rABOP: Co-managed by responsAbility Social Investments AG and SIFEM AG

Competition Finalist

This entry has been selected as a finalist in the
The G-20 SME Finance Challenge competition.

rABOP is a series of funds investing in private equity funds with active interests in SMEs in base-of-the- pyramid markets. rABOP’s fund-of-fund concept enables a wide range of private investors to provide non-listed SMEs with risk capital, traditionally the sphere of public investors. This enhances market building and growth.

About You

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About You

First Name

Christian

Last Name

Etzensperger

Website

Your Organization

responsAbility Social Investments AG

Country

Switzerland, ZH

About Your Organization

Organization Name

responsAbility Social Investments AG

Organization Website

Organization Phone

+41 44 254 32 79

Organization Address

Josefstrasse 59

Organization Country

Switzerland, ZH

Organization Type

Private Institution

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Your solution

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Name Your solution

rABOP: Co-managed by responsAbility Social Investments AG and SIFEM AG

Describe Your Solution

rABOP is a series of funds investing in private equity funds with active interests in SMEs in base-of-the- pyramid markets. rABOP’s fund-of-fund concept enables a wide range of private investors to provide non-listed SMEs with risk capital, traditionally the sphere of public investors. This enhances market building and growth.

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

Developing and transitioning countries worldwide

Region(s) your solution focuses on:

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

$6-10 Million.

Average turnover in USD of your target firm

USD 8 million

Number of employees in your target firms

25-49.

Average number of employees of your target firm

30

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

The current rABOP I portfolio holds equity investments ranging from USD 0.2 million to USD 5 million, and the average amount is USD 2 million. rABOP II can cover a broad range of loan sizes.

What stage is your solution in?

Operating for 1‐5 years

Innovation

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What makes your innovative solution unique?

The rABOP fund-of-fund family is a gate opener to private capital for development. It seeks to use the potency of financial markets for the benefit of SMEs in developing countries. Many high net worth individuals, pension funds, but also retail investors, would provide risk capital to a broad range of SMEs if only there was a convenient and cost-effective way to do so. Existing “frontier funds” only invest in listed companies, a highly limited segment. Local funds targeting non-listed SMEs have been overwhelmingly funded by public money, and so far have not managed to attract the magnitude of private risk capital sorely needed in BOP markets. Our solution makes all this possible.

As a pioneer in channeling private investment capital into poverty alleviation, responsAbility Social Investments AG (responsAbility) launched rABOP I, the pilot program of the rABOP fund family, as early as 2006, with a capital base of USD 32 million to address the SME financing gap via a public-private partnership.

rABOP I is jointly managed by responsAbility and SIFEM, the Swiss Investment Fund for Emerging Markets, formerly part of the Swiss State Secretariat for Economic Affairs (SECO). This unique partnership enabled responsAbility to combine its existing track record in microfinance investments and fund management and its relationships with the Swiss banking sector with SIFEM’s expertise to identify and invest in successful local SME fund managers. For the first time ever, a professional, highly diversified private equity fund-of-fund investment vehicle opened up the world of SME investments in BOP markets to private investors.

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

The rABOP fund family is a private sector initiative that builds on the know-how and infrastructure of local investment fund managers who have been funded and trained by international finance institutions (IFIs) with taxpayers’ money from around the world. These investments have seeded a local risk capital financial infrastructure for SMEs in BOP markets that is now ready to be leveraged by private sector risk capital for developing country SMEs.

rABOP I, the pilot fund of the rABOP family of funds, has been conceived as a public-private partnership. On the initiative of responsAbility, Credit Suisse, the second largest bank in Switzerland, Switzerland’s State Secretariat for Economic Affairs (SECO), and a boutique Swiss private bank, Baumann & Cie, Banquiers, took part in the initial closing in 2006.

