It was surprising to learn that 80% of SME finance has been scaled up in the last 3-4 years, which means that this emerging trend needs the support of transparent and committed institutions to help monitor, motivate and track SME investment funds.
I wonder what type of tracking tools the Missing Middle will implement or develop to easily monitor the movements of SME investments, and also how transparent this process will be. I think that this type of initiative will be key to supporting and legitimatizing the steps needed to close the gap of the "Missing Middle".
This is a great question and one which our team has put in a lot of time thinking about. The Center of the Missing Middle plans to track the sector in a number of ways, but mainly focused on the details of SME funds and investments.
SME Funds:
The Center seeks to first organize the current status of funds in space, and then track their changes. To easily monitor SME funds, they will be organized and sortable by:
- Current Stage of Fund: Fundraising, Investing, Fully-Invested
- Total Fund Size:
- Range of Investment Size: fits roughly within $5K to $2M.
- Capital Type: Debt, Equity, Quasi-Equity, Mix
- Targeted Company Stage: Start up, Early stage, Mid stage, Late stage
- Industry Focus:
- Geographic Focus: Continent, region, country
- Core Mission: Social Impact, Financial Return, Balanced
- Website:
By tracking the above:
- Potential investors in SME funds will be able to quickly identify the funds in fundraising mode.
- It will be easier to track the percent of funds which graduate from pure fundraising to investing.
- More comprehensive data on total assets under management by sector, geography, and stage.
Investments:
The Center also seeks to track:
- New SME investments made by SME funds.
- SMEs currently raising capital.
- Successful SME exits: IPOs, M&A, Management Buyouts.
- Average returns on SME investments.
This, I feel, is important information that should be embedded into your entry! I would suggest outlining this information in one of the larger sections 1- What makes this solution unique or 2- Solutions addressing the barriers- just outline these points in an area that will allow you expound and explain your tracking methodology.
This is a fantastic idea that could really help close the gap in the SME finance sector.
Creating a Center for the "Missing Middle" seems like a very logical first step towards making SME financing into a legitimate and well-understood asset class.
Great proposal. Building a Center for the "Missing Middle" is definitely something that is vital to the future of this space.
Thanks Jenna for your support. The article you found is the first article in a series, which the Missing Middle Initiative is producing to track some of the key learnings our team is making and continuing to put a spot light on the sector.
At the Center for the Missing Middle, we are finding there are two key challenges for SME venture funds: Operational and execution issues.
For operational challenges, one of the biggest hurdles is making an SME venture fund of $10-30M operationally profitable. Funds must find strategies to increase the cash flow and/or decrease operating expenses in order to make funds like these possible. A fund manager must be able to profitably operate the fund, before they can focus on making investments and yielding a return. A traditional management fee of 2% for funds of these sizes are not enough to cover basic operational expenses such as salaries, overhead, and due diligence. However, there are number of funds which have found solutions to these issues, and which the Center is sharing in a blue print for how to successfully operate an SME venture fund.
These operational challenges must first be solved before private sector investors are willing and able to dedicate capital to a fund. If you get a commitment from an investor to start a $30 million fund, but you don't have the strategy in place to make the fund operationally profitable, you will not have the resources to make good investments. You need to able to offer competitive salaries, working capital to conduct in-depth due diligence and pay for lawyers to check and draft documents. In addressing your question, "Is it the lack of private sector capital that investors are willing to devote to the space", the answer is there are operational challenges that need to be overcome before private sector is able to dedicate capital to this space.
In looking at the challenges for operating an SME venture fund, you can see that it is more of a numbers issue, than an emerging market or regional issue. Execution challenges, such as raising a fund, making investments, and realizing a return on investments vary much more based on local markets.
Capital must go where it is ready to be invested, not just where it is needed. Some countries have laws that make it much easier to establish an investment fund and make investments than others. These are crucial points when deciding where you seek to establish the holding company, what countries you will be investing in, and the sources for where the capital is coming from.
When investment managers decide to create a fund, they must specify in detail the focus of the fund. What industries are they going to focus on, what type of capital will they be investing, and what will be the mission - social returns, financial returns, or a mixture. Once this has been outlined, marketing the fund to investors is the real execution challenge. A balanced fund model can be a good solution in raising a fund, as you can likely get the interest of both social investors and return focused investors, which increase your target market base of potential sources of capital. It also means you will likely be measuring your success based on both social and financial metrics, but the returns being sought are likely less aggressive or challenging to achieve.
A challenge which is both an execution and operational issue is having the right team and network on the ground to source the best investment opportunities and structure the best deals. You must have a local presence in the region you are investing, and be in close contact with those you invest in. At the end of the day, investment are made in people, not ideas, and you can only judge and help develop a business if you can look them in the face.
I understand that The Center is utilizing collected data and such to legitimize this time of investment, but are there other incentives to investors? Why would they stray from their original investments?
