APPROACH AND METHODOLOGY
By providing capacity development, technical assistance, and deal sourcing for impact investing opportunities in agricultural, sustainable tourism, renewable energy, and rural development, SNV will help develop new opportunities for employment and income generation for marginalized sectors, while contributing to social inclusion, food security, economic development, clean energy creation, and sustainable resource management.
SNV defines impact investments as deals that have a positive effect on people's social and economic well-being, the environment and that yield a 10-15% internal rate of return. SNV is positioned to identify investment opportunities and prepare SMEs to receive investment capital given the organization's long history of working in value chain development. SNV helps strengthen value chains through a multi-stakeholder approach by which SNV advisors bring together organizations from all stages of the value chain to identify and resolve production or supply problems. By working intensively with SMEs, producer groups, buyers, and larger businesses within a value chain, SNV advisors can identify if a particular firm is a strong investment potential, as well as assess the growth potential of the sector or value chain overall. Further, SNV's knowledge of local economic, political, and social context and capacity building expertise enable SNV staff to provide investors with valuable market information, pre-investment identification of opportunities, due diligence, and post-investment monitoring and evaluation. Through its services SNV will contribute to reducing transaction costs and to increasing the volume of impact investing activity.
SNV's approach has grown out of its experience piloting the Value Chain Catalyst Fund (VCCF) in East and South Africa. VCCF is an enterprise-focused approach to resolve bottlenecks in agricultural value chains through targeted business support and impact investing. These investments not only benefit the business that receives the financing, but ultimately impact all groups along the value chain. Lessons learned from the VCCF pilot will be applied to SNV's new Impact Investing Advisory Services (IIAS) practice in 28 countries and in a wide variety of sectors.
IMPLEMENTATION, TIMELINE, AND DELIVERABLES
Implementation and Timeline
To develop SNV's Impact Investing Advisory Services (IIAS), SNV is building an internal SNV IIAS team, which is focused on designing IIAS policies and service offerings (currently ongoing). SNV plans to hire an IIAS manager by the end of 2010. IIAS work is in development in 7 countries in East and Southern Africa (with IIAS in early stages in another two countries in ESA) and will be expanded with a phased rollout to an additional 21 countries in Asia, Latin America, and West and Central Africa beginning in 2011 and continuing through 2013.
Once a portfolio of deals has been identified as potential investment opportunities, SNV will proceed with a three phased approach encompassing: pre-investment technical assistance, post-investment capacity building services, and monitoring/evaluation. Pre-investment assistance involves identifying opportunities, conducting due diligence, and assessing investment readiness. Post-investment capacity building includes guidance on business strategy, financial and legal assistance, assistance in making market connections, and understanding market dynamics. Lastly, monitoring and evaluation will be based on SNV's own field experience and metrics from knowledge networks such as the Global Impact Investors Network (the GIIN) and Aspen Network of Development Entrepreneurs (ANDE) to evaluate social, environmental, and financial impact. By providing both pre- and post-investment technical assistance, SMEs will be able to effectively attract and utilize investment and be sustainable post-investment
IIAS impact deliverables will occur at three levels: 1) enhanced SME performance by improving local value chains, building local capacity, skills and market knowledge and so as to increase the attractiveness of SMEs for private investment; 2) increased private investment, leading to job creation for direct and indirect beneficiaries, generating higher income of those involved directly and indirectly and yielding higher productivity; and 3) enhanced human knowledge and more effective harnessing of human potential. In due course, the commitment will result in the development of more productive and knowledgeable producers, suppliers and other input actors who can benefit from larger and more efficient value chains and increased income for themselves and their families.
Poverty alleviation and sustainable development depend upon equitable market-based growth and improved economic opportunity for all members of society. With adequate resources and capacity, SMEs are significant employers and help drive social and economic inclusion for low-income people. In fact, in the Global South, 90% of all businesses apart from the agricultural sector consist of SMEs and microenterprises (United Nations Economic Commission for Europe). Further, some SMEs, such as those working in agriculture, water and sanitation, renewable energy and environment, not only provide jobs, but also respond to complex global challenges such as food security, public health, and energy needs.
Despite the clear societal benefits offered by SMEs, they often face tremendous challenges in attracting the financing they need to fuel their growth and increase employment. This reality is highlighted by the Inter-American Development Bank's finding that in Latin America as much as 90% of entrepreneurs finance their enterprises from their own savings (Promoting SMEs for Sustainable Development, SNV-WBCSD, 2007). Research conducted by Gray Ghost Ventures further documents the difficulty enterprises face in securing initial financing. The Gray Ghost Ventures survey of 31 well-known impact investing funds revealed that only three provide investment at the start-up stage (and only as much as ,000 per deal) (Gray Ghost Ventures, 2010).
With the growing focus in international development on accountability and impact, many development organizations and donors are interested in moving away from only relying on grants and contracts and moving toward investments. At the same time, some capital funds are looking for a new paradigm in the composition of their investment portfolios. This strategic shift toward using direct capital investing as a means to achieve greater impact and accountability, combined with the growing number of investors who are interested in investing in financing enterprises that provide social, environmental, and solid economic returns has given momentum to the nascent impact investing industry.
Despite this clear window of opportunity to link SMEs in need of financing with impact investors, there exist significant barriers to the creation of markets that would promote such linkages. For example, a lack of information about opportunities in emerging markets and relatively weak SME business structures are extremely common challenges faced by this emerging industry. Further, inadequate benchmarks to measure impact and an unproven track record of successful poverty alleviation results from impact investing funds only add to the complexity of the situation ('With Impact Investing, a focus on more than returns', NY Times, 23 April 2010).
By providing Impact Investment Advisory Services, SNV will act as a broker between fund managers and SMEs and help these market players find each other . Since it is expensive, and often difficult, for fund managers to identify viable investment opportunities in emerging markets due to a lack of local knowledge and in-country presence, SNV will leverage its presence, expertise, and experience to identify and prepare investment opportunities, conduct due diligence, and source deals. At the same time, many SMEs in emerging markets struggle to reach their full productive potential due to a lack of business training, experience, and proper management systems. To address these challenges, SNV will provide technical assistance (TA) to help SME leaders develop management and organization development skills, gather market intelligence, improve management practices, streamline production processes, and understand capital market dynamics to reach investment readiness.
From the lessons learned over 30 years in value chain development, in inclusive business initiatives - including deal generation for the Inter-American Development Bank, and other programs engaging the private sector, SNV understands that economic development and employment generation requires both investment and investment-ready enterprises.
SNV is looking to partner with fund managers and is looking for TA grants to help finance various TA and capacity building services for SMEs. Unlike many social investment funds, SNV's support is not limited to legal and financial matters. SNV has the ability to draw upon its 1,000+ professionals in 38 countries to provide technical assistance (i.e. deal generation and pre/post-investment services) in the areas of agriculture and food security, renewable energy, and water, sanitation and hygiene. By working with SNV, donors, partners and impact investors can promote local capacity building that directly benefits rural communities and organizations, and is backed by SNV's expertise and quality assurance.
SNV also hopes to have an opportunity to discuss its impact investing model, private sector initiatives, and results at the 2013 CGI Annual Meeting, which may be informative for CGI partners interested in impact investing and market-based development approaches.