RENEW Strategies

Q&A: RENEW in 2012

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Matthew Davis, CFA
| January 18, 2012

The year 2012 is going to be about investment and growth for the RENEW team. We will continue to work with development partners to facilitate impact investing into small and medium enterprises (SMEs) in frontier markets, and we will be building a permanent presence in Addis Ababa, Ethiopia.

Our goals include opening our office in Addis, working with strategic development partners on our public-private-partnership model for impact investing, continuing to build our SME investment portfolio, and closing on an investment. We are keen on the following sectors: private healthcare, agriculture, manufacturing, transportation and logistics, ICT and construction.

Below are some questions you may have about what we are doing, and our best attempt at concise answers.

Why focus on SMEs?
Short answer – because SMEs have the potential to create social impact and good financial returns.

Social impact

  • SMEs are the engines of growth in developing countries – the International Finance Corporation (IFC) indicates that formal SMEs contribute up to 45 percent of employment and up to 33 percent of GDP in developing economies; these numbers are significantly higher when taking into account the estimated contributions of SMEs operating in the informal sector. Thus, focusing on strategies to help SMEs grow is a social motivator for RENEW.
  • The greatest barrier to growth for SMEs in developing countries (second only to electricity) is access to affordable finance. Thus, there is significant demand for capital in developing countries.

Financial returns

  • SMEs are very risky, and foreign investors can’t just fly into a developing country, drop off a bag of money and expect it to go smoothly. But, if done well, investments in SMEs generate good returns, especially for angelic investors who have the right risk tolerance and skill to pick good early-stage ventures.
  • SMEs are a great entry point for foreign investors. They often require between $100K and $5M, which allows investors to explore developing countries before pursuing larger investments. SMEs also allow individuals, or a small group to make a few investments to hedge their risk.

Why Ethiopia?
Ethiopia will grow by 7.5% this year, without a drop of oil to export. Ethiopia’s projected GDP growth in 2012 makes it the 8th fastest growing country in 2012. Yes, the government can be bureaucratic, but doesn’t have the corruption issues seen in other countries. And, we just like it there.

What is your public-private-partnerships model?
Our model takes a different approach from most development projects. Our model focuses on the investor and the SME, where other projects mainly focus on the SME. The model significantly reduces the barriers preventing high net-worth individuals (HNWIs) from becoming active impact investors by walking them through the investment process, step by step. We do this by working with development organizations like USAID, DFID and the World Bank to establish a platform to increase the number of impact investments being made into SMEs in frontier markets like Ethiopia, Libya and Afghanistan. Once the platform has been established, and enough investments have been made, it becomes sustainable through private funding much like a traditional equity fund.

Who are your investors and where do they come from?
In short – our investors come from a network of people we have developed relationships with over the years. We continue to invest in our network and meet almost all of our prospective investors through word-of-mouth.

What’s unique about what you are doing?
We focus on serving the investor. We act as an outsourced fund management team for HNWIs who want to experience their investment by visiting the country, meeting with businesses, reviewing the financials, and making their own decisions about where they will invest; but they don’t want to move to the country to oversee their investment. We offer them a platform to do this.

Why private healthcare, agriculture, manufacturing, transportation and logistics, ICT and construction?
First, because we are most familiar with these sectors, having investigated them for years. Second, we feel these are growth industries as Africa’s population continues to expand and require basic infrastructure and health needs.

How do you mitigate your risks?
By partnering with strong, innovative development organizations that are seeking to implement new partnership models with the private sector; finding and working with great local partners; and sourcing SMEs with exceptional management teams.

Contact us at renew@renewstrategies.com or follow us on Twitter @RENEWLLC to find out more.