The Silk Road Fund for SMEs, a scalable PE network.

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The Silk Road Fund for SMEs, a scalable PE network.

Algeria
Project Summary
Elevator Pitch

Concise Summary: Help us pitch this solution! Provide an explanation within 3-4 short sentences.

Our fund will have a 12 year life, and several classes of shares depending on the objectives of our investors. It will build or partner with local PE teams who will target: high growth SMEs, woman entrepreneurs, Blue chip managers with Greenfield projects (reverse brain drain), International SMEs with Greenfield projects, SMEs in Agriculture or Renewable Energy sectors,and Microfinance Operators.

About Project

Solution: What is the proposed solution? Please be specific!

We focus on high growth SMEs who are part of the “S” of SME, Greenfield projects, or Women Entrepreneurs. We are not only looking to expand the SMEs of the region, but also to bring international SMEs or local managers trained in blue chip companies to launch Greenfield projects in the region in order to transfer international best practices and train future entrepreneurs. We focus also on developing Women Entrepreneurs in the Middle East and North Africa. We address the exit challenged faced when investing in SMEs by extending the fund life to 12 years in order to let the SME grow over a longer period which should facilitate the exit of a minority investment either through a buy back or via an external if the business has become sufficiently large to do so. We address the high cost of investing in SMEs by creating two types of shares depending on the objectives of the shareholders. “Development/Government Investors” will have a priority to recover their capital plus their cost of financing, and will contribute to the development of SMEs across the region. “Financial Investors” will meet their return objectives. We are looking to build teams locally closer to the entrepreneur and often with a more competitive cost structure than in the US/Europe. We build PE expertise in local teams and reduce the risk of creating an SME PE industry in MENA. DFI feel they need to invest in SME private equity funds who do not have a track record, and feel they may have limited influence on the General Partnership later on. Our team of experienced private equity investors and operational managers is looking to invest in both the GP and the LP to build or partner with SME Private Equity teams. We have strong links to gulf countries. We are looking to build initial SME success stories that allow us to mobilize the petro dollars from the gulf countries to SME funds in the Middle East, Africa and India.
Impact: How does it Work

Example: Walk us through a specific example(s) of how this solution makes a difference; include its primary activities.

Arab & African Youth. Over 50% of the population of the Middle East and Africa is under 25. According to the International Labor Organization: 1) the Arab and African youth have the highest unemployment rate in the world, 2) 100 million arabs will be looking for a job within 10 years. Building a scalable solution to build SMEs in MENA is crucial to keep the region stable:  SME account for 66% of jobs in MENA  A disproportionate part percentage of all future jobs could be created by a small percentage of fast growing companies, more than 50% of those jobs will be created by SMEs  $1 spent on SME generates $10 for the community.  $1 spent generates 3 times more jobs for the local economy than the same amount invested in Microfinance. Algeria, Yemen, Syria and Palestine are top priorities for SME development. According to the Global Entrepreneurship Monitor or the Anima Network, Entrepreneurship success varies significantly across the MENA region. Tunisia, Morocco and Lebanon are the most successful. Yemen, Syria, Palestine and Algeria are the least. The rest of the countries are in between. Our team will focus on building strong PE teams with a broad skill set including: Pre-deal:  Market & Industry Analysis  Sourcing transactions  Preparing a deal entry form & initial discussion of deals  Preparation and Negotiations of Letter of Intent  Preparation of business plan and financial model  Preparation of information memorandum and presentation to investment committee  Due diligence  Negotiation & Legal Documentation Post deal:  Strategy  Financial Controls & Financial Management  Governance and Transparency  Operational Improvement  Strategic partnerships Fund Raising:  Prepare a Private Placement Memorandum  Market PE funds to potential investors Micro Finance: We would partner with an MFI operator to launch the first MFI in Algeria which would finance at least 30 000 loans within five years, and probably much more (Morocco has 1.2 million active micro finance loans)
About You
Organization:
Armalia Partners
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About You
First Name

Rudolph

Last Name

Waels

Your Organization

Armalia Partners

Country

, AZ

About Your Organization
Organization Name

Armalia Partners

Organization Phone

+971 50 591 8172

Organization Address

118 Glocester Road - Flat 4, SW7 4SP London

Organization Country

, LND

Organization Type

Private Institution

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Your solution
Country your work focuses on
If multiple countries, please list them here. If your solution targets an entire region, please select it below

First, the Middle East & North Africa, then Sub Sahara Africa, then India.

