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From microcredit to impact investing to social enterprise startup funding, this blog explores money matters.

Friday, February 01, 2013

Asia’s Rising Economic Tide Doesn’t Lift All Boats: Multiple strategies for inclusive business investment from the ADB Forum

By Sara Enright

By many measures the Asia Pacific region is rapidly developing. In the past decade, GDP per capita growth in ASEAN countries far outpaced that in most developed nations.  However, this increase does not paint a full picture. According to the Asian Development Bank (ADB), growth in the region has not been inclusive: inequality has remained a persistent problem leaving many impoverished, as others rise to the middle and upper classes. Further, the poverty rate across ASEAN countries, while steadily declining from 35 percent in 1990 to 21 percent today ($1.25 per capital income at purchasing power parity of 2005), is not on track to meet the region’s goals of halving poverty by 2015. 

While many actors have responsibility to improve the quality of life and opportunities for the poor, the ADB has called on the private sector to play a catalyzing role in inclusive economic growth. 

At the conclusion of a two-year scoping study of how to optimize financial support for inclusive businesses in the Asia Pacific, the ADB convened the first Regional Forum for Investing in Inclusive Business in Asia last November, at its headquarters in Manila. The event brought together regional company executives, social impact investors, and development agencies to discuss how all of these actors can better support private sector engagement in inclusive development through targeted investment. 

One major theme of the forum was cross-organizational knowledge sharing. Sahba Sobhani, acting program manager of the Business Call to Action (BCtA), participated in a cross-institutional panel discussion “The Role of Development Partners in Supporting Inclusive Business” with insights from his work on private sector engagement and inclusive business with the United Nations Development Programme, which hosts the BCtA.  Other panelists included representatives from SNV Netherlands Development Organization, Inter-American Development Bank’s  Opportunities for the Majority  initiative, IFC Advisory Services, Japan International Cooperation Agency’s Office for Private Sector Partnership, and DFID’s Business Innovation Facility

While all of the institutions represented on the panel have programs that seek to engage the private sector in inclusive business projects, the Inter-American Development Bank (IDB) is currently the only multilateral financial institution with a team dedicated to finance inclusive business models. The Inter-American Development Bank’s Opportunities for the Majority (OMJ) initiative has successfully deployed over USD$260 million to more than 40 organizations across the Latin American region since the program was founded in 2007. The team outlined several factors that led to the growth and adoption of this initiative within the bank, including championship from IDB leadership and early outreach to investment officers, allowing the initiative to successfully leverage the wider resources of the development bank towards OMJ’s mission.  During the event, the ADB announced a partnership with the IDB to foster learning on inclusive business between Asia and Latin America.

Another key focus area at the forum was the need for financing all along the lifecycle of an inclusive business. While there is increasing interest in financing social enterprise and inclusive businesses, the majority of investors entering the impact investing space are looking to invest in organizations that have already passed the “proof of concept” stage, and demonstrated the viability of their business model.   Many impact investing firms report that there simply aren’t enough qualified companies in which to invest. 

 

 

 

 

 

 

 

 

 

 

(Above: A cross-institutional panel discussion on “The Role of Development Partners in Supporting Inclusive Business” during the ADB. Image credit: Business Call to Action)

Michael Chu, founder of the Ignia Fund, argued during his keynote speech “Inclusive Business: The Private Commercial Sector as a Catalyst for Social Change,” that there is a need for investors that specifically target early stage social enterprise start-ups, combined with the provision of technical assistance to ensure that the companies make it through to scaling up. This is a much riskier investment, but is necessary in order to prepare a more robust pipeline of scalable business models. The ultimate goal is to foster entire industries that are inclusive, inspiring greater competition and innovation to add value to the customer at the base of the pyramid.

Many of the 75 executives from inclusive business ventures in attendance, whose firms had already passed the growth hurdle, made the argument that there was also a significant mismatch between the funding available for scale-up and their actual financing needs. This message was also confirmed by the 30 fund managers attending the conference.

ADB commissioned country studies of the enterprise and finance markets for inclusive business in the Asia Pacific region reveals that there is a need for growth capital to be made available to the smaller inclusive businesses.  For example, according to the results of a survey of over 70 inclusive business firms in the Philippines, inclusive businesses are looking for debt financing in the range from $1 million-$10 million, or equity in the range of $500,000 to $3 million. Executives from several companies in attendance confirmed that banks considered their companies to be too high risk for business loans, and development actors—accustomed to making much larger investments—do not have the capacity to provide such small loans. Therefore, while these companies have sufficient demand to grow significantly in their markets, they have limited access to the capital required to reach their full potential.

In response to this market need, it was suggested that ADB establish two $100 million funding facilities specifically designed to invest in scaling up inclusive businesses in South Asia and Southeast Asia. These two sub regional funds would deploy debt, equity, and market guarantees to the companies so that they can better acquire financing during their critical growth phase.  Recommendations include pairing the financing facility with a technical assistance facility. Representatives from additional development partners, including AFD (France), CIDA (Canada), KfW (Germany), SIDA (Sweden), AusAID (Australia) and DFID (UK) showed interest in co-financing such facilities.

For more about ADB’s Inclusive Business initiative, click here.

 

Sara Enright supports business outreach and partnership efforts for the Business Call to Action (BCtA) a global initiative that seeks to challenge companies to develop inclusive business models that offer the potential for development impact along with commercial success.

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