Great question Yon. The early investors in SME venture funds were and still are largely philanthropic organizations, foundations, wealthy families and individuals, and government entities. This happened mainly because these type of investors often don't make investments for the financial returns, and are more focused on the social impact it can create. Those that went in with the intent to make a profit, did so knowing that this was a very infant market, and they might lose it all in trying to be pioneer, but someone had to try.
Only in the past few years, have the minds of investors begun to come around to the idea that investing in Missing Middle funds could yield competitive market rate returns. You asked "why would investors stray from their original investments" and and begin investing in this sector. I think it's important to note that sector of SME venture funds are beginning to bucket themselves into three big categories: Socially focused funds, return focused funds, and balanced funds (a mix of trying to generate both social and financial returns).
In order for return focused investors to begin dedicating capital to this space, the sector needs to establish a track record that shows it is a viable asset class, able to yield certain returns with certain products. Once a strong grouping of SME venture funds have proven they can hit competitive market rate returns, the private sector will be more likely to add this asset class into the diversification of their portfolio.
Another incentive is that the balanced funds, those which seek actively seek to generate both a social impact and a financial return, provide a great opportunity for fund managers to promote the philosophy of "doing well by doing good".
The sector will continue to mature, and as it does, it will break down into various asset classes of type (debt, equity, and quasi-equity), focus (Social, Returns, balanced), and a number of other characteristics and investment criteria. As this happens, all types of investors will be able to easily identify the type of investment products in this sector that make sense for their portfolio.
I am greatly impressed with your Idea because it has the potential to create competitive market returns.
What kind of agreements will the Investors and the Centre for the missing middle have with the governments in the countries where they are ready to invest in inorder to make this work sufficiently ?
In a region like Africa politics can be unpredictable in some cases and it does affect the growth of small businesses especially during elections. Majority of the people there are poor and not well educated about the potential of having investors so sometimes they are not open to having them come in and tend to think that they are taking away their privillages e.g like in Uganda and Kenya where you have the successful small Indian business men going through that almost each year during elections. How are you and your investors prepared to tackle this issue should it arise in one of the regions you choose to invest ?
Comments
This is a great, well thought out concept.
It was surprising to learn that 80% of SME finance has been scaled up in the last 3-4 years, which means that this emerging trend needs the support of transparent and committed institutions to help monitor, motivate and track SME investment funds.
I wonder what type of tracking tools the Missing Middle will implement or develop to easily monitor the movements of SME investments, and also how transparent this process will be. I think that this type of initiative will be key to supporting and legitimatizing the steps needed to close the gap of the "Missing Middle".
Good luck!
Hi Bahiyah,
This is a great question and one which our team has put in a lot of time thinking about. The Center of the Missing Middle plans to track the sector in a number of ways, but mainly focused on the details of SME funds and investments.
SME Funds:
The Center seeks to first organize the current status of funds in space, and then track their changes. To easily monitor SME funds, they will be organized and sortable by:
- Current Stage of Fund: Fundraising, Investing, Fully-Invested
- Total Fund Size:
- Range of Investment Size: fits roughly within $5K to $2M.
- Capital Type: Debt, Equity, Quasi-Equity, Mix
- Targeted Company Stage: Start up, Early stage, Mid stage, Late stage
- Industry Focus:
- Geographic Focus: Continent, region, country
- Core Mission: Social Impact, Financial Return, Balanced
- Website:
By tracking the above:
- Potential investors in SME funds will be able to quickly identify the funds in fundraising mode.
- It will be easier to track the percent of funds which graduate from pure fundraising to investing.
- More comprehensive data on total assets under management by sector, geography, and stage.
Investments:
The Center also seeks to track:
- New SME investments made by SME funds.
- SMEs currently raising capital.
- Successful SME exits: IPOs, M&A, Management Buyouts.
- Average returns on SME investments.
Hi J. Skyler:
This, I feel, is important information that should be embedded into your entry! I would suggest outlining this information in one of the larger sections 1- What makes this solution unique or 2- Solutions addressing the barriers- just outline these points in an area that will allow you expound and explain your tracking methodology.
Great approach!!
This is a fantastic idea that could really help close the gap in the SME finance sector.
Creating a Center for the "Missing Middle" seems like a very logical first step towards making SME financing into a legitimate and well-understood asset class.
Great proposal. Building a Center for the "Missing Middle" is definitely something that is vital to the future of this space.
Also, I read your article on the Huffington Post and would recommend that everyone read your article and send it to friends who could be interested in the topic:
http://www.huffingtonpost.com/j-skyler-fernandes/investing-in-africa-def...
Thanks Jenna for your support. The article you found is the first article in a series, which the Missing Middle Initiative is producing to track some of the key learnings our team is making and continuing to put a spot light on the sector.
To view the 2nd article in the series: The Evolution of the Missing Middle Landscape, click here: http://www.africa.com/blog/blog,the_evolution_of_the_missing_middle_land...
The 3rd article will focus on the operational challenges and solutions for SME venture funds, and should be coming out soon.
Best regards,
J. Skyler Fernandes
What are some of the big challenges for creating an SME venture fund?
What's holding back the creation of funds? Is it lack of private sector capital that investors are willing to devote to the space or something else?
