Attracting Sustainable Capital to Private Investments in Emerging Markets

TBLI 2013

Challenge

1 “The SME Banking Knowledge Guide,” International Finance Corporation, 2010, Washington, DC: IFC

Available capital to private small - mid sized businesses in developing economies is significantly limited – particularly when

compared to the U.S.

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

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

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.

Obstacles, Part 1 – the Usual

6

Capital providers want…

Professional investors find…

?

- Low risk

- High return

- Simplicity

- Liquidity

- Risk-adjusted returns

- Opportunities to create value; financial and impact

(rarely very simple)

Companies need…

- Patient capital(i.e. Illiquid)

- Flexible capital

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)

Obstacles, Part 2 – Fear of Unknown

What they should see: EM Avg. Developed Economy Avg.

0% 2% 4% 6% 8%

1.54%

5.64%

GDP Growth1

-4% -3% -2% -1% 0% 1% 2% 3% 4% 5%

-2.75%

3.62%

Export Growth2

0% 1% 2%

0.48%

1.28%

Population Growth1

0% 40% 80% 120%

112.71%

32.69%

Debt as a % of GDP1

1Source: IMF World Economic Outlook, UNCTAD database 2013 Estimate2Source: IMF World Economic Outlook, UNCTAD database 2012 Year End

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 terrorismNo. 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

The Toughest Nut to Crack

10

Capital providers want…

Professional investors find…

?

- Low risk

- High return

- Simplicity

- Liquidity

- Risk-adjusted returns

- Opportunities to create value; financial and impact

(rarely very simple)

Companies need…

- Patient capital(i.e. Illiquid)

- Flexible capital

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!