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NGOs Should Offer Business Support to Grow Impact Investment in Frontier Markets

May 26, 2016

By Henning Ringholz, Agustin Belloso and Mark Wallace

Lack of access to finance and business development services are key obstacles to growth for social enterprises operating in frontier markets. While there has been a rise in investment in East Africa—where almost US$10 billion has been invested by impact investors to date—much of this money is channelled into a handful of large businesses. There is an opportunity for NGOs to take a more active role in helping social enterprise to attract investment, by providing dedicated business development services.

While grants are often available for micro-enterprises, these are insufficient to help the next tier of small and medium-sized enterprises (SMEs), those that require investment between US$250,000 and US$2 million. Earlier this year a group of Cambridge MBA students, in partnership with GOAL, travelled to Uganda to figure out whether international NGOs can help close this “pioneer gap” and help social enterprises grow through targeted investments and business development services.

The aim of the project was to assess the current social enterprise landscape and to provide insights for GOAL on the creation of an impact investment venture. GOAL has worked in Uganda since 1979, and over the last few years has moved away from traditional aid and towards market systems development. Impact investing could be the next logical step.

The team interviewed 21 social enterprises associated with the agribusiness sector in Kampala and across northern Uganda, and assessed them based on criteria such as profitability, scope for growth and scalability, social impact, and quality of the management team. Six were then selected for a deeper analysis of their business, finance, and impact models. The aim was to document the needs that businesses are facing, rather than taking a top-down approach.

Need for tailor-made business development support

Although SMEs identified financial needs as very important, capacity building, technical assistance and market facilitation were also seen as crucial.

One business the team studied is a buyer of staple crops who provides embedded services for 6,000 smallholder farmers—access to improved seed, agronomy training, aggregation, and pathways to market. This business is an attractive target for a social investor. However, even with an average turnover in excess of US$1.1 million over the last four years, the buyer has limited financial management capacity, no experience with investors, and needs a better system for tracking farmers.

While there is some funding available in the form of grants from aid agencies and NGOs, this often does not come with tailor-made business development services (BDS), and if it does, the quality is often low. Classroom training based on a standard curriculum is insufficient—enterprises want dedicated support, mentorship, and joint planning.

The Cambridge team found an example of investment without business capacity building in the case of a high-value crop buyer and exporter from northern Uganda. They have accessed US$1 million in business grant funding over the past four years. This support, while welcomed by the buyer, only addresses financing and not the other capacity-building components required to increase the scale of business.

There are BDS providers in Uganda, but many business owners aren’t aware that they exist, can’t access them, or find their services too generic to be useful. In consequence, the BDS providers struggle to find clients, and many businesses do not see value in paying for these services.

Moreover, potential investors are often reluctant to sink funds into pre-investment support for a potential investee and run the risk of losing that investment if the deal falls through. While they may have an interest in discovering promising new enterprises, they are not set up to nurture businesses until they become investable.

Opportunity for NGO leadership

Currently, there are few investment options tailored to the specific needs of social enterprises in the agribusiness sector. Root Capital, an impact investor, has led the way by creating innovative investment vehicles linked to agriculture and by working closely with social enterprises throughout the investment period.

“Technical assistance is critical to increase the capacity of agricultural SMEs to absorb and effectively manage debt or equity investments,” says Brian Milder, Executive Vice President at Root Capital. “Given the risks and realities that come with working in frontier markets, investors can rarely place capital without also assisting SMEs in developing the managerial capacity, systems, and processes that are just as essential.”

GOAL and other NGOs—such as the 40 non-profit organizations that are part of a new impact investment network supported by the Aspen Network of Development Entrepreneurs and InsideNGO—are uniquely positioned to address the key skill gaps that social enterprises are experiencing. GOAL has strong relationships with many social enterprises in Uganda, and is already linking them with BDS to build capacity, technical skills, and the local business ecosystem.

Leveraging existing program resources to build business capacity will bring promising SMEs closer to investment readiness, lower the cost of due diligence processes, and create a pipeline of investment-ready businesses. These could be attractive propositions for traditional impact investors—but also for the impact investment vehicles that many NGOs are currently designing. Some NGOs may even go a step further, and invest directly in social enterprises, in addition to offering technical assistance and facilitating investment by others.

Given the dearth of investment vehicles aimed at SMEs that combine debt or equity with high-quality business development services and market linkages, there is an opportunity for NGOs to position themselves as leaders in this space and help accelerate the growth of the social enterprise sector in developing countries.

Support for this article provided by Julian Nyachwo – Livelihoods Programme Advisor, GOAL

If you had $1 million to invest to improve outcomes for smallholder farmers, would you invest it as equity or make a grant? At the 2016 Skoll World Forum, panelists debated whether nonprofit or for-profit generates the higher social return on investment. Featuring Root Capital CEO Willy Foote, and One Acre Fund Director Andrew Youn.

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