Region(s) your solution focuses on:

Africa, 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

2

Number of employees in your target firms

Fewer than 5, 5-24, 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

Range : $100 000 to $3 m

Average : $1.5 m

What stage is your solution in?

Idea phase

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

The Magic 6%. According to NESTA, a British endowment:

 High growth companies (companies growing their sales at more than 20% over three years) with more than 10 people account for around 6% of all companies but generate more than 50% of new jobs created,

 50% of the jobs created by high growth companies came from SMEs and the rest from a small number of large but still high growth companies.

 The average high growth company tripled its headcount from 60 employees in 2005 to 170 in 2008. Other firms - small, medium or large - were far less successful in creating jobs.

 High growth companies accounted for roughly 6% all companies in each SME size category (Small or Medium).

This has important policy implications for SME financing. It means that to create jobs, we should focus on high growth SMEs - both small companies (deals between 100 000 and $3m) and medium companies (deals between $3m and $10m). This is why we need to consider both the growth track record of SMEs and the need to address the equity gap.

Within 10 years, about 100 million young Arabs will be looking for jobs. If we focus on the high grow SMEs and assume that they will create 25 million jobs (using the same ratio as in the UK). If we make the extremely optimistic assumption that we would invest in high growth SMEs who would start with 60 employees and would create 1500 Jobs over the next 10 years, we would need to invest today in 17 000 of such wonderful success stories. Assuming that this was done by SME funds with the right skills to each accompany 40 of such businesses, we would need over 400 SME funds across the MENA region today ready to invest close to 20 billion dollars. Where are they? Since very few SME funds exist, and very few professionals have a private equity track record, it is crucial to create a scalable solution that will build a network of good SME private equity across the MENA region.

Scalability. We will invest in GP structures across the MENA region and transfer the private equity and operational expertise of our team to local teams investing in SMEs. We will also use our GP investments to build a strong collaboration between various SME private equity team across the region and facilitate the international growth of our most structured SMEs portfolio companies. We will also invest in the LP structure of our partners to ensure that they can carry out initial deals and build a track record that will be used to raise additional funds.

Lower Risk. By partnering with us, DFIs, Foundations, and Governments will reduce the risk of building an SME private equity industry the MENA region because they will use an experienced intermediary to mentor this process and because our fund structure and profit allocation scheme will meet their need to recover their capital plus their cost of financing across many SME private equity funds.

Profit allocation scheme: The fund will include public and private shares with the following profit allocation.

 First, the public shareholders receive all realizations, until they receive the equivalent of an interest (its cost of financing) on its disbursed capital,

 Then, the capital is repaid to all investors (private and public) pro-rata their disbursed capital,

 Then the profits are split between the private investors and the investment team until a certain IRR is achieved,

 Eventually, the profits are split between the private investors, the investment team, and the public investors (to cover losses on less performing funds).

