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Emerging market fund managers scramble to keep enterprises and entrepreneurs afloat



ImpactAlpha, Mar. 31 – As the coronavirus spreads in Africa, Wemy’s products have been flying off local shelves, as families stock up on supplies for a two-week, government-imposed lockdown. 

The Nigerian personal hygiene products company sells locally made diapers, feminine products and sanitary wipes, often at a lower cost than imported products. Few businesses could have been better aligned to a pandemic-spurred demand spike for essential goods than Wemy. 

Yet even companies with essential products and established distribution channels have been caught in the global downdraft of the COVID crisis. 

“Our supply chain has been disrupted massively,” says Aruwa Capital Management’s Adesuwa Okunbo Rhodes, an investor in Wemy. Aruwa, a private equity fund manager in Lagos, invested in Wemy last October. Supply constraints on raw materials from China and Europe have made it hard to restock, even with high demand. State border closures preventing Wemy from reaching distributors in northern Nigeria is compounding the disruption. “It’s definitely a challenging time,” Rhodes says.

Wemy and thousands of otherwise viable, sophisticated and growing businesses around the world are being forced to pivot, pause business lines, furlough or fire workers, and shutter. The global economic slowdown and local lockdowns that come with the COVID pandemic has shut down global capital flows from retail to remittances. 

Entrepreneurs’ and funds’ own capital-raising efforts have frozen up at the very moment they need cash. Fund managers describe scenarios in which portfolio companies in mid-fundraise are having term sheets withdrawn or renegotiated. 

Only the decisive survive. Will your business?

The businesses are the kind of cashflow-positive, pro-social ventures that have come to represent an emerging model for global sustainable development. Through no fault of their own, markets have seized up, perhaps for months. As a generation of entrepreneurs worry they will run out of cash, the ecosystem of emerging market capital providers that has financed their growth is scrambling to help them survive.

“Many of these fund managers are investing in exactly the solutions that we need right now and the future: health, climate, water and sanitation,” says Catalyst at Large’s Suzanne Biegel, who convenes fund managers, particularly those focused on investments in and for women. Managers are eager for strategies to keep their portfolio companies afloat, and particularly to protect and provide security to frontline workers.

“The question for fund managers right now is very much about how you find the right resources wherever you and your investees are,” said Biegel, who postponed this month’s Gender Smart Investing Summit. “If investors pull back, if they don’t invest in these funds, then entrepreneurs don’t get what they need.”

Capital on the Frontier: Impact in emerging markets is a 2020 growth story

A rush of liquidity may be crucial to mitigating a broad-based economic domino effect. Getting cash and other resources to small and growing businesses is being seen as a critical part of economic recovery in countries already grappling with inequality, unemployment and social unrest. 

Institutions including the World Bank and International Finance Corp., as well as European and U.S. development finance institutions, have already committed billions to emerging market partners. But capital providers who have staked out the kind of small and growing businesses, or “SGBs,” that are considered vital to inclusive prosperity still face challenges finding short-term financing to save such enterprises. 

Investors are reacting to perceived risk, which is “off the charts,” observes Amanda Cotterman, founder of Nairobi-based venture debt firm EquaLife Capital. “The real risk is that companies here will not get the funding they need in time.”

EquaLife just launched a $20 million COVID-19 relief fund to provide fast, low-cost cash injections to companies needing immediate support. Cotterman says she’s been “inundated with requests” from entrepreneurs since announcing the fund last week.

“There is growing recognition that small businesses urgently need cash to continue operations,” agrees Courageous Capital’s Laurie Spengler, who is working with the Collaborative for Frontier Finance to identify such needs. “Understanding their underlying needs – from revenue substitution to employment retention to supply chain transactions and more – will ensure that the terms and conditions of the cash are aligned with what the business needs to survive.”

