Paul sanford attracting capital to private investments in emerging markets

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Measuring the impact of investments remains a main challenge for sustainable finance professionals and, together with Climate Change, an overarching theme at TBLI. Sixteen related workshops offer debate on ESG and Impact Investing trends, private equity, portfolio strategy, food production, emerging markets, sustainable energy or philanthropy investing.

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  • The “Missing Middle” (aka the SME Financing Gap) is well understood at this point.In the U.S. tens of billions of dollars are being raised currently for private “middle market” financing to address the Gap.Here in Europe, a variety of SME measures - from exchanges to lending platforms - have been announced.Yet EM “middle market” finance lags behind.
  • In the U.S., there would have multiple bidders (BDCs, SBICs, Mezzanine funds, etc.) for a financing opportunity of this nature.ProfitableExcellent debt service Access to Finance impact opportunityPilot program already successfulPrivate money managers of this nature are few in Indonesia.
  • In the U.S., there would have multiple bidders (BDCs, SBICs, Mezzanine funds, etc.) for a financing opportunity of this nature.Private money managers of this nature are few in Indonesia.
  • To-date, even if a deep pool of private asset investment managers did exist in emerging markets (as in the U.S.)…Scalable investor capital for them to invest has historically been limited in these markets.
  • Impact investing in emerging markets suffers from all of the usual challenges associated with both private emerging market investing and impact investing…Fortunately, experienced investors spend their careers building structures to bridge the gap between those who supply the capital and those who need it.
  • While there are investors (either financial first or impact first) who are comfortable investing in emerging markets, the level of scale necessary to truly fill the Financing Gap will require the participation of all private investor types (incl. institutional, U/HNW and retail).Unfortunately, mainstream investors are frequently looking at the wrong things.
  • Despite short-term “slow down” concerns, emerging markets are fundamentally poised to provide excellent investment and impact opportunities…
  • At TriLinc, we analize global macro indicators of the real economy – as opposed to capital market data that correlates with short-term investor sentiment…Our Macroeconomic Analysis Platform (or “MAP”) is combined with “on the ground” feedback and analysis from our local partners…
  • As I travel around the U.S. and the world, the biggest outstanding challenge continues to be properly defining ourselves as impact investors (and doubly so as impact investors in emerging markets)…Mainstream investors want to categorize, analyze and compare investments to benchmarks, peer groups and understood expectations…So long as we impact investors in emerging markets remain a “complex story” in a “risky neighborhood” mainstream capital in the amounts necessary for scale will be a challenge.Education is key, but so is an industry speaking with closer to one voice… (like EMPEA, perhaps?) Mainstream investors won’t “figure it out” for us – we have make it easier for them.
  • Paul sanford attracting capital to private investments in emerging markets

    1. 1. Attracting Sustainable Capital to Private Investments in Emerging Markets TBLI 2013
    2. 2. Challenge Available capital to private small - mid sized businesses in developing economies is significantly limited – particularly when compared to the U.S. 1 “The SME Banking Knowledge Guide,” International Finance Corporation, 2010, Washington, DC: IFC
    3. 3. Challenge Exemplified • Private mid-sized Indonesian appliance and electronics retailer – Seeking financing for an expansion of existing store credit program, predominantly focused on the growing Indonesian middle class – “Signature” consumer credit is generally only available to the top income segments – Pilot store credit program had proven successful – Business is profitable and cash flowing • Cash Flow Coverage Ratio >2.5x – Unable to secure traditional bank financing for expansion of the store credit program
    4. 4. Solution • Introduce scalable sources of private capital to supply critical unmet demand for financing with the potential for meaningful development impact – More mature private investor market will better intermediate between savers/investors and borrowers – Private capital of this nature has the opportunity to draw attention to, and incent, sustainable business practices – Due to the varying stages of development within emerging markets, there is significant opportunity for economic, social and/or environmental impact
    5. 5. If only it were that easy… While the need and the opportunity are in many ways obvious, the challenges to bring scalable private capital to private companies in emerging markets are real and solutions require creativity and persistence.
    6. 6. Obstacles, Part 1 – the Usual Capital providers want… Professional investors find… - Low risk - Risk-adjusted returns - High return - Opportunities to create value; financial and impact (rarely very simple) - Simplicity - Liquidity ? 6 Companies need… - Patient capital (i.e. Illiquid) - Flexible capital
    7. 7. Obstacles, Part 2 – Fear of Unknown Many scalable capital providers are uncomfortable with substantial allocations to emerging markets What they see:  Financial and political instability  “Risk On” and “Risk Off” trades  Low correlation between GDP growth and capital market performance  (Interestingly, few doubt the potential for meaningful development impact)
    8. 8. Obstacles, Part 2 – Fear of Unknown What they should see: EM Avg. Developed Economy Avg. GDP Growth1 Debt as a % of GDP1 5.64% 32.69% 1.54% 0% 2% 112.71% 4% 6% 8% 0% Population Growth1 40% 80% 120% Export Growth2 1.28% 0.48% 0% 1Source: 2Source: 1% 3.62% -2.75% 1% 2% IMF World Economic Outlook, UNCTAD database 2013 Estimate IMF World Economic Outlook, UNCTAD database 2012 Year End -4% -2% 0% 2% 4%
    9. 9. Obstacles, Part 2 – Fear of Unknown What they should be looking at:  Key indicators that reflect country macroeconomic conditions and public perceptions tracked and reported by institutions like the World Bank, IMF, World Economic Forum Growth Stability Access Government budget balance Property rights Internet users Gross national savings Intellectual property protection Internet bandwidth Inflation Public trust in politicians Mobile telephone subscriptions Government debt Judicial independence Fixed telephone lines Country credit rating Business costs of terrorism No. of procedures to start business Domestic market size Business costs of crime and violence Time required to start business Foreign market size Organized crime Prevalence of trade barriers GDP PPP Reliability of police services Trade tariffs Exports/% GDP Strength of Investor Protection Business impact of rules on FDI Company spending on R&D Legal rights index Redundancy costs
    10. 10. The Toughest Nut to Crack Capital providers want… Professional investors find… - Low risk - Risk-adjusted returns - High return - Opportunities to create value; financial and impact (rarely very simple) - Simplicity - Liquidity ? 1 0 Companies need… - Patient capital (i.e. Illiquid) - Flexible capital
    11. 11. If the remaining challenges can be overcome, there is the OPPORTUNITY and the IMPERATIVE… … to not only impact the borrowers, populations and communities where we invest - but to CHANGE the way ALL investors think about investing! 11

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