Thursday, March 24, 2011

A Big Need: The Next Level up from Micro-Financing

“'Micro-financing' has already made it.” said Randall Kempner of the Aspen Network of Development Entrepreneurs (ANDE).

"Millions of individuals in developing countries are receiving micro-financing loans to get their businesses started. Last year, sixty-five billion dollars in micro-financed loans were made, at an average size of around $500 per loan. But the next level of investing, growth capital of $20,000 to $2 million to existing small and growing businesses, has yet to catch on, and that is our focus.”

Mr. Kempner was addressing our firm, as part of the Makovsky Speaker Series, a program designed to enlighten our entire organization.

First, what is ANDE? It is a global network of investment funds, business assistance organizations, foundations, corporations and academic institutions dedicated to helping small business entrepreneurs in emerging markets.

According to the World Bank, “In high-income ‘developed’ countries, small and medium enterprises provide approximately 60% of employment opportunities and are the engine of economic growth. However, in low-income "developing” countries, formal small and medium businesses typically comprise less than 20% of employment.”

“Our goal is to move that percent upwards.” Kempner said. “My concern, and that of ANDE, is helping reduce poverty in these emerging markets.” And without the jobs, income and innovations created by a vibrant small business community, emerging markets can’t grow, he advised.

Investing in small and growing businesses in emerging markets is one segment of the growing market for impact investment. As a new JP Morgan report explains, Impact Investment is a new asset class of investments that are explicitly made with the intention of addressing social or environmental challenges while still providing a positive financial return.

This is an emerging space in which institutional investors are just getting their feet wet. Some leading corporations, developmental finance institutions, and foundations are blazing the trail, but there is still much ground to travel, Kempner says. If Impact Investments grow to even just 1% of total global managed assets, it would mean $600 billion in investment to leverage market-based approaches to addressing social challenges.

Potential investors can establish the targets they want (e.g., women-owned businesses, environmental firms, food production), Kempner said, which makes this inviting. “The challenges we face are multiple,” he said. “We need candidate companies to make themselves visible. We need to stimulate investor interest. And we need to encourage laws that, not just maximize shareholder return, but maximize stakeholder returns.”

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