Meanwhile, rABOP I is fully invested, and will reach its final closing with an expected USD 40 million in committed capital by the end of the year. As rABOP I has the lion’s share (77%) of targeted capital committed, responsAbility now plans a scaled-up successor fund, rABOP II, that will also be based on a public-private partnership. With USD 30 million of public money, we would be able to catalyze USD 120 million of private capital from our private sector network. Thereafter, the rABOP III fund will be entirely sustained by private sector funding. rABOP I was designed to be of small scale, but the rABOP structure is highly scalable as it is not constrained to particular sectors, business models or geographic regions. In short, the public-private partnerships of rABOP I, the pilot, and rABOP II, the larger successor, prepare the ground for entirely sustainable private sector investment operations such as rABOP III.

What barriers does your proposed solution address?

Asymmetry of information, Informality, 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, 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.

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

Asymmetry of information:

rABOP’s local fund managers actively take part in the companies they invest in. By doing so, they improve governance structures and increase the transparency of the SMEs, which paves the way for transactional lending by other investors and local financial intermediaries.

Informality:

rABOP’s local fund managers help build corporate governance structures that transform partly informal SMEs into formal businesses. Moreover, by providing access to finance, rABOP enables SMEs to grow. The jobs created in the process are formal, which widens the local governments’ tax base.

Lack of collateral:

rABOP provides equity as long-term risk capital invested on the basis of the economic prospects of the company’s business plan and management. Thus strengthened, the capital base allows the SMEs to significantly improve its access to debt finance. The equity investment therefore functions as collateral.

Lack of financial capacity:

rABOP provides equity as long-term risk capital, the scarcest type of capital for SMEs. Getting access to long-term risk capital enhances the financial capacity of a firm dramatically.

Lack of SME access to skills / knowledge markets:

The local fund managers, originally trained by public funders’ technical assistance initiatives, now engage in institutional capacity-building, as they take active part in the development of the SMEs they invest in.

Unavailability of financial products tailored to SME needs:

The core objective of rABOP is to provide access to private long-term risk capital, which is currently unavailable in developing countries.

Lack of institutional capacity of financial intermediaries:

rABOP I and II build on an emerging landscape of local private equity fund managers. The public-private partnership character of rABOP I and II enables managers to increase their institutional capacity by way of technical assistance facilities. rABOP III will sustain the landscape with purely private capital, thereby allowing public funders to exit.

High transaction costs for financial intermediaries to serve SMEs:

The provision of risk capital lowers transaction costs by reducing uncertainty and risk. Higher fund volumes subsequently overcome the obstacle of substantial fixed costs.

Underdeveloped local capital markets (term local currency funding, exit options for SME equity):

A key objective of rABOP is to develop a market for SME private equity in BOP countries by offering an attractive and convenient investment vehicle to a broad range of private investors. Exit is possible through an initial public offering, whereby rABOP strengthens the market for listed SMEs, or trade sale, which allows market consolidation.

General barriers to SME development related to investment climate:

Local funds financing SMEs within the rABOP framework allow firms to set foot in the formal economy. Creating formal jobs broadens the tax base. A broad and stable tax base is a necessary condition for effective institution-building. These institutions become accountable to the taxpayers and adapt to their specific needs. rABOP therefore creates spillovers for all entrepreneurial activity.

Lack of financing to women entrepreneurs:

rABOP allows fund managers to place an explicit focus on female entrepreneurs. By way of illustration, a South African fund in which rABOP I is invested has a black empowerment focus.

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

rABOP I, with USD 32 million currently invested through 7 private equity funds, reaches out to 60 SMEs with 30,000 employees in the formal sector. These SMEs refinance themselves in the local capital market, thereby strengthening it. responsAbility and SIFEM expect an internal rate of return of 15% per annum for rABOP I. Furthermore, we expect about 6 of the SMEs to go public through an initial public offering in the mid term.

Access to risk capital enables SMEs to finance their long term growth strategy with an adequate capital structure. Further, the fund managers of the rABOP portfolio become strategic partners of the SMEs they consider promising. They give advice, analyze business plans, improve transparency and introduce exemplary corporate governance structures. The professionalization of SMEs lifts them out of informality and tends to spur growth and job creation. Spillovers advance the formalization of the local economy. The formal jobs created in the process broaden the tax base. In the long run, the quality of institutions and the business climate can be expected to improve.

