dec 2011 wharton msme fund recommendations

TOOLKIT FOR DEVELOPMENT

OF A SUCCESSFUL MSME

FUND IN AFRICA

Team:

Melissa Brown

Nonya Collier

Andrew Deberry

Peter Isaacson

Margaret Lee

Babatunde Ojo

December 6, 2011

1

STRATEGIC ROADMAP

CompetitiveLandscape

ToolkitPartner Analysis

SectorAnalysis

FundStructure

CompetitiveLandscape Overview & SWOT of MSME Investing

VisionVisionVisionVision

Launch a

SuccessfulToolkit Framework to analyze a business

Partner Analysis Tools for Building A Partnership Business Model

SectorAnalysis Decisions for Investment Sectors

FundStructure

Criteria for Investment Structuring & Performance Measurement

Successful

MSME

Fund in

sub-

Saharan

Africa

2

RECOMMENDATIONS


Geographic considerations are important, especially for ease of doing business

Toolkit Use a scorecard to vet potential investments

VisionVisionVisionVision

Launch a

Successful

3

Partner Analysis

Development finance institutions are ideal partners

SectorAnalysis

Top sectors include utilities, financial institutions, retail and tourism

FundStructure A debt fund structure offers the most advantages

Successful

MSME

Fund in

sub-

Saharan

Africa

OVERVIEW & SWOT

CompetitiveCompetitiveCompetitiveCompetitiveLandscapeLandscapeLandscapeLandscape

ToolkitPartner Analysis

SectorAnalysis

FundStructure

4

MSME INVESTMENT SPACE

MSME Investments

Investment & RiskManagement Skills

StandardizedMetrics

CompetitiveCompetitiveCompetitiveCompetitive LandscapeLandscapeLandscapeLandscape Toolkit Partner Analysis Sector Analysis Fund Structure

5

OrganizationalStructure

IndustryOrganizations & Association

MSME INVESTING IN AFRICA

Importance of Modern

Financial & LegalSystems

Presence of Oil & Other Natural Resources

Political and Resource Instability

South Africa, Mauritius,

North Africa

Congo, Equatorial

Guinea, Gabon, Chad

6

Financial & LegalSystems

Resources Instability

Government-ledPrivate SectorDevelopment

Intensity of Corruption

PhysicalInfrastructure


Senegal,

Kenya

Nigeria

FACTS ABOUT SMES IN AFRICA

Definitionof an SME

CongoCongoCongoCongo:

SmallholderFarms

BeninBeninBeninBenin:

Commericeis 50% of SMEs

South South South South AfricaAfricaAfricaAfrica

55% of Total Employment

Source: African Development Bank and OECD Development Centre, African Economic Outlook (2004- 2005).

7CompetitiveCompetitiveCompetitiveCompetitive LandscapeLandscapeLandscapeLandscape Toolkit Partner Analysis Sector Analysis Fund Structure

Definitionof an SME

Kenya: Kenya: Kenya: Kenya:

18% of GDP

NigeriaNigeriaNigeriaNigeria:

95% of MfgActivity

MoroccoMoroccoMoroccoMorocco: : : :

93% of IndustrialFirms

INVESTORS ARE….

Development Actors

•Development Finance Institutions

•Community Development Finance Institutions

Private Investors

•Private Wealth Managers

•Foundations

8

Institutional Investors

•Pension Fund Managers

•Boutique Investment Funds

•Commercial Banks

Corporations


SOCIAL IMPACT INVESTING IN AFRICA

10%

25%

43%

7%

5%

0% 10% 20% 30% 40% 50% 60%

Multiple Countries

South & Southeastern Asia

Africa

2%

18%

2%

5%

7%

9%

11%

57%

Other Asia

Transition Economies

Americas

Eastern Asia

Developed Economies

Social Impact Projects

FDI Flows

Source: UNCTAD database9

STRENGTHS & WEAKNESSES

Donor GuaranteedFunds

Remittances from

High Transaction Costs

Performance

Strengths

10

Remittances fromAbroad

Performance Measurement

Managing fromAbroad

Weaknesse

s


OPPORTUNITIES

Demand for FinancingOutstripsSupply

Warehouse-ReceiptFinancing

Under-utilization of

RiskManagement

Tools

11

The MissingMiddle

InadequateFinancial Facilities

Cluster Associations of

SMEs


THREATS

Tax Regimes

Due Diligence

Legalsystems

Deal Sourcing


BureaucracyAccess to FormalFinance

Financial Systems

High Default Risk

GEOGRAPHIC CONSIDERATIONS: CHALLENGE

OF BUSINESS IN SUB-SAHARAN AFRICA VS.

