Permanent Capital Vehicle for SMEs

The creation of a Permanent Capital Vehicle will scale access to long-term growth capital by providing a structure attractive to a broad set of investors and SMEs. A start-up grant combined with SEAF’s 20-year track record, presence in 20 countries, and asset contribution can make this significant innovation a reality.

About You

Organization: Small Enterprise Assistance Funds (SEAF) Visit websitemore ↓↑ hide↑ hide

About You

First Name

Mildred

Last Name

Callear

Your Organization

Small Enterprise Assistance Funds (SEAF)

Country

United States, DC, Washington

About Your Organization

Organization Name

Small Enterprise Assistance Funds (SEAF)

Organization Website

Organization Phone

(202) 737-8463

Organization Address

1050 17th Street NW, Suite 1150 Washington, DC 20036

Organization Country

United States, DC, Washington

Organization Type

Non-profit/NGO/Citizen-sector Organization

Your solution

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Name Your solution

Permanent Capital Vehicle for SMEs

Describe Your Solution

The creation of a Permanent Capital Vehicle will scale access to long-term growth capital by providing a structure attractive to a broad set of investors and SMEs. A start-up grant combined with SEAF’s 20-year track record, presence in 20 countries, and asset contribution can make this significant innovation a reality.

Country your work focuses on

n/a

If multiple countries, please list them here. If your solution targets an entire region, please select it below

Global Developing Countries

Region(s) your solution focuses on:

Africa, East Asia and the Pacific, Europe and Central Asia, Latin America and the Caribbean, Middle East and North Africa, South Asia.

Range of turnover in your target firms, in USD

Less than $1 Million, $1-5 Million.

Average turnover in USD of your target firm

$1.8 Million

Number of employees in your target firms

5-24, 25-49, 50-74.

Average number of employees of your target firm

50

Specify the size, average and range of expected loans or investments in each target firm

Range: $200,000 to $2 million; Average: $1 million

What stage is your solution in?

Operating for less than a year

Innovation

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What makes your innovative solution unique?

The proposed Permanent Capital Vehicle (PCV) is a transformative solution that will change the way SMEs in developing countries access long-term growth capital, while providing an appropriate structure for impact investors. A Challenge grant will enable SEAF to bring the PCV model to market, catalyzing broader systemic change.

The PCV will unlock private financing by offering an investment structure tailored to both SMEs and investors. SEAF’s experience has demonstrated that many fast-growing SMEs need equity and mezzanine debt financing well beyond the average fund life in order to reach scale. At the same time, investors need current returns, and the option to redeem their investments. A PCV will eliminate this time-horizon mismatch by providing liquidity for investors, while allowing each SME time to reach scale. With increased diversification and a healthy current income payout, the PCV also opens the asset class to a broader array of investors.

SEAF is well-placed to bring the PCV model to fruition. With a strong 20-year track record, SEAF has the experience and coverage necessary to win investor confidence and mobilize the model. SEAF’s local presence in 20 countries and experience investing in 30 countries will enable the PCV to source global SME investments. In addition, a contribution of SEAF-managed SME assets, with varying maturities and current income payout will provide a platform for growing investments. With a Challenge grant, SEAF believes it can establish the PCV and gain traction with investors to provide a new investment model for the sector, scaling-up SME finance.

How does your proposed innovation leverage public intervention in catalyzing private SME finance?

The PCV will transform more than 20 years of public-private partnerships to catalyze private financing to SMEs. Public intervention will support the development and launch of the PCV, while a public anchor investor will provide the backstop that will attract a wide variety of new private investors to SME finance. Such public intervention will help establish a vehicle that will provide the sustainable private SME financing needed to scale up SME investment and growth.

SEAF is seeking public support to co-sponsor Phase II of its work in designing and taking to market a Permanent Capital Vehicle. Over the course of the past year with the support of the Rockefeller Foundation, SEAF has researched, modeled and gauged the marketability of a PCV. In Phase II, SEAF will solicit investors through a road show and bring the PCV to market, initially through a private placement. SEAF is seeking a co-sponsor to support this phase of implementation, joining Rockefeller Foundation, which has financed the first phase of work.

In addition, SEAF seeks a public anchor investor to provide a small subordinated capital tranche to encourage early investors while the PCV scales up. Such a commitment would enhance the PCV’s marketability by promoting confidence in a new investment model.

SEAF anticipates completing Phase II and privately placing the PCV within 12 months of the receipt of Phase II financing. A junior anchor investment in the early phase of the PCV will support investor confidence as the PCV grows its assets and builds a track record for a few years prior to considering a listing on a public exchange. Such support is expected to build investor confidence in a private SME finance model with an unlimited time horizon and the capacity to catalyze hundreds of millions of dollars to SME risk capital finance.