Thanks Jenna.
At the Center for the Missing Middle, we are finding there are two key challenges for SME venture funds: Operational and execution issues.
For operational challenges, one of the biggest hurdles is making an SME venture fund of $10-30M operationally profitable. Funds must find strategies to increase the cash flow and/or decrease operating expenses in order to make funds like these possible. A fund manager must be able to profitably operate the fund, before they can focus on making investments and yielding a return. A traditional management fee of 2% for funds of these sizes are not enough to cover basic operational expenses such as salaries, overhead, and due diligence. However, there are number of funds which have found solutions to these issues, and which the Center is sharing in a blue print for how to successfully operate an SME venture fund.
These operational challenges must first be solved before private sector investors are willing and able to dedicate capital to a fund. If you get a commitment from an investor to start a $30 million fund, but you don't have the strategy in place to make the fund operationally profitable, you will not have the resources to make good investments. You need to able to offer competitive salaries, working capital to conduct in-depth due diligence and pay for lawyers to check and draft documents. In addressing your question, "Is it the lack of private sector capital that investors are willing to devote to the space", the answer is there are operational challenges that need to be overcome before private sector is able to dedicate capital to this space.
In looking at the challenges for operating an SME venture fund, you can see that it is more of a numbers issue, than an emerging market or regional issue. Execution challenges, such as raising a fund, making investments, and realizing a return on investments vary much more based on local markets.
Capital must go where it is ready to be invested, not just where it is needed. Some countries have laws that make it much easier to establish an investment fund and make investments than others. These are crucial points when deciding where you seek to establish the holding company, what countries you will be investing in, and the sources for where the capital is coming from.
When investment managers decide to create a fund, they must specify in detail the focus of the fund. What industries are they going to focus on, what type of capital will they be investing, and what will be the mission - social returns, financial returns, or a mixture. Once this has been outlined, marketing the fund to investors is the real execution challenge. A balanced fund model can be a good solution in raising a fund, as you can likely get the interest of both social investors and return focused investors, which increase your target market base of potential sources of capital. It also means you will likely be measuring your success based on both social and financial metrics, but the returns being sought are likely less aggressive or challenging to achieve.
A challenge which is both an execution and operational issue is having the right team and network on the ground to source the best investment opportunities and structure the best deals. You must have a local presence in the region you are investing, and be in close contact with those you invest in. At the end of the day, investment are made in people, not ideas, and you can only judge and help develop a business if you can look them in the face.
This is spot on, Skyler!
Very best,
Magatte
Really interesting proposal!
I understand that The Center is utilizing collected data and such to legitimize this time of investment, but are there other incentives to investors? Why would they stray from their original investments?
Great question Yon. The early investors in SME venture funds were and still are largely philanthropic organizations, foundations, wealthy families and individuals, and government entities. This happened mainly because these type of investors often don't make investments for the financial returns, and are more focused on the social impact it can create. Those that went in with the intent to make a profit, did so knowing that this was a very infant market, and they might lose it all in trying to be pioneer, but someone had to try.
Only in the past few years, have the minds of investors begun to come around to the idea that investing in Missing Middle funds could yield competitive market rate returns. You asked "why would investors stray from their original investments" and and begin investing in this sector. I think it's important to note that sector of SME venture funds are beginning to bucket themselves into three big categories: Socially focused funds, return focused funds, and balanced funds (a mix of trying to generate both social and financial returns).
In order for return focused investors to begin dedicating capital to this space, the sector needs to establish a track record that shows it is a viable asset class, able to yield certain returns with certain products. Once a strong grouping of SME venture funds have proven they can hit competitive market rate returns, the private sector will be more likely to add this asset class into the diversification of their portfolio.
Another incentive is that the balanced funds, those which seek actively seek to generate both a social impact and a financial return, provide a great opportunity for fund managers to promote the philosophy of "doing well by doing good".
The sector will continue to mature, and as it does, it will break down into various asset classes of type (debt, equity, and quasi-equity), focus (Social, Returns, balanced), and a number of other characteristics and investment criteria. As this happens, all types of investors will be able to easily identify the type of investment products in this sector that make sense for their portfolio.
Hello Skyler
I am greatly impressed with your Idea because it has the potential to create competitive market returns.
What kind of agreements will the Investors and the Centre for the missing middle have with the governments in the countries where they are ready to invest in inorder to make this work sufficiently ?
In a region like Africa politics can be unpredictable in some cases and it does affect the growth of small businesses especially during elections. Majority of the people there are poor and not well educated about the potential of having investors so sometimes they are not open to having them come in and tend to think that they are taking away their privillages e.g like in Uganda and Kenya where you have the successful small Indian business men going through that almost each year during elections. How are you and your investors prepared to tackle this issue should it arise in one of the regions you choose to invest ?
VERY INTERESTING CONCEPT! I LOOK FORWARD TO SEE HOW FAR THIS GOES! VERY WELL THOUGHT OUT! KEEP UP THE GOOD WORK!
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