BRICS

Mauritius

South AfricaBotswana

ChinaChinaChinaChina

0

20

40

60

80

Business 2010

(Rank out of 183 Countries)

Most <----------------------------------------------------------------------------> Least Competitive

ChinaChinaChinaChina

GhanaKenya

RussiaRussiaRussiaRussiaNigeria

IndiaIndiaIndiaIndia

ZimbabweAngola

BrazilBrazilBrazilBrazil

100

120

140

160

180

WB DoingBusiness 2010

(Rank out of 183 Countries)

Source: World Bank

Note: Ranking Scale of 1 being the most competitive


GEOGRAPHIC CONSIDERATIONS

0% 5% 10% 15% 20%

Access to Financing

Corruption

Inadequate Supply of Infrastructure

Inefficient Government Bureaucracy

Tax Regulations

Tax Rates

Inadequately Educated Workforce

Problematic Factors for Doing Business in SS Africa

14

Source: World Economic Forum Executive Opinion Survey, 2010

Inadequately Educated Workforce

Poor Work Ethic in National Labor Force

Inflation

Policy Instability

Foreign Currency Regulations

Crime and Theft

Restrictive Labor Regulations

Government Instability / Coups

Poor Public Health

% of Respondents



Global Corruption Index : sub-Saharan Africa

vs. BRICs2008200820082008 2009200920092009 ChangeChangeChangeChange

Botswana 36 37 -

Mauritius 41 42 -

South Africa 54 55 -

Ghana 67 69 -

Brazil 80 75 +

China 72 79 -

Least Corrupt

15

China 72 79 -

India 85 84 +

SSA Average 117 116 +

Nigeria 121 130 -

Sierra Leone 158 146 +

Kenya 147 146 +

Russia 147 146 +

Angola 158 162 -

Source: Transparency International

Note: Ranking shows how one country compares to others included in the index, with 1 being the least corrupt, out of

180 countries


Most Corrupt


Transparency International’s Corruption Index

Rwanda

Cape Verde

Ghana

Botswana

Mauritius

Namibia

Seychelles

South Africa 4

5.5

7

Score

Score

Score

Score

16

The Corruption Perceptions Index ranks countries based on how corrupt their public sector is perceived to be. The score indicates the perceived level of public sector corruption on a scale of 0 - 10, where 0 means highly corrupt. The rank indicatesits position relative to the other countries in the index.


D.R. CongoAngola

Burkina Faso

Côte d'Ivoire

Gambia

Guinea

Guinea-Bissau

Liberia

Mauritania

Niger

Nigeria

Senegal Sierra Leone

Togo

São Tomé and Príncipe

Cameroon Central African Republic

Mali

Chad

Republic of the Congo

Benin

Equatorial GuineaGabon

Kenya

Tanzania

Zimbabwe

Zambia

Uganda

Sudan

Djibouti

Eritrea

Ethiopia

Swaziland

Somalia

Comoros

Lesotho

Madagascar Malawi

Mozambique

1

2.5

20 50 80 110 140 170 200

Score

Score

Score

Score

RankRankRankRank

FRAMEWORK FOR EVALUATION

Microsoft Office

Excel 97-2003 Worksheet

17

CompetitiveLandscape ToolkitToolkitToolkitToolkitPartner

AnalysisSectorAnalysis

FundStructure

QUALITATIVE FRAMEWORK FOR ASSESSING A

BUSINESS

•Education

•Experience

•Years of Operation

•Number of Employees

•Assets

•IT

•Contracts

Company Management

18

CompetitiveLandscape ToolkitToolkitToolkitToolkit Partner Analysis Sector Analysis Fund Structure

