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Investment Supply for SMEs Ana Marr and Charles Chiwara June 2011 Content Overview Instruments • SMEs - The Missing Middle • Private Equity • Barriers to Financing SMEs in Africa • Credit Guarantee Schemes • Global Investment Funds • Islamic Banking • Innovative Financial Models •Current Funding Sources “Missing middle” Investment Size Commercial bank debt Private Equity (US$) $2M “Missing middle” – debt and equity Family & friends $25K Micro-finance Money lenders Perpetual Barriers to Financing SMEs in Africa • Perceived risks • Institutional barriers • Policy and regulations • Skills and training needs Global Investment Funds Investor Type of product European EIB Loans for Investment Bank SMEs European Private equity Investment Fund and venture capital funds investing in SMEs 8 miles – Bob Private equity Geldof fund for Africa Total amount available Euros 30 billion (over 2008-2011) Individual amount Target group per SME project From very small to SMEs < 250 a maximum €12.5m employees in the 27 EU member states EUR 409 million in 2008 n.a. SMEs US$750 million to Investments worth Africa be raised between $15m and $80m Investment purpose of SMEs Tangible (e.g. equipment) and intangible (e.g. distribution networks) Seed capital; buildup strategy; internationalisation; mezzanine finance. Agribusinesses, financial services and telecommunications. Intermediary Local commercial banks, guarantee funds, mutual guarantee institutions, microcredit organisations. For some, EIB provides guarantee to reduce risk. The EIF is a fund of funds. In 2008, it worked with 32 venture capital funds in Europe. Secured backing from the African Development Bank and the International Finance Corporation. Other investors are set to sign up. Innovative Financing Models • Acumen Fund • Grofin • E+Co • Root Capital Private Equity • Definition • Seed Capital – Valley Of Death – FFFs • Venture Capital/Early Stage • Buyouts/Later Stage New venture financing cycle Investment Banks, Merchant Banks or other Financial Institutions REVENUE Secondary Offerings VCs, Acquisitions/Mergers & Strategic Alliances Angels FFF INVESTMENT Later Stage Early Stage Seed Capital Mezzanine C Break Even B A Valley of death IPO/ M&A Public Market or Private Equity Emerging Growth Company Public / Private Company Private Equity Life Cycle Commitments By limited partners (multiple closings) Commitments By limited partners (multiple closings) Commitments By limited partners (multiple closings) Liquidation FUNDRAISING 1 year INVESTMENT PERIOD 4-5 years REALIZATION PERIOD 4-6 years POTENTIAL EXTENSION 2 years Private Equity Investment Process Investing Fundraising • Selecting • Structuring • Monitoring Divesting / exiting Defining Impact Investing Business designed with intent Provide Capital Impact Investing To generate positive social and / or environmental impact Expect financial returns Credit Guarantee Schemes • • • • Definition Proponents Critics Operation of CGS Islamic Banking • Rationale – Emerging – Significant population in Africa • Principles – – – – Prohibition of usury Profit sharing Certainty of contracts Ethical • Examples – Mudarabah – Marabaha – Musharaka - VC - Asset Finance / HP - FRL, mortgage finance Current Funding Sources 1. Guarantees – AGF , MIGA 2. Private Equity : 1. 2. SMEs Buyouts 3. DFI’s :1. 2. African, Regional, International Tools 1. 2. 3. 4. Debt Equity Guarantees Grants