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, 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) Asymmetry of information. Our teams and partners operating on the ground will have a better access to local information, which we believe is crucial to carry out a proper due diligence.

b) Informality. Our PE team will introduce transparency and better governance in our investee companies.

c) Lack of collateral. We will partner with or encourage the creation of counter guarantee funds. We will invest based on cash flow projects, quality of business plan, and management.

d) Lack of financial capacity. Our project is a scalable and low risk approach to develop the SME private equity industry.

e) Lack of SME access to skills / knowledge / markets. Building expertise in local teams is the core of our model. We will also work with Universities to create specific entrepreneurship seminars including all types of students (not just business studies). We will use in company coaches and charge a management fee for this.

f) Unavailability of financial products tailored to SME needs. We will partner with or encourage the development of counter guarantee funds, focus on the “S” of SMEs to address the equity gap, and support the development of Microfinance.

g) Lack of institutional capacity of financial intermediaries This is the reason why we have a team of highly experienced Private Equity professionals to transfer their expertise and build local teams focused on developing SMEs. This is also why we are investing in the GPs.

h) High transaction costs for financial intermediaries to serve SMEs. The public/private structure of the SME fund with two classes of shares and our investment in the GP should address this issue.

i) Lack of competition / incentives for financial intermediaries to serve SMEs. This is why we are creating a scalable solution building different GPs, and using a public/private partnership with two types of shares.

j) Underdeveloped local capital markets (term local currency funding, exit options for SME equity) Creating SME funds with a 12 years life should help to address this issue, as the SME will have more time to grow. We can aslo structure a buy back process and/or charge a management fee to the SME over a long period. The carried interest will be spread widely across the team to build an entrepreneurial culture and retain the investment team during the long period necessary to build SME success stories.

k) General barriers to SME development related to investment climate

The key is to build initial success stories to change perception and create momentum. We also have an in depth expertise and top level network in the regions we are targeting which can help SMEs.

l) Lack of financing to women entrepreneurs. Creating specific SME fund for women owned and managed companies should increase the number of women entrepreneurs.

m) Specific barriers to fragile and weak states. Build success stories and creating jobs in places like Algeria is the best way to fight terrorism.

Impact
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 project is still a start up in the MENA region but : a) IP has already invested 19 companies who are part of the “S” of SMEs in Sub-Sahara Africa and created 1 200 jobs, b) Armalia team has a deep expertise of private equity in the Middle & North Africa and operates in the region. Both are looking to join forces to build SME Private Equity teams and SME success stories across the MENA region such as theses ones:

Cameroun Breuvages is a company producing and distributing water in plastic sachets.
Its flagship product, “Sawawa” has now become part of daily life for the people of Douala. From 2004 to 2006, Cameroun Breuvages had a difficult start-up: a poorly-designed distribution system and management weaknesses resulted in stock failures and accumulated losses.

I&P brought in close, hands-on support: an expert, the former director of an SME, undertook technical assistance missions lasting several weeks to examine the company’s commercial and financial management and logistics. Improvements, short- and long-term, were introduced, both at the technical level (plastics and raw materials) and organisational (accountancy support). These helped to produce a significant improvement in the management of the business.

From 2006 to 2008, the management was consolidated, a local supply chain was organised and the distribution system was reorganised. Losses were brought under control, steady growth was achieved and cashflow balance was reached in 2008. By end-2008, success was confirmed.

A capital increase, with the entry of a new partner, has been organized with I&P’s help. Proceeds of the increase have allowed the company to launch a new line of flavoured water products: Pamparam. Beyond its financial engagement, amounting to 250,000 euros, I&P has played an active part in every stage of the company’s development.

CAMED is a distributor of pharmaceutical products. I&P became a shareholder in 2003. From the beginning, I&P’s team helped CAMED with the development of monthly monitoring procedures to follow its performance and control its margin management. It also set up a budget process with the finance department. Technical assistance helped CAMED to implement a revised business strategy in 2006. While the company was initially specialised in the distribution of generics (selling 300 to 500 products), its catalogue was expanded, starting in 2006, to attack the specialty drugs market. This shift in strategy led to a multiplication of product offerings, and substantially more complex logistics, notably in supply and stock management, demanding a change in management structures. I&P organised two missions which helped draw up a diagnosis of the situation, followed by recommendations for general organizational improvements to the company and its procedures. They then helped with follow through on certain recommendations. The result was a reorganisation and computerisation of stocks, allowing far more efficiency in product management. On the financial level, I&P provided several bridging loans to CAMED to accompany the growth of the business. In 2006, in the context of the strategy shift, I&P’s team helped CAMED to organise a capital increase which brought in 70 pharmacists as new shareholders.
It also helped CAMED to arrange a medium term loan, in 2009. The results below show the rise in the number of reference products managed since 2006, and the rise in CAMED’s sales, from 1.4 million euros in 2006 to 2.1 million in 2009 (to end-October).