Both responsAbility and its investment partner SIFEM can demonstrate an excellent financial track record in fund management and SME financing. responsAbility currently manages more than USD 850 million in of social investments in 266 small and medium sized institutions in 62 developing and transitioning countries. SIFEM manages a portfolio of USD 410 million, mainly invested in local SME private equity funds, and has achieved a historical yearly internal rate of return of 16% on invested capital since 2002.

How many firms do you expect to reach?

rABOP II, with an initial public funding of USD 30 million, aims to invest USD 150 million to reach up to 300 SMEs.

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

rABOP I has raised USD 32 million in private capital with an initial public funding (by SECO) of USD 4 million. For rABOP II we are aiming for USD 30 million of public funding, which will allow us to raise USD 120 million in private investment.

What time frame will be required to reach these targets?

rABOP I will be closed by the end of the year 2010. 77% of the fund’s assets are committed. This means that an immediate launch of rABOP II is possible. We plan to start private sector fundraising for rABOP II in mid-2011.

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

Yes

What would prevent your solution from being a success?

rABOP II is a crucial second step in a progression between the pioneering rABOP I and rABOP III, which will be entirely funded by private sector capital. The rABOP fund-of-fund family is the hitherto missing link between traditional public SME funding and the supply of risk capital by private sector investors to SMEs in developing countries through financial markets. rABOP I was launched in the midst of the financial crisis, when private investors proved very reluctant to commit to a closed investment vehicle for 12 to 14 years. Financial turmoil is a threat during the fundraising period. However, these risks can be mitigated by a public funder’s endorsement. The more initial public funding rABOP II receives, the larger the amount of private capital it will be able catalyze, and the more successful follow-on products such as rABOP III will be. A lack of endorsement and initial financing by a public funder would therefore jeopardize the graduation process of the rABOP family of funds and – in the wider picture – the allocation of private risk capital to foster the growth of SMEs in BOP markets.

This Entry is about (Issues)

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

With a volume of USD 32 million invested in seven specialist private equity funds, rABOP I reaches out to 32 countries and 60 SMEs with a total of 30,000 employees. rABOP I invests around 32% of its assets in small and medium-sized financial institutions, and the rest in SMEs in sectors ranging from manufacturing, media, healthcare and social housing to agriculture – each sector with different social impact characteristics. The investee companies are in different stages of development: 45% have successfully passed the start-up stage, 18% are in their start-up phase, 19% are already in their late growth phase, and 18% of the companies are mature.

Some evidence on quantified development impact comes from a 2007 Small Enterprise Assistance Funds (SEAF) study financed by SECO and based on 18 SME finance case studies. It states that 12 dollars are generated in the wider economy per USD invested in SMEs, with four of these twelve dollars – or one third – benefiting consumers, competitors, producers of complementary goods, local communities, and local governments outside the enterprise. Much of the other USD 8 goes to employees as healthcare or pension contributions.

To further illustrate the success of the rABOP concept, we have attached an interview by responsAbility with Raghuveer Mendu, an investment manager at VenturEast Proactive Fund. This private equity fund is currently invested in ten companies in India that employing 1,627 people, 439 of them women. rABOP I has committed 15% of its assets to VenturEast Proactive Fund.

Attachment 1: Interview Raghuveer Mendu, Manage VenturEast Proactive Fund

Please also refer to our Social Performance Report 2009 as an example of how responsAbility informs its investors on the development-related outcomes of its investment funds.

Attachment 2: Social Performance Report

Sustainability

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

rABOP’s funding source is investors. Operating costs are covered by management fees. rABOP I received USD 4 million initial funding with public money from SECO. rABOP II is applying for USD 30 million from a public funder by participating in this competition. rABOP III will not require initial public funding. All rABOP funds can conveniently be complemented by publicly funded technical assistance facilities in order to foster developmental impact.

