ImpactAlpha, October 24 – Hundreds of local fund managers are looking to prove that investing in small businesses is a viable and profitable path to economic development in emerging markets. Their challenges in building investment businesses often mirror the businesses they’re trying to support. Too little funding—check. Too few investors who understand their business models—check.
“We’re all entrepreneurs. But a lot of organizations with money to invest care more about the underlying deals we do and whether they fit perfectly in a mandate, not the firms we’re building and positioning in emerging ecosystems.” said Laura Davis of Ethiopia-based investment firm RENEW Capital at a recent convening by the Collaborative for Frontier Finance. That mindset limits fund managers operationally and can lead to burnout just as they’re getting to scale.
While limited partners in the room scrutinized fund managers’ operating costs, Davis and others challenged investors to invest with a goal of building emerging fund managers as organizations. “In a dream world, LPs would be able to invest in fund managers in a way that’s more aligned with how businesses are built.”
To do that, investors have to shift their risk perspectives.
“You have to think at a portfolio level,” said Laurie Spengler of Courageous Capital. “You’ve got to step back and look regularly at the portfolio you’re building and have an appetite for experimenting, learning, growing and adapting.”
TA-investment gap
Emerging fund managers are tapping technical assistance grants to set up their funds and cover their business costs. But such capital typically can’t be used as proof-of-concept funding for managers’ investment theses. Fund managers, particularly women, decry being “over-trained, over-mentored and underfunded.”
Hema Vallabh of South Africa-based venture fund Five35 Ventures observed that incentives between technical assistance funding and investment capital needs to be more aligned.
“The way we invest in enterprises is the way institutional investors should invest in first-time fund managers,” she said. “Write the check, make the investment, and then do the capacity building because then my success will be your success, and it will create more capital flow momentum for first-time funds.”
Getting deals done
Fifty emerging fund managers in the CFF network are looking to raise a collective $1 billion. They’ve raised about a quarter of their target, according to CFF’s latest survey. More than 80% of fund managers are already inking deals, even though just a third have announced a first close.
CFF’s Susan de Witt argues in a guest post that investors need to reframe their thinking around where emerging fund managers should sit in their portfolios. “Consider them an emerging asset class,” she writes, that can build the pipeline for later-stage funds, deploy capital flexibly and creatively as local markets need, and better serve women than nearly all other sectors of finance.
Decision makers
Field builders lament that the conversation around small business financing has changed little in the past two decades at least. Fund of funds like Nyala Ventures and Kuramo Capital are trying to match emerging fund managers with early capital while making the investment economics work for institutional investors. Initiatives like 2X Ignite want to help fund managers warehouse deals and bundle operating costs. Organizations like Switzerland-based Argidius Foundation are providing early, catalytic funding for emerging fund managers and other small business financiers.
There need to be many more such examples, said Spengler. “It’s all about how decision makers look at risk and opportunity. If they are not willing or able to shift the way they assess risk and opportunity of local capital providers, then we need to change the decision makers.”
