ImpactAlpha, July 8 – Last year, at least 56 new investment vehicles launched raising $1.2 billion in capital to invest in small and growing businesses around the world. That represents an uptick over the prior year’s 47 vehicles and tops the annual average of 51 new vehicles over the last decade (see, “Emerging-markets impact investors turn away from small businesses, at their peril“). Still, capital gaps continue to limit the impact potential of the world’s small and growing businesses.
That’s according to the annual “State of the SGB Business Sector” report from the Aspen Network of Development Entrepreneurs, which defines the sector as businesses with five to 250 employees, capital needs from $200,000 to $2 million and growth potential.
“We see lots of favorable trends in the sector, but sector growth remains linear,” ANDE’s Randall Kempner told ImpactAlpha. Kempner says the sector has yet to reach “the exponential growth we’d need to see to unlock the full prosperity-creation power of SGBs in emerging markets.”
- Small is beautiful. In emerging markets, private capital vehicle investment jumped 27% to $70 billion in 2017. While less than 1% of the total capital went to deals under $2 million, small deals represented a greater proportion of the total number of deals. In Latin America last year, deals under $1 million made up more than half (335 out of 610) of all private investments.
- Gender alpha. Nearly 20% of new small and growing business-focused investment vehicles have an explicit gender mandate. That’s the largest percentage since ANDE began tracking (see, “Female fund managers make the case for ‘gender alpha’ in emerging markets”). ANDE backed NESst, MEDA and Agora Partnerships, and Root Capital and Value for Women to incorporate gender lenses into impact measurement (see, “Capturing the alpha in gender inclusion”).
- Divide and conquer. Segmentation is key to closing the $940 billion financing gap for small and growing businesses, according to the Collaborative for Frontier Finance (see, “The four ‘missing middles’ among small and growing businesses”). Also key: Overcoming risk perceptions. “More data and experimentation are needed in order to better understand the relative risk of these businesses, and therefore the commensurate return requirements,” the collaborative’s Drew von Glahn told ImpactAlpha (see, “Financing inclusive growth at Palladium’s Positive Impact Summit”).
- Linear growth. Kempner says the sector hasn’t yet turned a corner, “but it does seem like the corner is visible and there are more hands on the wheel leaning into the turn.” He says even with recent increases, donor agency support for small businesses is yet to reach historic highs. Increased allocations from investors to emerging market SGBs have not closed the massive capital gap. Though more organizations are embracing a gender lens, female entrepreneurs still struggle to raise capital. Accelerators are popping up like wildflowers, says Kempner, “but quantity doesn’t necessarily reflect quality.”