•Revenues

•Profits

•Liquidity

•Debt

•Bank Accounts

•Demand for Product

•Joint Venture / Partnerships

FinancesProduct

USE CASE: REGMIFA

SSA RegionalMSME

StrategyRefinancing Partner LendingInstitutions

TechnicalAssistance

19

MSME Investment

Fund

Assistance

Increase DevelopmentImpact while MitigatingRisk


USE CASE: REGMIFA: SAMPLE MSME FUND

SCORECARD

Example model

Qualitative and quantitative evaluation metrics

Numerical information about funds gathered, aggregated, and shared

Several fund segmentations provided

Use case in Uganda provided

20


TOOLS FOR BUILDING A

PARTNERSHIP

BUSINESS MODEL

21


Partner Partner Partner Partner AnalysisAnalysisAnalysisAnalysis

ToolkitSectorAnalysis

FundStructure

PARTNERSHIP ANALYSIS

Why Partner?Why Partner?Why Partner?Why Partner?

Leverage local and industry expertise, and established networks

22


Toolkit Partner Partner Partner Partner AnalysisAnalysisAnalysisAnalysis Sector Analysis Fund Structure

Increased access to funding

Access to technical assistance programs for MSMEs

PARTNERSHIP ANALYSIS

23



CENTER FOR GLOBAL DEVELOPMENT:

INVESTMENT TYPOLOGY

Ultra-High-

Net-Worth

Individuals

Development

Finance

Institutions

Foundations Values- &

Faith-

Based

Networks/

Funds

Retail

Investors

Large

Corporations

/ Financial

Institutions

Public

Institutional

Investors /

Sovereign

Wealth Funds

Primary Goal Application of

business

principles to

philanthropic

pursuits

Achieve

development

results without

sacrificing

financial

sustainability

High social

impact with

the discipline

of an

investment

Diversified

portfolio of

investments

consistent

with social

values

Achieve social

impact – view

investment as

akin to a

donation

Support for

corporate social

responsibility

(CSR) programs

Deployment of

set percentage

of capital in

socially

responsible

manner

24

Risk / Return

Expectation

Moderate to

high, willing to

take more risk

for social

impact, but

expect a return

Moderate, need

to preserve

institutional

stablity, but

often « funding

of last resort »

Moderate to

high,

sometimes

can forgo

return for

social impact

Low, may be

willing to

trade off

return for

social

impact, but

seeking safe

investments

Low, because

vehicles available

to retail investors

cannot be too

risky by law

Moderate to

low, not willing

to take

inordindate

risks outside

core business

TBD

Examples Bob Johnson,

John McCall

MacBain,

George Soros

OPIC, IFC, FMO,

Proparco, DEG

Rockefeller,

Kellogg, Gates,

Skoll, Omidyar,

Google

TIAA-CREF,

Thrivent,

MMA Praxis,

GuideStone,

Amana,

Saddleback

Buyers of /

Donors to Calvert

Community

Investment

Notes,

Microplace, Kiva

Cisco,

Storbrand,

Shell, Chevron,

Starbucks

CalPERS,

Government

Pension Fund of

Norway, Abu

Dhabi

Investment

Authority



Source: Acumen Fund

SECTORS FOR INVESTMENT

CONSIDERATION

25


Partner Analysis

ToolkitSectorSectorSectorSectorAnalysisAnalysisAnalysisAnalysis

FundStructure

FOCUS ON SECTOR VS. GEOGRAPHY

Upside protection:

Sector-specific

Expertise

Geographic-specific

Diversification

26

Focus:

Strengths:

Obstacles:

Works best with:

Business risk mitigation and comparables

Competitive advantage for SMEs

Market risk

Specialized staff in complementing countries

Partners and political environment

SMEs are country-distinct

High operational burden

Partnerships for sourcing and tech assistance


Toolkit Partner Analysis SectorSectorSectorSector AnalysisAnalysisAnalysisAnalysis Fund Structure

