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.
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.