Emerging and Growth Markets | April 7, 2020

Needed: Responsive, aggregated and accessible capital for (once-) growing businesses in emerging markets

The team at


ImpactAlpha, Apr. 6 – A viable company is a terrible thing to waste.

A whole generation of otherwise cashflow-positive small and growing ventures that deliver pro-social goods and services around the world is on the edge of failure because of the COVID crash. In emerging markets no less than developed ones, revenues and demand have evaporated, supply chains have ground to a halt, exports have collapsed and customers are being slow to pay.

“In terms of business hospitalization, and putting many of these companies and their employees in economic intensive care units, we are six to nine weeks behind the human health tsunami,” said Grofin’s Brienne van der Walt, on ImpactAlpha’s Agent of Impact conference call last week. “We need to get these guys through the next three to six months before we can begin rebuilding.”

The Call gathered experience and perspective from local providers of small-business equity and debt capital in markets like Johannesburg, Lagos, Kampala and São Paulo, who are scrambling to help their portfolio companies with safety, operations, employees and financing – in other words, survival. Co-hosting The Call was the Collaborative for Frontier Finance, which is working with such capital providers to expand financing for small and growing businesses. The Collaborative’s Drew von Glahn warned of a liquidity crisis “that if we don’t address properly will soon become a solvency problem.”

Cash flow resilience

What is needed immediately is  “cash flow resilience”—through debt or bill payment holidays, loan restructuring, and working capital financing, van der Walt said. Headquartered in Mauritius, Grofin lends to about 300 small- and medium-sized companies in Africa and says it has committed funding of $500 million from both public and private global development investors. As with the health mobilization, van der Walt said, emerging market investors must “intervene at massive scale and speed now and reduce the economic impact.”

Adesuwa Okunbo Rhodes, Aruwa Capital Management

Funds from major development finance institutions, as well as multilateral and bilateral lenders, often don’t reach to the majority of small and growing businesses that don’t qualify for bank loans. The International Finance Corp. for example, announced $8 billion in lending, mostly to banks. The African Development Bank issued a $3 billion social bond and the Inter-American Development Bank and IDB Group will make $3.2 billion available; IDB Invest is readying $500 million for short-term loans to small and medium-sized companies.

Responsive, aggregated and accessible is how Laurie Spengler of Courageous Capital Advisors summarized the “design principles” needed in any solution. “Responsive to the need, fast, simple, speedy. Get it going,” Spengler said. “Aggregated. Bespoke individual solutions are not going to be as effective. And accessible.” She said even without new capital, individual capital providers can ease pressure on small businesses simply by extending time and changing terms of current loans. (Spengler recommends CASE at Duke‘s i3 compendium of resources for ideas of how to provide financial and non-financial support to entrepreneurs.)

Courageous Capital and the Collaborative for Frontier Finance are developing a facility to provides liquidity – and therefore time – for local capital providers. “The facility is predicated on the engagement of broad swath of donor and investment stakeholders that have spent the past decade developing the impact investing sector,” von Glahn and Spengler said in an e-mail. “They should be equally motivated to work collectively to see these enterprises and the sector prosper into the next decade.”

Different types of capital will be needed to bridge specific gaps and challenges, which include revenue decline due to the evaporation of demand from the lockdown; revenue declines from supply chain constraints as borders close; liquidity crunches because of unpaid invoices or frozen financing agreements; or simply high fixed staff and overhead costs without the cash to cover them — at least without mass layoffs that would sink the company. 

Non-bank capital

Local capital providers and fund managers with a development-finance focus have bridged the gap – sometimes called “the missing middle” – in financing for small and growing businesses. The COVID crisis may present an opportunity to utilize such non-bank channels to more efficiently get capital to the small and growing businesses that are the lifeblood of every economy. 

Even as relief and recovery funds begin to flow, “Often there’s a big gap between demonstrative need and ability to draw down on that funding,” said Evan Jones of South Africa-based Inyosi Empowerment. “A significant component of our borrowers simply don’t have the means or the administrative capability to access government funding.”

“What’s available from the government is typically debt funding, with burdensome collateral requirements [and] very bureaucratic loan application processes,” agreed Adesuwa Okunbo Rhodes of Lagos-based Aruwa Capital.”

The pandemic has created opportunities as well as threats. “The short term pain is quite clear. This is going to be brutal for many companies,” said ADAP Capital’s Andy Lower. “On the positive side of it, I see a couple of opportunities for mergers and sustainable acquisitions within our current portfolio.” Vox Capital’s Gilberto Ribeiro said one portfolio company, Magnamed, which produces the respiratory ventilators now in hot demand, had ramped production more than five-fold in the past month. 

Individuals fund managers are rallying their own investors and resources. Uganda-based lender iungo capital is willing to “freeze interest payments, add additional moratoriums over time, and depending on how long this lasts for these businesses, restructure,” said iungo’s Roeland Donckers. It’s also working with investors on a facility to provide interest-free short-term loans for the hardest hit of iungo’s portfolio companies.

But even in better times, the razor-thin economics of such fund management firms means that portfolio managers are limited in how much technical assistance they can provide to founders and enterprises. Catalyst at Large’s Suzanne Biegel has been in discussions with more than 60 managers of gender-lens investment funds seeking a collaborative approach. “What are the ways that we can aggregate the capital needs across funds in a way that is efficient for the institutional investors and effective for those fund managers to be able to get those resources?” she asked.  

Tahira Dosani, of Accion Venture Lab agreed one-off rescue funds from individual firms would be of limited value. Rather, asset owners and not just managers could together design common facilities for such lending. How can we create these quickly, and with a flexible structure, that actually serves the needs of these companies? she challenged participants on The Call.

As a measure of how much has changed so quickly, ImpactAlpha’s Agent of Impact call in February brought together a local early-stage capital providers to discuss how they were finding “impact alpha” in emerging markets. Now, capital providers and fund managers are grimly dissecting whether to “triage” companies that might not make it through the crisis. “We’ll have to make the right choice as to who should get the medicine to survive,” van der Walt acknowledged.

Call No. 12: How local early-stage funders are finding impact alpha in emerging markets

Spengler urged investors not to make such decisions prematurely “and give businesses a chance to navigate through this timeframe.”