How many firms do you expect to reach?

We should start by reaching 30 firms in our Algeria fund.

Overtime, we are looking to build or partner with a network of 10 to 12 private equity teams, each of which should reach 30 SMEs per five year period, which translate into 300 to 360 SMEs. Assuming each SME creates 100 jobs, we would create 30 000 to 36 000 Jobs every five year.

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

In the next six to 12 months, we are looking to raise a $50m in public financing for our SME fund both locally and internationally.

Overall, the 10 to 12 private equity teams we are looking to build or partner with should receive 2/3 of their funding from public organizations, which means that we will require between $300 and $400 m of public financing.

What time frame will be required to reach these targets?

Our PE network will include: a) some private equity teams that we will build completely, b) many partnership with new teams with new independent teams or commercial banks. We expect that building this network should take 5 to 10 years.

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

Yes

What would prevent your solution from being a success?

We feel that public finance will be allocated to this type of project to make them possible; nonetheless we feel that the biggest risk is that the final commitment by governments/DFIs or the execution - by us and others - could be too slow to meet the urgency of job creation for the Arab youth. This is the biggest risk faced by the MENA region where most of the world’s energy is. This is not a 10 year issue, this is a 5 year challenge, during which many success stories need to be built.

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

Armalia is looking for investors such as Development Agencies, Foundations, and Sovereign Wealth Funds.

Armalia needs $5 million to build initial partnerships and PE teams across the MENA region as well as to make our first investments in the “S” of SMEs in Algeria, a key step to raise further funding.

Armalia is looking for investors (Development Agencies, Foundation, and Sovereign Wealth Funds)

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

The nature of investing in SMEs means that building companies before exit an investment requires some patient capital. Once we have built strong investment teams, invested a fund, and exited part of the transaction we believe that more funding from private investors could be raised, particularly from High Net Worth Individuals from the Gulf Countries.

That said, IP Sub Sahara Africa has already raised a significant part of its funding from private investors.

We will also include some successful entrepreneurs from the MENA region as part of our partnerships, possibly with a specific industry focus (renewable energy, foods, retail, etc). This should allow us to tap into some additional industry expertise, local network of contacts. It will also create some additional role models in the region, and make them more visible. Eventually, it should also increase our capacity to raise private funding.

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

Our objective is to structure the fund to make it viable based on the capital committed by the government or development agencies, and then to create momentum for private fund raising.

Public organizations and high net worth individuals from the Middle East - where we are based - have significant financial resources that could be mobilized to build SME funds across the world. We believe that the Arabic culture does not deserve the negative image it received after Sept 11 and that the Arabs/Muslims will back SME funds worldwide to fight poverty on a large scale regardless of religion. To make this happen, we need to strengthen our structure and build initial success stories first in the Middle East & North Africa, then in Africa, India, and other emerging markets.

Our Idea to back experienced managers/entrepreneurs to launch a start up could be attractive to many public organizations. For instance, if we build a success story in Algeria with an experienced Algerian manager who was trained in large multinationals but decided to go back to his roots to create his own business in Algeria, we could create role models, build hope, and start reversing the brain drain of North Africa.
Backing International SMEs with Greenfield projects in our target markets should also facilitate fund raising from many governments interested backing the international development of their SMEs in the Middle East, Africa or India. We could consider setting up bilateral SME funds for this.