Public support would be highly leveraged. SEAF estimates that a $1 million implementation grant and a $10 million junior equity commitment to the PCV would catalyze at least $200 million in private finance by the time of the PCV’s listing. Public support in this initial phase will enable investments in approximately 200 firms with an initial average of 40 employees each. As investments are exited, the PCV will utilize proceeds to finance additional SMEs. Furthermore, the vehicle’s scalability will enable SEAF to offer more shares in response to investor demand, further increasing the PCV’s size and long-term financing to SMEs.

As the first permanent capital vehicle investing globally in SMEs in developing countries, this PCV will demonstrate the innovative benefits associated with this investment model in this asset class. A positive demonstration effect will enable the PCV to induce systemic change, unlocking further private growth capital for SMEs.

What barriers does your proposed solution address?

Asymmetry of information, Lack of collateral, Lack of financial capacity, Lack of SME access to skills / knowledge / markets, Unavailability of financial products tailored to SME needs, Lack of institutional capacity of financial intermediaries, High transaction costs for financial intermediaries to serve SMEs, Lack of competition / incentives for financial intermediaries to serve SMEs, Underdeveloped local capital markets (term local currency funding, exit options for SME equity), General barriers to SME development related to investment climate, Lack of financing to women entrepreneurs, Specific barriers to fragile and weak states.

If you checked any of these barriers, describe how your solution addresses them

A Permanent Capital Vehicle will address numerous barriers to SME financing. The PCV is expected to reduce barriers at the firm, financial intermediary and investor levels, while increasing the volume of growth capital available to SMEs.

SEAF’s investment process is structured to remove firm-level barriers. SEAF’s “on the ground” presence and close engagement with portfolio companies reduces the information asymmetries faced by many international investors. SEAF’s local investment offices also work closely with portfolio companies to design financing packages that, where necessary, reduce the need for collateral. As a private equity investor, SEAF often seeks investments in SMEs that lack financial capacity, and access to skills, knowledge and markets. SEAF provides technical assistance designed to build skills and the financial capacity necessary to grow each portfolio company.

In addition to removing these firm-level barriers, the PCV will make available a financial product tailored to SMEs’ needs. Many SMEs require growth capital beyond the time horizon of the average private equity fund. An infinite-life PCV enables long-term financing, ensuring that portfolio companies have sufficient time to reach scale and achieve a developmental impact.

Importantly, SEAF’s PCV model also addresses barriers to private SME finance at the financial intermediary and investor levels. First, the PCV model improves the incentive for financial intermediaries, such as SEAF, to invest in the SME asset class. By reducing both the cost of raising capital and the transaction costs associated with setting up many separate country funds, the PCV model reduces the cost of investing growth capital in SMEs. These costs savings will significantly increase net profits, and will attract additional intermediaries and investors to the SME asset class, building institutional capacity. Lower costs will enable investors to resist size creep and continue to focus on SMEs rather than moving to larger and potentially more profitable investment opportunities.

Second, the PCV structure reduces the need for financial intermediaries to continually raise new investment funds and makes SME development less vulnerable to economic downturns. Third, the PCV will invest globally in developing country SMEs. Global investments will provide increased diversification benefits to investors, and enable SEAF to more easily invest in fragile and weak states. By removing these barriers, SEAF intends the PCV model to catalyze significant financial intermediary and investor involvement in the SME asset class.

Finally, with additional growth capital available to SMEs, the PCV is expected to positively impact local capital markets and women entrepreneurs. As a result of more available finance, additional SMEs will grow and seek public listings, which will bolster local capital markets. The availability of dedicated financing will also benefit women entrepreneurs who often find it doubly difficult to access commercial sources of capital.

Impact

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Provide empirical evidence of your proposed solution's success/impact at present. If your project is in the idea phase, please provide evidence that speaks to its potential impact

The PCV will provide more SMEs with the long-term capital necessary to grow their businesses. While it is accepted that investments in SMEs spur economic growth and contribute to poverty reduction, SEAF has found that growth capital in particular has a profound positive impact. Investing in SMEs with high-growth potential and working closely with portfolio companies to realize that potential, SEAF has successfully leveraged every $1 invested to achieve $12 in benefits to local stakeholders. Unlocking significant private growth capital, the PCV will enable the benefits from this high-impact form of finance to reach more local communities in developing countries.

SEAF has conducted in-depth analysis and produced a series of reports evaluating the development impact of our investments on a variety of community and government stakeholders. While it has long been assumed that SMEs were a powerful tool for economic growth and poverty reduction, our research has provided concrete evidence of the profound impacts these growing small businesses have on job creation, wage growth, employee benefits and training, and a host of other indicators that have proven essential to the sustainable development of emerging economies.

