Risk capital funds formed with host country bank/NBFI partners
- Business
- Employment
- Economic development
- Financial services and markets
- Globalization
- Rural development
- Trade
Example: Walk us through a specific example(s) of how this solution makes a difference; include its primary activities.
Lawrence
Camp
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Africa, Europe and Central Asia, Latin America and the Caribbean, Middle East and North Africa, South Asia.
Less than $1 Million, $1-5 Million.
$2 million
5-24, 25-49.
25
The average size loan would be $100,000 and the range would be from $50,000 to $300,000.
Idea phase
While the Growth Capital Fund will predominately be funded by host-county bank and NBFI partners, its impact will be significantly greater and can be brought up to scale more rapidly with public support, which could include:
- A small level of grant funding to support launch and first two years of the financing facility until it becomes fully self-funding.
- The ability to access partial guarantees and other risk mitigation measures in order to increase the willingness of investors and host-country banks and NBFIs to participate.
- Support from donor and IFI funded business development services (BDS) providers to prospective clients in: (i) developing business plans and loan request packages; and (ii) implementing the financial management system.
- Support from volunteer organizations such as the International Executive Service Corps (IESC) to link experienced business professionals and industry specialists with client companies.
- Support from trade development organizations to new domestic, cross-border and global markets for client businesses.
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, Underdeveloped local capital markets (term local currency funding, exit options for SME equity).
It addresses all of the barriers which developing country entrepreneurs and SMEs face in accessing the financing needed to longer-term capital investment.
It addresses the barrier of collateral and insufficient capital which constrains otherwise viable investment projects from being developed. Banks are often willing to extend credit for what they consider to be a viable investment, but generally limited to not greater than 50% of the fair market value of the collateral – for example, on a $200,000 cold storage unit, a bank might lend $100,000 collateralized by the unit. However few farmers or small rural entrepreneurs have cash to fund the additional $100,000, or the sufficient additional collateral to pledge for that amount. The Growth Capital Fund will provide subordinated debt to bridge the gap between what the project developer can contribute and the bank can lend and on terms which will allow for bank repayment first.
It addresses the tenor barrier of lack of access to longer term financing. Assuming the cold storage unit will take a year to start cash flowing and has a repayment projection of six years; it requires a source of patient, longer-term financing.
It addresses the pricing barrier. Spreads on senior secured bank loans tend to be high in developing countries, and the spread on junior unsecured debt (if available) would be excessively high (beyond the capacity of most capital investments to service). The Growth Capital Fund provides for a low coupon in the early stages (when the bank debt is being serviced and repaid), and rising in line with the cash flows and capacity to service.
It addresses the capacity barrier of limited corporate finance skills. Participating banks and NBFIs would be encouraged to rotate their best and brightest officers to the Growth Capital Fund where they would receive training and hands-on support with transaction structuring.
It addresses the capacity barrier of limited formal business education and skills among entrepreneurs and small business people, but ensuring access to business skills training, BDS providers, and mentoring by senior experienced businesspeople and industry specialists.
It addresses the information asymmetry and financial literacy barrier faced in developing country businesses (and in privately owned and operated firms in general) though introducing a standard template for financial and managerial reporting which has been specifically developed for SMEs. This template provides a financial management tool (actually a rudimentary MIS) as well as a monthly, quarterly and annual financial reporting system.
There is a strong track record of success in providing subordinated/mezzanine debt to developing country medium size businesses on the part of entities such as Business Partners and SEAF. A key innovation of the Growth Capital Fund is to engage host-country banks and NBFIs as the investors, fund managers and intermediaries (thereby driving down the transaction costs) and to serve SMEs. A number of projects have proven successful in developing local domestic capacity to intermediate and manage funds, including USAID’s American Bank of Kosovo, Khan and Xas Bank in Mongolia, and any number of on-lending facilities in which donor/IFI funds have been channeled through domestic banks. The Growth Capital Fund builds upon the experience of developing banking capacity for on-lending of funds, and extends it to developing corporate finance capability for more sophisticated financial transactions at the SME level.
The approach is scalable. $5 million in the financing facility (primarily funded by participating banks and NBFIs) will produce $19.8 million in risk capital loans over 10 years and assuming an average risk capital loan size of $50,000 this equates to almost 400 firms.
The $5 million will leverage $33 million in senior bank financing (assuming bank debt 50% of the investment) and $13 million of equity. Again the $5 million would be predominately provided by host country bank and NBFI investors. The seed investment is small and resulting leverage much greater.
The financing facility (the local in-country operating unit under the Growth Capital Fund) would be operational within 3 months of launch. Each financing facility is expected to have a life of 10 years but could be extended.
Yes
Lack of seed funding. Poor execution.
Funding will come primarily from investors and from participating host-country banks and NBFIs. Initial grant funds would be required to support launch and first two years of operating expenses of each financing facility.
Public finance would be utilized only for launch and start-up costs and each facility would be expected to be fully self-sustaining within two years.
The proposed approach has elicited strong commit for investment by developing country banks and NBFIs as well as local national investors. We believe that there are numerous potential investors and accordingly will limit participation with the objective of engaging a broad number of investors and funding sources. As such, the loss of one funding source would not be an issue.
The Growth Capital Fund hinges upon partnerships with developing country banks and NBFIs (who will be the primary investors in the financial facilities. Also important will be partnerships with donors, IFIs and foundations which can provide support through risk mitigation instruments and innovation grant. Finally, partnerships with NGOs and volunteer organizations such as MBA Corp, FSVC and IESC which can provide advisory services to the financial facilities and to clients.
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The proposed solution would seek to scale up geographically. Financing facilities would initially be established in five countries as pilots, each with a slightly different business model. At the close of the first year and assessment would be conducted, and based upon to findings and lessons learned of that assessment, the model would be refined. The target would be to roll out five new financing facilities annually for the first three years.