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

rABOP I, the pilot program, relied on USD 4 million of public money, which was provided by SECO. This initial public funding catalyzed private sector investments of USD 28 million. The rABOP fund family builds on the know-how and infrastructure of local investment fund managers who have been trained by international finance institutions (IFIs) around the world. Until now it has not been possible for this infrastructure to graduate so that it could sustain itself through private sector capital. The rABOP fund family is set to change this.

By way of its fund-of-fund structure, the rABOP funds allows a broad range of private sector capital owners to invest in a well diversified universe of non-listed SMEs in developing countries. Complete graduation will be achieved with rABOP III. As rABOP I, the smaller scale pilot public-private partnership, is fully operational, there is just one step missing, rABOP II. rABOP II will replicate rABOP I on a larger scale, in order to best pave the way for rABOP III. If rABOP II receives USD 20 million in initial funding and endorsement by a public funding source, it will be able to raise approximately USD 120 million of private capital through responsAbility’s funding network of high net worth individuals, pension funds and other investors. Once such a volume is achieved with rABOP II, and once the profits of rABOP I are realized, we see no obstacles to launching rABOP III and thereby giving developing country SMEs access to private sector risk capital on a scale never accomplished before.
rABOP II is likely to start private fundraising in mid-2011. rABOP III, representing full graduation and sustainability in private sector risk capital SME financing, could be launched as early as 2012.

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

Via its own network of private investors and established relationships with the Swiss and European wealth management banks, responsAbility will be able to market rABOP to a large and diversified private banking clientele. This will enable rABOP to effectively diversify its private sector funding sources across a large number of investors. Furthermore, the rABOP family of funds is a closed private equity fund-of-fund structure. Once the capital is called from investors, it will be available to rABOP until maturity of the fund. Also, investors enter a legally binding obligation to fulfill their commitments. However, as experienced in the private equity markets during the financial crisis of 2008/9, there is a risk that investors will not be able to fulfill their commitments. Therefore, diversification across a broad range of private investors is the only effective way to mitigate the dependence on a large private funding source.

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

In the mid to long run we will rely entirely on the private sector, whose financing and problem-solving capacity we know and trust. Channeling private sector capital to developing countries is where our expertise lies. rABOP I, the pilot program, received USD 4 million in public funding and remained relatively small, with an expected final volume of USD 40 million. For rABOP II we envisage public funding of USD 30 million. A material endorsement by a public funder would underline the proven viability and strength of our model vis-à-vis pension funds and private investors. This would enable the scaling-up, providing finance to a great number of SMEs and thus fostering growth in developing countries.

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

The SMEs in which rABOP invests could be affected by natural disasters, war or extreme political turmoil. For the investor, such risks can effectively be eliminated through diversification across countries and regions.

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

The rABOP family is to be scaled up via fundraising. In the case of rABOP I, USD 4 million of initial public funding catalyzed private sector investments of USD 28 million. rABOP II aims to achieve a volume of USD 150 million through initial public funding of USD 30 million. rABOP III and successors will rely entirely on private sector capital.

213 weeks ago Matt Guttentag said: On October 27, 2010, the judges reviewed entries for the Changemakers G-20 SME Finance Challenge competition and would like to pass on ... about this Competition Entry. - read more >
215 weeks ago responsAbility BOP Investments (rABOP) has been chosen as a finalist in The G-20 SME Finance Challenge.
223 weeks ago Christian Etzensperger updated this Competition Entry.
223 weeks ago Christian Etzensperger updated this Competition Entry.
223 weeks ago Christian Etzensperger updated this Competition Entry.
223 weeks ago Christian Etzensperger updated this Competition Entry.
224 weeks ago Christian Etzensperger updated this Competition Entry.
224 weeks ago Christian Etzensperger updated this Competition Entry.
224 weeks ago Christian Etzensperger updated this Competition Entry.
224 weeks ago Christian Etzensperger submitted this idea.