Local fund managers

Early-stage capital providers, who are on the frontline of diligencing and disbursing funding to small businesses, say that what’s urgently needed is patient capital that maintains jobs and keeps supply chains from grinding to a halt. 

“The advice everyone is getting is ‘shorten your cash-conversion cycle’ or ‘delay payments to your suppliers.’ Well that’s easier said than done,” says Brendan Mullen, co-founder of “micro” private equity firm Secha Capital in South Africa that operates as a holding company of a half-dozen operating enterprises. 

Secha, with $2.7 million in capital to deploy, invests in what Mullen describes as “boring” businesses—small agri- and consumer goods companies with solid growth and job creation potential. Not tech companies. “These are businesses that clean, feed and clothe South Africans,” he says. The companies are small, with 250 employees across the group. Three-quarters are women. 

“Other companies are laying people off—we’re not ready to do that,” Mullen says. “We’re trying to protect people. Our concern is how do we keep production going as everyone is getting tighter and tighter with their cash.” 

The Secha team is working hard to avoid pausing operations in order to keep employee incomes flowing. For example, Stoffelberg, which produces long-life cured and dried meats, is bypassing its large retail customers and delivering directly to smaller vendors to speed up its cash-conversion cycle in the near-term. “It’s a tough call and it will lead to a lower margin, but it ensures cash on delivery so we can continue to operate,” says Mullen. 

Stoffelberg is also exploring new sales channels through hospitals or the military, where its products will be in demand. As a food company, it is layering on additional safety measures to ensure it can continue to operate as an “essential business” during South Africa’s three-week lockdown.

Small businesses, big opportunities: Where to hunt for impact investments in Africa this year

Other investors, like Blue Haven Initiative, are digging in with portfolio companies to determine how urgently they need a cash injection, or whether they can ride out revenue losses by making other concessions. To cut costs, one of its portfolio companies in Nairobi has offered to pay its office rent for the rest of the year upfront, in exchange for a rental rate discount. 

“Our main goal is keeping companies’ teams intact, and helping them position themselves for the bounce-back when this is all over,” says Blue Haven’s Lauren Cochran. “We don’t want them to do a ton of layoffs, then have to rebuild their teams when this is over.” 

Strategic pivots

Inclusive fintech-focused investor Accion Venture Lab is working with portfolio companies to make short-term strategic pivots and even launch new products that are relevant to customers in the present moment. 

An education lender in the Philippines, for example, is exploring how to provide equipment financing to help schools transition to remote teaching models. 

In Brazil, Vox Capital has found that most of its portfolio companies have liquidity. With Vox’s focus on companies “delivering solutions for actual problems the low-income population suffers,” says Daniel Izzo, “we are learning that these solutions are even more critical in times of crisis.”

Three of Vox’s companies are having their best month ever, he says. Magnamed, a medical device company that is focused on ventilators (“Yeah, who would have thought?” says Izzo) is delivering 10X its typical volume. Sanar has high demand for its online education for medical students and young professionals. The fintech company Celcoin makes it possible for Brazilians to pay their bills at the corner store, with no lines nor need for public transportation.

The economic shocks hitting developed markets like Italy, the U.K. and the U.S. are an echo of the chronic issues that have long plagued emerging markets. Small and growing businesses meeting the needs of growing populations in emerging markets could power a broad-based recovery. The opportunity now is to use the recovery and relief efforts to establish long-term channels of capital so such enterprises can not only survive but succeed. 

Rhodes, whose firm is raising a $20 million fund to invest in African growth businesses with a gender-focus, cautions that companies like the ones in Aruwa’s portfolio and pipeline are most vulnerable to failure even though they have the greatest impact. 

“They can’t access their markets, but they have fixed costs, so they need grants, technical assistance and patient capital now more than ever,” Even on a good day, she says they lack access to capital. “We’re trying to find pockets of institutional capital that can act quickly.”

Agent of Impact: Adesuwa Okunbo Rhodes, Aruwa Capital Management

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