SEAF’s in-depth case study analysis shows that the benefits of growth capital return to local society through a variety of stakeholders—from employees, suppliers, customers and competitors, to the local government, community and financiers. As these businesses grow, so do the communities and families around them. And with stable jobs and growing incomes, families can better plan for their futures—investing in improved housing, preventive health care and education for their children that can end the cycle of poverty and build the base for a more sustainable society.

In a review of portfolio companies in 2008, SEAF found…
• 23% average annual increase in revenues in USD terms
• 17% average annual increase in non-seasonal employment
• 74% of jobs created have been allocated to unskilled and semi-skilled workers
• 17% average annual increase in wages in USD terms
• 14% of employees received promotions
• $4 Million paid on average to local suppliers by each company
• 32% average annual growth in taxes paid to the government

How many firms do you expect to reach?

As a $200 million vehicle making $1 million investments, the PCV will reach 200 SMEs. SEAF expects to invest in 160 new SMEs, and retain investments in 40 SMEs. Beyond the initial investment period, SEAF will reach additional SMEs by recycling capital and scaling-up in response to investor demand.

What is the volume of private SME finance you aim to catalyze?

SEAF aims to catalyze over $200 million in private SME finance. Based upon investor demand and the availability of high-growth investment opportunities, SEAF will grow PCV assets to $200 million or more. In addition, the PCV’s demonstration effect is expected to catalyze private SME finance well beyond this amount.

What time frame will be required to reach these targets?

SEAF anticipates that the PCV will catalyze $200 million in private finance to SMEs in three to four years. SEAF expects Phase II development, including structuring, organization and launch of the PCV through a private placement to be completed within one year of receipt of public support. After the PCV’s private placement, SEAF will take measured steps to build upon existing assets and grow the PCV to reach $200 million through a listing on a public exchange. SEAF expects to list the PCV within two to three years of the vehicle’s private placement.

Does your solution seek to have an impact on public policy?

Yes

What would prevent your solution from being a success?

Inability to find financing and build scale could prevent the PCV model from succeeding. Financing for Phase II development and an anchor investor are integral to the PCV’s success. In addition, inability to build scale as a result of low investor confidence could jeopardize the model. SEAF recognizes and is working to mitigate these risks to ensure that the PCV model induces systemic change in the way SMEs access and investors provide growth capital.

Describe the social impact of your innovation. Please include both numbers and stories as evidence of this impact

SEAF has found that growth capital investments in SMEs have a significant positive social impact. The PCV will widen this impact, channeling additional long-term capital to high-growth SMEs in developing countries. In addition, by offering a financial product better tailored to the growth time-horizon of SMEs, SEAF anticipates that the social impact of financing through the PCV will be further amplified. In a 2008 review of portfolio companies, SEAF found that…

• 83% of employees were provided health and pension benefits by their companies
• 83% of companies provided formal internal or external training to their employees
• 69% of companies had women in senior management positions
• 6% of company revenues were contributed to local charities and community projects

Case Study – Sunshine Exports, Trans-Andean Fund, Peru

Since 2005, SEAF has made multiple investments in Sunshine Exports, a family-run mango and avocado packer, processor and exporter in Peru that works with over 450 small-scale farmers and provides more than 3,000 jobs during high season. With financial assistance from SEAF, Sunshine constructed frozen and dehydrated fruit processing plants that allow the company to accept 100% of harvests from local farmers (previously discarded imperfect fruit is now used for packaged products) and extend the production season, increasing returns to the company, farmers and employees through year-round job opportunities.

In addition, Sunshine founded and operates Sol Radiante, an NGO that promotes sustainable farming practices amongst more than 600 small producers through trainings, technical assistance in organic production, and partial financing of organic certification costs. The NGO also supports social development programs for farmers’ families and communities through summer schools, visual arts, and education on gender equality and health and sanitation issues. SEAF’s investment in Sunshine catalyzed grassroots development initiatives, and demonstrates how the social impact of investment often reaches far into the local community.

Sustainability

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List all the funding sources that are required for the sustainability of this solution

The PCV’s sustainability depends upon Phase II funding and the commitment of an initial anchor investor in the vehicle’s private placement. SEAF anticipates that Phase II funding will require a $1 million commitment to ensure the PCV meets all necessary legal and regulatory requirements and to identify anchor investors. A public anchor investment of $10 million in the vehicle’s private placement is also needed to build private sector confidence in the PCV model.

Demonstrate how your proposed solution has the capacity to graduate from dependence on public finance. What is the time frame?

SEAF expects that the PCV will graduate from dependence on public finance within three to four years. Short-term public finance is necessary for SEAF to bring the PCV to market and signal confidence in the model to private investors. SEAF anticipates that this support, SEAF’s reputation, and the model’s design, which is suited to the needs of investors, will enable the PCV to securely graduate from dependence on public finance at or shortly after a listing, and remain sustainable in the long-term.