PHILOSOPHY ON HIGH POTENTIAL SECTORS

Goal

Many jobs

Proxy

Labor intensive

Indicators

Low capital labor ratio

27

High quality jobs

Valuable Output

High wages

High demand

High wages and training

High capital and growth rate



SECTOR ANALYSIS OVERVIEW

HighestPotentialSectors

Employ low-skilled workers

Leverageabundantresources

Lowerproductivity

Less skilledworkers

28



Lowdependency on infrastructure

Obstacles Across Sectors

Lessinvestment

Civic infrastructure

SECTORS WITH HIGHEST LABOR DEMAND

20

25

30

35

% of Total Labor Demand




0

5

10

15





Low-Skilled

High- Skilled

Medium- Skilled

29



SECTORS THAT PROMOTE JOB GROWTHIndustryIndustryIndustryIndustry Growth rate Growth rate Growth rate Growth rate Capital Labor RatioCapital Labor RatioCapital Labor RatioCapital Labor Ratio

Electricity Gas and WaterElectricity Gas and WaterElectricity Gas and WaterElectricity Gas and Water

Financial / Business Services, Financial / Business Services, Financial / Business Services, Financial / Business Services,

Insurance, Real EstateInsurance, Real EstateInsurance, Real EstateInsurance, Real Estate

Wholesale and retail TradeWholesale and retail TradeWholesale and retail TradeWholesale and retail TradeTop

Hospitality and TourismHospitality and TourismHospitality and TourismHospitality and Tourism

Agriculture: tea, tobacco, sugar, Agriculture: tea, tobacco, sugar, Agriculture: tea, tobacco, sugar, Agriculture: tea, tobacco, sugar,

coffee, cottoncoffee, cottoncoffee, cottoncoffee, cotton

ManufacturingManufacturingManufacturingManufacturing

HealthHealthHealthHealth

30



2nd

SECTOR ANALYSIS

Electricity, Gas, Water

Growth supports

growth of other industries

High wages for skilled jobs

Financial and Business Services

Low variable costs

High consumer need

Wholesale and Retail Trade

Uses labor at all levels

Local wage growth

Hospitality and Tourism

Driven by skills,

information and innovation

Variety of business models

Agriculture

Reduceddistribution

costs

Abundance of commodities

Health

High consumer need

Large donorsupport protects

fin.downside

31

More diverse consumer needs

High fixedcapital needs

Unskilled labor

Currency risks

Regulatory environment

High goods and transport

costs

Large untapped markets

Seasonal demand changes

Industry-level economies of

scale

Dependence on

infrastructure investment

Inevitable croprisk

Slower agricultural

labor productivity

High imports for equipment/

supplies

High skilledlabor and

capital needs

Strengths

Weakness



INVESTMENT STRUCTURING

&

PERFORMANCE MEASUREMENT

32


Partner Analysis

Toolkit SectorAnalysis

FundFundFundFundStructureStructureStructureStructure

DEBT FUND STRUCTURE

•Effective for agricultural financing

•Very risky

•Potential for corruption

Short termLoans

<12 MonthsDebt

CapacityCapacityCapacityCapacity

Business fundamental

InterestInterestInterestInterestCollateralCollateralCollateralCollateral

33

Months

•Better ability for social impact

•Aligned incentives withdebtor

•High monitoring cost

Long termLoans

3 – 7 Years


Toolkit Partner Analysis Sector Analysis FundFundFundFund StructureStructureStructureStructure

Debt Fund

InterestInterestInterestInterest

Fixed rate @ inflation + 500bps

CharacterCharacterCharacterCharacter

Management quality

CollateralCollateralCollateralCollateralAsset Debenture

Inventory

Future sales contract

EQUITY FUND

Advantages Disadvantages

34



MEZZANINE FUND

Advantages Disadvantages

Structured Note with Long Term Debt and Percentage of Sales

35



PERFORMANCE MEASUREMENT

Financial Return

•Determined by spread

Social Return

36

•Jobs created, retained

•Female employment generation

•Value creation

• Increase in tax revenue

•Environmental impact

•Reach of economic impact in community

• Increased training for entrepreneurs



dec 2011 wharton msme fund recommendations

Documents

analysis retail

africa south africa

competitive source

africa congo

africa team

subsaharan africa vs

african development

oecd development centre