reduce risk.

European Investment Fund

Private equity and venture capital funds investing in SMEs

EUR 409 million in 2008

n.a. SMEs Seed capital; build-up strategy; internationalisation; mezzanine finance.

The EIF is a fund of funds. In 2008, it worked with 32 venture capital funds in Europe.

8 miles – Bob Geldof

Private equity fund for Africa

US$750 million to be raised

Investments worth between $15m and $80m

Africa Agribusinesses, financial services and telecommunications.

Secured backing from the African Development Bank and the International Finance Corporation. Other investors are set to sign up.

Innovative Financing Models

• Acumen Fund• Grofin• E+Co

• Root Capital

Private Equity

• Definition• Seed Capital– Valley Of Death– FFFs

• Venture Capital/Early Stage• Buyouts/Later Stage

Later Stage

Early Stage

B

C

Mezzanine

A

Seed Capital

Public Market or Private

Equity

Secondary Offerings

Investment Banks, Merchant Banks or other

Financial Institutions

Emerging GrowthCompany

Valley of death

REVENUE

Angels FFF

Public / Private

Company

IPO/M&A

VCs, Acquisitions/Mergers & Strategic Alliances

Break Even

INVESTMENT

New venture financing cycle

INVESTMENT PERIODFUNDRAISING REALIZATION PERIOD POTENTIAL EXTENSION

Commitments By limited partners (multiple closings)

Commitments By limited partners (multiple closings)

Commitments By limited partners (multiple closings)

Liquidation

1 year 4-5 years 4-6 years 2 years

Private Equity Life Cycle

Fundraising

Investing• Selecting• Structurin

g• Monitorin

g

Divesting / exiting

Private Equity Investment Process

Provide Capital

To generate positive social and / or environmental impact

Expect financial returns

Impact Investing

Defining Impact Investing

Credit Guarantee Schemes

• Definition• Proponents• Critics• Operation of CGS

LOANAPPRAISAL

GUARANTEEAPPRAISAL

SUFFICIENTCOLLATERALEND

END END

AGREEMENTWITH BORROWER

ISSUESINVOICE

ISSUESGUARANTEECERTIFICATE

LOANCONTRACT

DISBURSESLOAN

PAYSGUARANTEE

FEE

END

SENT TO LENDER

EX-POST

EX-ANTE

BORROWERLENDER GUARANTEE FUND

NO

NO

NO

NO

PAYMENT TRANSFERREDTO GUARANTEE FUND

YES YES

Islamic Banking• Rationale

– Emerging– Significant population in Africa

• Principles– Prohibition of usury– Profit sharing– Certainty of contracts– Ethical

• Examples– Mudarabah - VC– Marabaha - Asset Finance / HP– Musharaka - FRL, mortgage finance

Current Funding Sources

1. Guarantees – AGF , MIGA2. Private Equity :

1. SMEs2. Buyouts

3. DFI’s :-1. African, Regional, International2. Tools

1. Debt2. Equity3. Guarantees4. Grants