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
Empact believes that the development impact of the Fund, targeting companies in one of Africa’s poorest countries where risk capital is all but non-existent and the private-sector remains chronically under-invested, will be extremely significant. More specifically, Empact considers that the Fund will be well-placed to achieve tangible, meaningful development impact in the following three areas, among others:
1. Poverty Alleviation
• employment generation as Empact portfolio companies grow which, in turn, will help to underpin wage increases with important multiplier effects at the family and community levels;
• improvements in the livelihoods of portfolio company employees, not just from the perspective of meetings basic needs, but also, empowerment, security and reducing vulnerability;
• concrete contributions to the achievement of the Millennium Development Goals (MDGs), notably:
• MDG 1: Eradication of extreme hunger and poverty
• MDG 3: Promotion of gender equality and empowerment of women
• MDG 7: Environmental sustainability
• MDG 8: Global partnership for development
• to the extent that the Fund makes investments in the pharmaceutical and healthcare sectors (which, at the time of publication of this Memorandum, the Manager believes is likely in light of the investment pipeline), the Fund may also be in a position to make contributions to more specific, health-related MDGs.
• professionalisation of Ethiopian SMEs, whose management capacity and corporate governance require significant strengthening in order to attract complementary domestic and international financing;
• reducing the vulnerability of SMEs which, the Manager believes, often struggle to achieve critical mass due to lack of access to working capital and the resulting cash flow fluctuations and short-termism; and
• assisting SMEs to achieve international standards of accounting, financial management and internal controls.
3. Private Sector Development
• accelerated growth of the SME sector, the backbone of the Ethiopian economy;
• purveying much-needed risk capital to private Ethiopian business which, in the Manager’s view, are starved of risk capital and require equity to grow;
• demonstrating to the Ethiopian government the tangible results, in the form of increased FDI channelled by the Fund, of making improvements to the operating environment and investment climate;
• helping to re-calibrate the Ethiopian economy by forging a stronger private sector to complement the heavily-invested public sector;
• reducing costly import dependence by building domestic productive capacity and competitiveness, thereby helping to alleviate foreign-exchange shortages;
• contributing to the deepening of the financial sector by introducing vital intermediaries, such as a private equity fund, to provide an important counterweight to tightly-controlled public and private banks; and
• facilitating complementary FDI inflows as private international investors take note of the opportunities which the vastly under-invested Ethiopian economy offer;
How many firms do you expect to reach?
With over 200 businesses already screened, Empact expects to invest in approximately 10 to 20 portfolio companies. Due to the interconnectedness of the SME segment in Ethiopia, Empact estimates that its direct investments into 15 SMEs could potentially benefit over 45 additional SMEs through local procurement of goods and services that accompany expansion plans of the portfolio companies.
What is the volume of private SME finance you aim to catalyze?
Empact is seeking to raise US$50 million for SME finance in Ethiopia. Empact expects to mobilize up to 10 percent of the total Fund capitalization from private sources. Moreover, Empact plans to tap into local financial institutions to gain access to debt financing to its portfolio investments, when needed and appropriate.
What time frame will be required to reach these targets?
Empact is targeting a first close of the Fund in March 2011. Following discussions with prospective investors in the second half of 2009 and early 2010, numerous development finance institutions, multilateral development banks and high net worth individuals have demonstrated significant interest in a private equity fund providing exposure to Ethiopia’s heavily under-invested SME sector. Once the Fund closes, Empact plans to deploy the capital within the first three years.
What would prevent your solution from being a success?
There are two primary issues that might hinder Empact’s success. One is lack of much needed “last mile” seed capital to establish and launch the Fund. Second is raising the appropriate amount of capital needed to fully capitalize the Fund and its associated Technical Assistance facility in order to deliver the developmental impact promise of the Fund.