A new way to invest in businesses in developing economies

Technology Eye | March. 09, 2016

From fuel made out of waste in Uganda to healthy nut snacks in Nicaragua, small firms in developing countries will get direct links to international investors under a new scheme to help them expand and bring extra income to poor communities.

Five British charities have created a syndicate through which investors can back hand-picked businesses, using a model similar to that of the "Dragon's Den" TV series in which entrepreneurs pitch ideas to prospective funders.

Around 70 percent of small and medium-sized businesses in developing countries cannot access capital, according to Christian Aid, which co-founded the scheme called "Access To Capital For Rural Enterprises" ( ACRE ), launched on Thursday.

Investors, both local and global, often see deals with smaller companies as too risky or expensive, said Joanna Heywood, who leads the ACRE programme for Christian Aid.

"There were a lot of enterprises we came across that were buying, or wanted to buy from, farmers and producers, and wanted to grow and expand, but were struggling to get beyond a certain growth stage," Heywood said.

The agency decided to look beyond its traditional work of aiding poor farmers in developing countries, seeking to address problems further up the supply chain.

Christian Aid and its partner charities - Traidcraft, Practical Action, Twin and Challenges Worldwide - have a track record of working on agricultural commodities, fair trade and clean energy.

They are hoping to secure investments in the so-called "missing middle" of between 100,000 pounds ($141,280) and 1 million pounds.

So far, they have found seven investors, including individuals and impact investment firms, seeking to channel around 4 million pounds to enterprises they will select from a pool of 100.

The first deal involving a Zimbabwean company is now being put together, Heywood told the Thomson Reuters Foundation.

"Enormous Barriers"

Martin Rich, an investor who advised on the creation of ACRE, said the new scheme would allow the companies to access business support and "patient capital".

The financiers are planning to leave their money invested until a positive result has been achieved, which could be 10 years or more, according to ACRE.

"I've come to understand the enormous barriers faced by these types of enterprises, which make it hard for them to grow from being grant-funded to self-sustaining," former banker Rich said in a statement.

Heywood said the charities involved have provided technical assistance to some 30 enterprises to get them ready to pitch to potential investors.

This, together with the identification of suitable businesses, pro-bono legal support and the syndicate administrator operating at cost, makes the deals cheaper than usual for investments of this size, she added.

ACRE is targeting enterprises that could transform the efficiency or scale of the market in which they operate.

They include a Zimbabwean producer of organic baobab tree-based products that lobbied the European Union to allow baobab imports into Europe, opening up a major new market.

ACRE also hopes to nurture women entrepreneurs and boost the incomes of women producers, in an effort to address the imbalance between the high proportion of farming done by women and the low level of assets they own, Heywood said.

Some two thirds of the businesses in the ACRE pipeline are based in Africa, and just under half the total are involved in agriculture, with around 15 percent in the energy sector.

The ultimate aim is to open doors for these small and medium-sized enterprises in their local financial markets, where they often struggle to obtain credit due to a lack of collateral or confidence to approach banks.

"Impact investment might be a temporary thing - it might be a catalyst for local finance providers to step in and replace impact investors," said Heywood. "But in the meantime, there is a role for it, because there really is that gap." ($1 = 0.7078 pounds)

SOURCE: World Economic Forum

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