Other investors may be running away from early-stage investments in emerging markets. Capria is running toward them.
The Capria network now includes 16 local impact funds that make sub-$1 million investments in Asia, Africa and Latin America. The International Finance Corp., the investment arm of the World Bank, has committed $13 million in Capria Fund, which invests in both the fund managers and their funds.
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The “network fund” is an effort to address “the missing middle” in emerging market finance for businesses that are too large for microfinance institutions, but generally too small for banks, private equity or venture capital or development finance institutions. The Aspen Network of Development Entrepreneurs recently reported that investment in deals under $2 million fell to $217 million last year, down 13% from $249 million in 2016, despite record fundraising for both emerging market private equity and venture capital funds.
The gap could choke off the pipeline for larger, later-stage impact investments in emerging markets, as well as a key source of innovation and entrepreneurship needed to meet the U.N. Sustainable Development Goals.
Where others see perils, Capria sees potential. “As investors continue to migrate to later-stage because their traditional investment models are struggling, they will encounter new struggles including more investor competition, fewer deals, and inflated valuations,” Capria’s Dave Richards told ImpactAlpha in an email exchange. “Capria’s ‘network fund’ model is equipping local investment teams to be more efficient and effective in investing in earlier stage deals where there is little investor competition and a lot more deals to choose between.”
Capria is rolling its $5.2 million accelerator fund into what it expects to be a $100 million network fund. The earlier fund took stakes in the general partnerships of 15 of the 16 members of the network and helped them “warehouse” early deals to build their portfolios. Capria’s Will Poole said the fund’s first close, expected next month, will let the fund make investments of up to $5 million in the partner funds.
Among the new funds that have recently joined the network are Adobe Capital and Capital Invent in Mexico; KAP, a fintech investor based in Mauritius; Prismapar Capital, an education investor in Latin America; and Terra Global Capital, an agriculture investor in Colombia.
The ANDE report said the number of new funds targeting investments under $2 million in emerging markets appeared to decline. ANDE tracked 47 such new investment vehicles, six fewer than the year before.
“The idea of a network fund is saying we’re going to get superior results, both financial and impact, as a result from having this tightly connected network of local managers around the world working together,” Poole said. “Our network is entirely non-competitive. We’ve created a zone of safe collaboration among people who are usually competitive and tight-lipped about what they’re doing.”