An anchor investor will provide the private sector the confidence necessary for the PCV to graduate from public finance within three to four years. An anchor investor will lead the way forward; enabling SEAF to prove to the market the benefit of both SME investment in developing countries and the PCV design. By building assets and a track record prior to listing with the public investor’s support, SEAF expects to solicit sufficient private sector interest for the public investor to exit at or shortly after a listing.

SEAF’s well-respected reputation in the SME investment sector will support the PCV’s graduation from public finance. Private investor confidence in the vehicle’s manager rests, in large part, on SEAF’s long and successful track record of investing growth capital in SMEs, and on the organization’s global presence. These attributes, combined with SEAF’s capacity to grow PCV assets to $200 million, will raise confidence in the PCV and support the vehicle’s graduation from public finance.

Finally, SEAF expects private investors to recognize the benefits of the PCV’s design and move to a model that better fits their needs. In addition to providing liquidity, the PCV offers significant geographic and investment maturity diversification benefits to investors. Given its cost benefits, the PCV model will also enable diversification in terms of investment size. The PCV will allow managers to continue to invest in small businesses rather than moving up-market. Furthermore, with a diversified mix of mezzanine debt and equity investments, the PCV will provide income for investors with significant upside. SEAF expects that this payout structure will open SME investment to a new class of interested investors. As a model tailored to fit investors’ needs, SEAF expects that the PCV will make a smooth, permanent graduation from dependence on public finance.

Demonstrate how your proposed solution will survive a potential loss of its largest private funding source

Diversification will enable the PCV to survive the potential loss of its largest private funding source. For Phase II development, SEAF is seeking the support of two or more grantors. For the vehicle’s private placement, SEAF seeks investment from a number of both public and private investors. This diversification will enable SEAF to refrain from relying solely on a single private funding source. While the potential loss of SEAF’s largest private funding source may delay the project in the short-term, diversification will ensure that the PCV comes to market.

Please tell us what kind of partnerships, if any, could be critical to the greater success and sustainability of your innovation

SEAF seeks partnerships that will enable the organization to grow PCV assets to reach scale. In recognition that many investors require liquidity, but are unable to exit from their SME investments, SEAF seeks partnerships with those entities seeking an exit from their performing SME investments. Such a partnership would enable SEAF to build assets for the PCV, while providing liquidity for the original investor. SEAF recognizes that building a strong asset base is integral to the PCV’s success and future sustainability.

Are there non-financial issues that could threaten the sustainability of your proposed solution?

The sustainability of the PCV rests, in part, upon SEAF’s ability to scale up the vehicle by sourcing high-growth SME investments. Inability to source new investments, for reasons related to availability or capacity, could diminish investor confidence and threaten the vehicle’s sustainability. SEAF recognizes this risk and believes the organization’s existing asset contribution of SEAF-managed assets and broad network of local developing country investment professionals and entrepreneurs built over the last 20 years greatly diminish the risk’s threat to the PCV’s sustainability. In addition, and in recognition that the PCV will need to be scaled up for a listing, SEAF is building internal front and back-office capacity to manage new investments. Thus, SEAF is taking pro-active steps to mitigate risks and ensure the PCV’s sustainability.

Please tell us if your proposed solution aims to scale up through a high growth sector, expand immediately to multiple sectors, and/or scale up geographically

SEAF will scale up the Permanent Capital Vehicle by expanding investments in new and existing sectors and geographies. The PCV will build upon an existing asset base of SEAF-managed equity and mezzanine debt investment in SMEs. These assets are well-diversified in terms of both sector and geography. SEAF will not confine itself to existing sectors and geographies, and will make new investments where high-growth opportunities beckon.

High-growth SMEs can be found in many sectors, and the PCV will be sector agnostic. The majority of SEAF’s investment funds are sector agnostic, and only carry restrictions pertaining to sectors with negative social impacts, such as armaments and tobacco. The contribution of SEAF-managed assets to the PCV includes investments in sectors ranging from agriculture to tourism. While the PCV will leverage existing expertise to invest in familiar sectors, SEAF will also seek to scale up assets by expanding to new sectors.

In addition, the PCV will scale up by extending SEAF’s geographic reach. SEAF expects to leverage its presence in 20 countries and investment mandate in 30 countries to scale PCV assets through investments in existing and new geographies. As a global vehicle, the PCV will scale up by leveraging SEAF’s expertise to source investments in numerous sectors and developing countries throughout the world.

215 weeks ago Mildred Callear updated this Competition Entry.
215 weeks ago Mildred Callear updated this Competition Entry.
215 weeks ago Mildred Callear updated this Competition Entry.
215 weeks ago Mildred Callear updated this Competition Entry.
215 weeks ago Mildred Callear updated this Competition Entry.
215 weeks ago Mildred Callear updated this Competition Entry.
215 weeks ago Mildred Callear updated this Competition Entry.
215 weeks ago Mildred Callear submitted this idea.