Emerging-markets impact investors turn away from small businesses, at their peril



More capital than ever is being raised by emerging-market private equity and venture capital funds. But less of it is going to small and growing businesses.

The trend suggests “the missing middle” is still missing. The gap could choke off the pipeline for larger, later-stage impact investments in emerging markets, as well as a key source of innovation needed to meet the Sustainable Development Goals.

“The support is stagnant,” says Randall Kempner, executive director of the Aspen Network of Development Entrepreneurs, a network of more than 280 organizations that provide investment and support to emerging-market entrepreneurs, which released its annual report on the state of the small and growing business sector. “The fundamental growth is not there.”

Last year’s fundraising for both emerging market private equity and venture capital funds set records at $61 billion and $11 billion, respectively.  But investment in deals under $2 million fell to $217 million, down 13% from $249 million in 2016. The 900 or so such smaller deals represented just over one-fifth of all deals, down from more than one-quarter in 2016.

Technical assistance and other business support, which is considered crucial to the success of emerging-market small businesses, also declined, falling 12% to $3.65 billion. Such support is generally provided by international donors and development financial institutions.

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The findings reflect pressure on many fund managers to push costs down and returns up. Transaction costs on small deals can be high as a percentage of the total investment, and early-stage businesses can require extensive non-financial assistance to succeed. Respondents to the Global Impact Investing Network’s survey in May said investors often seek to invest larger amounts of impact capital than investees need, leading them to pass over smaller deals. Kempner said one of the most troubling signs in the ANDE report is, “The size of the investments are going up.”

Indeed, 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. Only 10 of the new funds are “impact oriented.” The proportions of vehicles targeting East, Pacific, and South Asia increased, while falling in every other region.

The flat-to-down support for a segment considered crucial to both economic inclusion and to impact goals belied some of the hype of recent years, leaving Kempner uncharacteristically downbeat.

The numbers that we see do not align with the amount of talk around impact investing and social enterprise,” he said. The low levels of funding are “not enough to take advantage of the opportunity small and growing businesses represent in supporting the SDGs.”

How Small Businesses Are Having Big Impact on Global Goals

There were bright spots in the report. While only 6% of the new small-business investment vehicles launched in the last five years have an explicit gender-inclusion focus, half of those were formed last year. East and Southeast Asia is growing friendlier for women entrepreneurs, the report found.

Business support infrastructure is growing in South Africa, while in West Africa, governments are are turning to youth entrepreneurship to tackle unemployment and drive growth. Growth in debt finance in East Africa is helping off-grid solar companies distribute new products.

ANDE members said Brazil is increasing its focus on inclusive business. In Central America and Mexico, universities are making strides to close the small business talent gap.

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