We could also apply this approach to specific industries and - for instance - back the development of Agriculture SMEs in Africa who would then export their products to the Middle East, North Africa or China.
In terms of fund management, the carried interest will be spread widely across the team to strengthen team retention during the long period necessary to build SMEs, or in case we lose 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

Industry Specific Partnerships. We are looking to build industry specific partnerships with successful Entrepreneurs or SMEs who are looking apply their expertise across the MENA region.

Microfinance. We are looking to build the first Microfinance Institutions in Algeria, which could be done with in partnership with a Microfinance Operator.

Universities. We are looking to build with key universities, business schools or foundations to build a center for microfinance and SMEs covering the mena region.

Experts. Investing in SMEs requires a lot of due diligences on companies who are not always transparent. We will work with various experts (accountancy firms, law firm, industrial experts, etc) to make this process as efficient and cost effective as possible.

PE firms. We are looking to build partnership with Private Equity firm from the region or from outside to work with them and their portfolio of SME companies in order to partner in Greenfield projects across the MENA region.

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

The biggest issue will be to recruit, train, and retain strong private equity teams. That said, this is our mission.

On some of our initiatives, we could be ahead of our times, and face some resistance, which could be the case for our fund focused on woman owned or managed businesses in the Middle East and North Africa.

Another important aspect will be to adjust our business model to the local environment. For instance, we could create both Sharia and Sharia compliant funds to increase our ability to scale up the business across the region. This also means that to launch a Microfinance Institutions in Algeria we will also back an operator providing both Islamic and Non Islamic products.

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

SME Private Equity: Our objectives to build local partnerships and private equity team should accelerate the development of an SME focused private equity industry across the MENA region.

Sectors of Interest: We will invest across sectors but have a particular interest in the following themes

Demographic Growth: The old silk road (MENA, India, Pakistan) will account for 35 % of global population growth between 2002 and 2050, to which Sub Sahara Africa will add another 35%. This will open new opportunities in volume industries such as: Financial Services, Telecom, Media, Consumer Goods, Retail, Automotive, Real Estate, Infrastructure, Healthcare and Education

The Emergence of a New Middle class: The Middle East & North Africa, India, Subs Sahara Africa will see a very large increase in Middle Class Consumers, which will create many opportunities across sectors such as Real Estate, Healthcare, Consumer Goods, Retail, Financial Services, Automotive, Education, Entertainment, etc.

Agriculture & Food: The MENA region accounts for more than 25% of cereals imports in the world compared to 21% in Asia and 18% in Latin America, where water scarcity is less acute. Food prices will increase in the coming years for various reasons including:

 population growth,
 change in food consumption habits in new economies,
 water scarcity, export bans in key food producing countries,
 climate change,
 and potential political tensions between “family farms” and “highly mechanized (but less job intensive) industrial farms.

It will be important to make a better use of whatever resources are available in this sector because a combination of high food prices with high unemployment rate could be disruptive for the region.

Renewable Energy: Cars account for 95% of global oil consumption and the number of cars will boom in the coming years in line with the growth emerging markets. Since the oil production is not likely to increase under the same pace, oil prices will increase, which could be a barrier to development. Apart from geothermal energy, most renewable energy sources can not be profitable without subsidies many governments already are already facing growing financial pressures. Our only choices are to : a) invest in renewable energy projects that will reduce the break even cost of the associated technology, b) further expend renewable energy projects that can function without subsidies (geothermal), c) Invest in projects that will create a new approach to mobility and save energy.

The bottom of the pyramid (people making less than 2$ a day). 3.7 billions of consumers and entrepreneurs earn less than $8 a day and account for the “Bottom of The Pyramid”, a $2.3 trillion market growing at 8% per year. Many industries will appear to serve these consumers and entrepreneurs able to design, build and sell low priced products such as glasses at 2$.

Microfinance. Micro Finance and Growth Equity investment in micro entrepreneurs are much less developed in the MENA and Sub Sahara Africa regions than in Latin America or Asia. We are looking to back Microfinance Operators who will build Microfinance Institutions across the region. We believe that this industry could reach $6 to $9 billion of loans in the coming years in the MENA region.