SMEs: Emerging Markets ‘Promise Land’ for Impact Investment

Who are the linchpins holding the promise of emerging market impact investing together?

Many, like the Aspen Network of Development Entrepreneurs (ANDE), believe it is the small and growing business sector. The entrepreneur with five to 250 employees who has both the potential and ambition for growth, but lacks the capital to do so.

ANDE has created a network of 250 organizations to try to support their growth.

Randall Kempner, the Executive Director of ANDE, spoke with OnFrontiers recently about his organization’s work and the trends they are seeing in the sector.

Read excerpts from the interview below.

Can you explain what the Aspen Network of Development Entrepreneurs (ANDE) does?

ANDE is a network of about 250 organizations—ranging from large corporations and development agencies to small investment funds and capacity development organizations — that support small business entrepreneurs in emerging markets.

Our ultimate goal is to promote the prosperity of poor people in developing countries.

We think that small business and social entrepreneurs have the potential to do that by creating millions of jobs and also addressing specific social and environmental challenges that are faced in developing countries.

How does ANDE connect the small & growing business sector in emerging markets to impact investing capital?

We have about 60 member organizations that are impact investing funds. And many other organizations – like development financial institutions and foundations – that are either impact investors or support impact investment.

For all of our members, we try to keep them informed about opportunities in the space. We manage a whole variety of mechanisms to promote connections and cross-sector learning.

At one end, we have more traditional platforms such as our global newsletter – which goes to 14,000 people monthly and tracks new reports, new programs, new insights.

ANDE also has seven regional chapters – three in Africa, two in Latin America, one in India and an emerging chapter in Southeast Asia. They publish regional newsletters and hold meetings on a quarterly basis that touch on relevant topics in their geographic regions.  Those could focus on new government regulations, exploring new trends in education-focused entrepreneurship, or sharing best practices in talent retention.

We also do learning labs that touch on functional issues within the space: women entrepreneurship, youth entrepreneurship, legal tools to support entrepreneurs. For investors, we have a specific learning lab on capital aggregation where the members talk about different financial structures.

What kinds of development help has ANDE found small business entrepreneurs need most?

What we find is that most entrepreneurs need three things: access to talent, access to markets and access to capital.

I think the most important issue facing most entrepreneurs is the ability to recruit and build a management team that can support firm growth.   In emerging markets, it is often a question both of the quantity and quality of management that is available.

The second big challenge is access to markets. Part of that is just physical access – the physical infrastructure and/or the digital infrastructure in most emerging markets does not facilitate growth.

The final challenge is access to capital. Even if have a great team, you’ve identified an attractive market, you understand your customers, you’ve developed a product or service that’s relevant to their needs and you can sell it at a reasonable price – it’s still incredibly hard to get access to equity or debt in most emerging markets. And that’s why impact investors can have such a critical role in addressing this gap.

ANDE just released its 2015 Impact Report on the state of the small and growing business sector. What do you think were some of the more interesting findings?

One of the things ANDE focuses on is the so-called ‘missing middle’ in development finance. The way we define that boundary is finance between $20,000 and $2 million. And in particular, the most significant part of the ‘missing middle’ is the $20,000 to $250,000 range.

What we have seen positively is that there are more investment funds that are interested in making investments below the $2 million mark going down to the $1 million range.

It is still a major challenge to try to identify – in emerging markets – sources of capital that are willing to do the $20,000 to $250,000 range.

There is a great recent Economist article that hits exactly on this in the context of Uganda.

As a challenge to us and a challenge to the sector, we still need to find new financial mechanisms and models and investment structures that can cost-effectively be implemented to serve that need.

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Founded in 2014, OnFrontiers is a global advisory network and research firm that provides rapid access to targeted, high quality insights in hard to reach frontier markets.