ImpactAlpha, June 25 – A quarter of small businesses will fail and a quarter will succeed, and even thrive, in the aftermath of COVID. But the broad middle group of companies in emerging markets are treading water and in need of a lifeline.
A spate of efforts have arisen to try to prevent the worst-case scenario, which would decimate not only enterprises and the funds that have backed them, but also the enterprises’ impact.
“There will be an accelerated culling of businesses, because of COVID,” observes Drew von Glahn of the Collaborative for Frontier Finance, which surveyed nearly 100 emerging markets fund managers and other capital providers.
The survey found that 94% believe their portfolio companies need relief funding—specifically concessionary capital and debt. But three-quarters of them operate in markets where there aren’t any dedicated COVID relief programs, according to CFF. “There’s also an opportunity to save businesses that would only go out of business because of COVID-related factors,” von Glahn said.
The Collaborative, which was working to increase emerging market small businesses’ access to capital even before COVID, is designing a relief fund targeting the portfolio companies of local capital providers, specifically those based in sub-Saharan Africa (disclosure: CFF is a sponsor of ImpactAlpha’s Capital on the Frontier series). The fund, which will be managed by impact investment firm Investisseurs & Partenaires, is looking to raise $150 million to originate low-cost loans directly to companies that had “solid business performance and financial positions” pre-COVID. CFF anticipates average loan sizes of around $250,000, based on capital providers’ reported needs across portfolio companies, for a four-year term with up to an 18-month repayment grace period.
CFF’s facility will target businesses with a gender focus, whether that’s female ownership and management or whose businesses serve female suppliers and customers. It hopes to reach a first close and begin deploying capital as early as July.
Other efforts are mobilizing similar relief facilities. Calvert Impact Capital is partnering with the Ground_Up Project and SDG Lab on an Impact Rescue Facility that aims to raise $1 billion to support small and mid-sized enterprises in emerging markets. The blended-finance initiative, as with CFF’s facility, is looking to tap into billions of dollars in emerging markets COVID relief money earmarked by development financial institutions and multilateral banks, along with private capital. Whereas the CFF fund aims to work through local capital providers, the Impact Rescue Facility intends to work directly through DFI portfolios.
Global Alliance for Improved Nutrition and Incofin Investment Management, meanwhile, are partnering on a relief fund for small and mid-sized enterprises specifically working in the agrifood sector.
“SMEs deliver 70% of food consumed in Africa, especially fresh foods such as fruits and vegetables. They are also a major source of innovation in food production, storage, distribution and retailing,” write GAIN’s Sofia Condes and Gabriel Quiros and David Dewez of Incofin in a guest post. “Without proper financing options, businesses that do weather the storm will not be able to invest in activities that are key to building a better food system,” which the partners call “vital to the underlying health conditions of society.”
The Nutritious Food Financing Facility, or N3F, is a blended-capital fund that will provide both funding and technical assistance to support businesses working to strengthen emerging market food chains, by improving food safety and hygiene standards, investing in manufacturing and cold chain equipment, and developing new last mile distribution models. N3F is being developed with the support of the Netherlands Ministry of Foreign Affairs and has already secured commitments from The Rockefeller Foundation and Irish Aid.
Cut the checks
All of these partnerships stress the urgency of need and action to shore up small businesses as emerging market economies begin to reopen. “Businesses in emerging markets needed capital yesterday,” write Brindusa Burrows of The Ground_Up Project, SDG Lab’s Nadia Isler of and Jennifer Pryce of Calvert Impact Capital in a guest post. “If we don’t act soon, we will lose an entire generation of otherwise viable businesses – and all the jobs, goods and services, and positive family and community effects – that go with them.”
An earlier survey from microfinance institution BRAC found, as markets “reopen” from a crisis, it is critical for businesses to have access to capital to restart their businesses. The organization’s reluctance to immediately restart lending in Sierra Leone and Liberia as the countries emerged from the Ebola crisis was a misstep, acknowledged Shameran Abed in an earlier interview with ImpactAlpha. The organization has committed to originating new loans as its in-country operations restart from the COVID shutdowns. “Now is not the time to be risk-averse. The best thing we can do is go back into communities and lend. The faster we do that, the faster we all recover from this crisis.”
Indeed, many of the small and growing businesses that have weathered the crisis thus far have already proven their diligence, adaptability and resilience by cutting costs down to the bone and pivoting business strategies toward new opportunities. In South Africa, impact investment firm Secha Capital has been working with each of its operating companies to secure emergency funding, renegotiate leases, and identify new customers and distribution channels. Bridgement, an invoice factoring company that Secha partners with, extended its payment terms, which provided an immediate injection of credit for portfolio companies.
For Stoffelberg, a portfolio company that sells cured and packaged meats, Secha helped the business pivot to a direct-to-consumer sales model locally and begin exporting its products to the U.A.E. Stoffelberg saw its best sales ever in May, Secha’s Brendan Mullen says. For Hair City, a retailer and marketplace for wigs, extensions and hair accessories, Secha helped the company double down on digital marketing and sales. Mullen says Secha’s portfolio companies are positioned to survive and grow through COVID and beyond, but will need capital to support and expand the new business infrastructure they put in place.
While many firms like Secha have been working with individual portfolio businesses to secure and renegotiate financing, capital providers are reaching the limit of what they can do independently. Meanwhile, small businesses’ need to pivot may not yet be over: CFF’s survey found that more than 60% of emerging markets capital providers anticipate an evaporation of demand for products and services and protracted changes to the business environments in the primary markets where their portfolio companies operate.
What’s needed now is a coordinated response from funders, including development finance institutions, multilateral banks, and private investors, to ensure that the pandemic recovery is rapid – and sustained. “This is not only about emergency funding,” says von Glahn. “We are also trying to solve for a market gap, so that this will work over time.”