Beats | June 15, 2017

The ‘23 Fund’: A new model for growth capital in the world’s poorest countries

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By Peter O’Driscoll, Orrick, Herrington & Sutcliffe LLP

One of the biggest current challenges for the impact investing community is the aggregation and deployment of growth capital equity in the world’s poorest countries.

Few would argue with the proposition that for the world’s poorest countries to move out of poverty there must be a much higher volume of growth capital equity provided by private investors.

However, in view of the absence of local private equity, growth capital and venture funds in those countries, as well as the relatively small deal sizes, there is a challenge with respect to the way in which growth capital can be aggregated and deployed. It is unquestionably a ‘bottom of the pyramid’ problem. (For purposes of this article, I have considered the world’s 23 poorest countries, which I refer to as “the 23”).[1]

If the Sustainable Development Goals are to be achieved and the poorest countries are to benefit from impact investment, it is crucial that a new model is developed for impact-driven growth capital equity investment in those countries.

That new model is a large private fund and a manager focused exclusively on growth capital equity investments across the 23 (which I refer to as the ’23 Fund’ or the ‘Fund’).

To have a meaningful impact across 23 countries, the Fund would need aggregate capital commitments from its limited partners of between $600 million to $1 billion. The fact that the Fund’s portfolio investments would be spread across 23 countries would, in contrast to single country and regional PE funds, provide investors with a healthy degree of diversification.

Capital Gap

Private equity and growth capital investment in the 23 is almost non-existent. In 2016, only five of the 23 had any private equity investment — Madagascar (two transactions), Togo (one), Burkina Faso (two), Rwanda (three) and Ethiopia (two). The Democratic Republic of Congo had one private credit transaction in 2016. Transaction size figures are not available for any of the countries other than Rwanda (US$27m in aggregate for the three transactions) and Burkina Faso (US$1m in aggregate for two).[2]

The picture improves rather dramatically with respect to financial inclusion and microfinance commitments in the 23. The data supports the conclusion that the microfinance community has risen to the challenge of lending in nearly all of the 23, even though a number are frontier markets.[3]

There are reasons for that. In such markets, local microfinance providers with access to external funding are usually established before local growth capital, PE and venture funds.[4] It is generally easier and quicker to lend money to an emerging or frontier market borrower than to make an equity investment.

Equity investments, particularly minority stakes, involve negotiations with a company’s management, as well as existing shareholders. A loan generally requires a negotiation only with the borrower, and can be documented through a relatively simple loan agreement and possibly a guarantee or security agreement. Growth capital equity investments typically require a share purchase or subscription agreement and a shareholders agreement, as well as changes to a company’s constitutive documents.

Equity Challenges

Although comprehensive data is hard to find, not surprisingly, development financial institutions such as the International Finance Corporation (DFIs) are active in most of the 23.[5]

A DFI could, in theory, develop a program for impact-driven growth capital investment on a large scale across the 23. However, in my experience, due to the nature of DFIs, DFI-led transactions are costly and take a long time to negotiate and complete. In countries like the 23, DFI-led transactions almost inevitably involve a government component and may not always directly benefit the private sector.

It would be difficult for a DFI to do a large number of small growth capital equity transactions across 23 countries within a relatively short period.

Today, there are only five local PE funds in the 23 (one in the Central African Republic, one in the Democratic Republic of Congo, one in Ethiopia and two in Afghanistan).[6] That suggests it may not be realistic to expect that more local PE funds will be formed in the near term or that newly formed funds will have meaningful capital to deploy.

In many of the 23, there will only be a handful of possible target deals. The average deal size for all but one or two countries is probably US$1 million, and most deals will never exceed US$5 million.

At any given time, several of the 23 may not be ‘investable’ due to ongoing wars, civil unrest or government policy. But over time — for instance, a growth capital fund’s seven year investment period — the investment dynamics in the 23 will change. Some countries will suddenly become investable; others may cease to be investable; one or two will experience dramatic economic growth and leave the club entirely.

Taken together, those dynamics beg the question of how impact-driven growth capital should be aggregated and invested in the 23.

The state of affairs in most of the 23 is such that only impact motivated investors and DFIs are likely to be willing to invest in the first instance, a fact borne out by the CGAP data.[7] The virtual absence of local PE, growth capital and venture funds means that there is very little for a traditional emerging market fund of funds in which to invest.

The small size of some of the 23’s respective economies and the limited number of target deals make it uneconomic for a global or regional PE fund to set up a local office or actively pursue transactions. In a few cases, there may be security issues for investors’ local teams. And in an era in which institutional investors in PE funds prefer larger tickets (~ US$50 million) and fewer manager relationships, the small deal size also presents a challenge.

For the 23 to move out of poverty, microfinance and DFI lending is not enough. Growth capital equity is required for SMEs, early stage companies and startups. For such investment to have a meaningful long term impact, there must be a high volume of relatively small transactions, accompanied by investor follow-up to ensure that local management teams benefit from external advice and mentoring.

An impact-driven private fund is better placed to meet that challenge than a DFI. Although there are people and organizations who are beginning to think along these lines, to my knowledge, such a fund does not yet exist. For the challenge to be met, it must be created.

New Model

What would a fund designed to do growth capital investment across the 23 look like?

Form. For over 100 years, the traditional limited partnership has proven to be the most enduring and flexible vehicle for investment across a wide variety of sectors and asset classes, including the emerging market private equity, growth capital, venture and impact sectors, providing both tax transparency and investor protection. Institutional investors, including family offices and leading impact investors, understand it and have a high degree of comfort with it. To mobilize the maximum amount of impact capital from those investors, the 23 Fund should be set up as a limited partnership.

