So-called “growth firms” make up less than 20% of businesses in Africa, Asia and other emerging markets, but account for almost two-thirds of all new jobs.
Yet even with solid revenues and strong prospects, such young firms are often unable to access bank financing. Donor funding has dried up and few investors are focused on the segment.
The Growth Firms Alliance, a consortium of a half-dozen foundations, is trying to distinguish such growth companies as distinct from other small businesses, often called small and medium-sized enterprises. Many SMEs do provide informal employment but may not be positioned to scale up revenues or job-creation.
GFA is supporting this week’s All-Africa Pension Summit in Kampala, Uganda. The summit, hosted by Uganda’s National Social Security Fund will engage other pension funds on the continent, along with commercial banks and development financiers, to increase allocations to alternative assets, with a specific focus on small-business financing and infrastructure projects.
“We think the impact is outsized relative to the support (growth firms) receive,” Matthew Guttentag, who last month took over as manager of the alliance, told ImpactAlpha. The consortium, he said, “is premised on the idea that these [firms] are the key disproportionate driver of job creation and productivity in low and middle income countries.”
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Growth firms are generally defined as those able to double in size over five years. The alliance, including the Argidius, IKEA, Lemelson, Small and Visa foundations, are rallying up resources, including financial, policy advocacy and technical support for growth firms. Guttentag says GFA has received interest from development finance institutions, including the Dutch financier FMO.
Guttentag is not new to development finance and entrepreneurship. His background includes stints at the US Development Finance Corp. and USAID, as well as at the Aspen Network of Development Entrepreneurs and Ashoka Changemakers. He says he’ll focus on strengthening access to appropriate finance and strengthening market access and linkages to large buyers, all while creating a strong and supportive policy and regulatory environment.
Growth firms, Guttentag said, “are critical for moving people into formal employment and providing communities with the sort of investment that they need for improved living standards.”
African pension funds
The pullback in donor and aid funding has brought new urgency to the efforts by the alliance and others to intensified efforts to mobilize “new forms of capital or forms of capital that have not been mobilized in this way before, in particular local capital,” Guttentag said.
Private pension plans in Africa, which collectively manage an estimated $700 billion in assets, are just beginning to engage their role in supporting growth firms in their markets.
The host of this week’s pension fund gathering, NSSF Uganda, has been particularly proactive in channeling capital to small businesses, farmers and youth to spur job creation. The simple idea: newly employed workers also represent potential savers in NSSF”s pension schemes, helping bolster the financing needed to pay out pensions.
“We said, as a fund, we cannot be passive or bystanders in the economy,” NSSF’s Patrick Ayota said earlier this year in a video interview, part of ImpactAlpha’s series, Pathways to Growth, produced in partnership with the Collaborative for Frontier Finance (see “Ugandan pension fund is creating new savers with investments in small business and agriculture”).
The alliance hopes the pension fund gathering serves as a conversation starter to engage local capital providers directly and collaborate on other activities to unlock this capital. “Members of GFA really see this [pension capital] as a critical piece of the puzzle going forward and we’re thinking about how philanthropy can be involved to mobilize this capital,” he says.
GFA is already making commitments. Ghana’s Ci-Gaba, a $75 million blended finance vehicle of Impact Investing Ghana that aims to invest in providers of capital to small and growing businesses across West Africa received some funding from the Argidius Foundation, aided by the GFA, to cover its operational expenses (for background see, “African investors warm to regional funds of funds to finance small business growth”).
Structuring such funds of funds and other intermediary and wholesale funds, will be key to “take these large amounts of capital and deploy it in the sort of ticket sizes that growth firms need in places like Africa, where it’s always tricky to match up with investment models,” Guttentag said.
“Foundations have a very unique structure in being able to be very flexible and very strategically nimble,” Guttentag said. Foundation funding can help stand up such financing vehicles and crowd in development finance capital and even commercial investors. Foundations can cover upfront costs, for example, to set up a new fund-of-funds.
“And then having the DFIs coming in and being able to cover these different sorts of requirements. That’s where the pension funds might be able to come in as well,” he says. “We’re bringing everybody on board and looking at what role different types of capital can play.”