Size. As previously noted, to have a meaningful impact across 23 countries, the Fund would need aggregate capital commitments from its limited partners of between US$600 million to US$1 billion. If the Fund size was US$1 billion and same amount of capital were invested in each of the 23, without taking into account fees and expenses, approximately $43.4 million would be available for investment in each country — a modest amount in the modern private equity context. The spread of the Fund’s portfolio investments across 23 countries would, unlike single country and regional PE funds, provide investors with good geographic diversification.

The Manager. The manager and general partner of the Fund should be a newly formed entity with one objective — impact-driven growth capital investment in the poorest countries. Initially, the manager should have a single central office in a location suited for finding staff with relevant emerging markets experience. The focus should be on attracting highly motivated, mission-oriented team members and developing a deep knowledge base within the manager with respect to the 23 countries and the efficient deployment and management of growth capital in those countries.

The manager would need small teams focused on:

• Deal generation and negotiation of term sheets
• Legal, diligence and compliance
• Transaction execution
• Economics, research and impact measurement
• Post-transaction support and training for local management teams
• Investor relations

Technology should be maximized across the investment life cycle — from allowing entrepreneurs to file pitches and business plans online to monitoring investments, as well as providing post-transaction training for management teams.

Replicability. Emerging markets generally share more in common than they do differences, including a common set of investment risks.[8] That commonality makes replication possible. To undertake a high volume of small growth equity transactions across the 23 within a relatively short period, replicability would be the key to achieving the Fund’s objectives and must therefore be a principal consideration in structuring the manager and general partner of the Fund, as well as the Fund’s operations.

One of the ways in which capital markets develop and grow in volume is through standardization of documentation. Over the past 30 years, this has happened in emerging market debt trading, mortgage-backed securities, corporate lending and US venture capital. Recently, the higher profile microfinance institutions have standardized their documentation so that they can use the same loan documents across the markets in which they lend, with the only modifications being those required to reflect differences in local law and regulation and deal terms. There is no reason why the same thing should not happen in the impact-driven emerging market growth equity sector. One key to the Fund’s success would be to lead the charge in this area.

Fund terms. In view of the investment environment across the 23 countries and the corresponding challenges in deploying capital and realizing investments, the Fund should have a seven year investment period and a seven year realization period. European style-end of fund carried interest provisions would not make sense for a 14 year fund, so the manager’s carried interest should be calculated and distributed on a deal-by-deal basis, with an escrow fund (but no clawback) to cover any true-up adjustments to distributions of carried interest.

In view of the higher legal, travel and training costs associated with a fund of this type, there is a compelling argument for either a higher management fee — probably 2.5% of aggregate capital commitments during the investment period, with a modest step-down at the end of the investment period — or a more generous set of fund expense provisions.

Finally, because many exits will involve a sale of the Fund’s interest in a portfolio company to its local management, the Fund should have the ability to take back notes from management team purchasers.


Investment data shows that, while most of the 23 poorest countries currently benefit from microfinance investment, only a few benefit from private equity investment and, in those cases, the amounts available are very small. The absence of local private equity, growth capital and venture funds in those countries, and the relatively small deal sizes, prevent emerging market funds of funds from having much, if any, impact.

DFIs would be challenged to roll out a high volume of small deals across 23 countries within a short period of time. For the 23 to move out of poverty there must be a much higher volume of growth capital equity provided by private investors.

To achieve that, a new model — a large private fund and a manager focused exclusively on growth capital equity investments across the 23 — is necessary. Because such a fund does not yet exist, it should be formed and launched on an expedited basis.

A version of this article was first published in EMPEA’s Spring 2017 Legal & Regulatory Bulletin, Issue №21.

About the author: Peter O’Driscoll is a partner at Orrick, Herrington & Sutcliffe LLP and heads Orrick’s Emerging Markets Group.

[1] In 2016, these were the Central African Republic, Democratic Republic of Congo, Burundi, Liberia, Niger, Malawi, Mozambique, Guinea, Eritrea, Madagascar, Comoros, Togo, Guinea-Bissau, Sierra Leone, The Gambia, South Sudan, Haiti, Burkina Faso, Kiribati, Rwanda, Ethiopia, Zimbabwe and Afghanistan. Jonathan Gregson, The Poorest Countries in the World, Global Finance, Feb. 13, 2017,

[2] See Year-End 2016 Emerging Markets Private Capital Industry Statistics, Emerging Markets Private Equity Association (EMPEA), Feb. 20, 2017,

[3] See CGAP — 2016 International Financial Inclusion Funding Data, Dec. 13, 2016,

[4] As an example, Ethiopia has one local private equity fund, EMPEA, supra note 2, but has 12 active microfinance and financial inclusion funders, CGAP, supra note 3. The Democratic Republic of Congo has one local private equity fund, EMPEA, supra note 2, but 12 active microfinance and financial inclusion funders. CGAP, supra note 3.

[5] See Matthew Soursourian and Edlira Dashi, Taking Stock: Recent Trends in International Funding, CGAP, Dec. 13, 2016 (“Funding commitments increased among both public and private funders [in 2015], with public funders continuing to represent just over 70 percent of total funding. Development finance institutions provide the majority of funding, followed by multilateral and bilateral development agencies”),

[6] EMPEA, supra note 2.

[7] Soursourian and Dashi, supra note 5.

[8] See Peter O’Driscoll, De-Risking Emerging Market PE Investments: A Checklist for Investors, EMPEA Legal & Regulatory Bulletin (Autumn 2011).