Beyond Aid is a series from MEDA and ImpactAlpha exploring new tools for sustainable development.
As published on ImpactAlpha.
Even small amounts of grant-based business support can help growing enterprises in emerging marketing reach the lower-income customers that need them most.
Such enterprises face business pressures to go up-market to higher-income customers. At Mennonite Economic Development Associates, or MEDA, we’ve found that carefully targeted technical assistance can help them build profitable businesses serving poorer customers as well, and reduce risks for their own investors.
Take the Colombian industrial supply firm, Rayco. With a small grant, alongside an equity investment, the supplier set up a new store in a more rural location. The idea was to diversify away from consumer appliances and offer income-generating agricultural tools. When the new store did not yield expected traffic or revenues, the supplier introduced a mobile sales agent model to reach the most rural markets of Socorro.
One such mobile sales agent came across Allison, a 26-year-old mother of two. Allison runs a home-based restaurant catering to farmers and laborers during the coffee harvest season in the mountainous area of Socorro, Colombia. Her problem: Power outages, which occurred during her peak hours when customers were waiting to receive their meal orders. The consistent disruptions lead to lost revenues.
The mobile sales agent offered Allison a small generator for a reasonable price – $200 – on an affordable credit plan. Allison can now keep her business going when power outages occur.
Allison’s business can grow, the supplier gains a loyal customer and the store’s own investors face lower risks. Allison’s leased generator is an example of how coupling development-oriented investment capital with grant funds for capital expenditures can drive essential products and services to even the most remote markets.
Rayco is backed by Kandeo Fund, a regional private equity fund backed by Sarona Frontier Market Fund 2, a $150 million blended finance fund-of-funds managed by Sarona Asset Management. Sarona spun out of MEDA in 2010.
Sarona’s frontier fund was made possible by a $15 million commitment in first-loss capital in 2013 by the Canadian government’s aid agency to INFRONT, a project of MEDA, Sarona and the Mars Centre for Impact Investing.
With the government’s capital ready to absorb the fund’s early losses, Sarona was able to grow the fund ten-fold through an additional $50 million from the Overseas Private Investment Corporation and $85 million from individuals, pension funds, endowments and other private investors. Over the next five years Sarona Frontier Market Fund 2 deployed $100 million into more than 100 funds and companies in about two-dozen emerging markets.
The Canadian government went beyond the first loss commitment and put up $5 million for a technical assistance facility. The funds would provide portolio companies and fund managers backed by Sarona’s fund with impact matching grants, measurement advisory services and mentorship.
To access up to $100,000 in funding, investees had to propose ways to make their businesses more inclusive and equitable for employees, suppliers and clients, while strengthening their underlying businesses. The firms then had to match the funding two-to-one. The technical assistance package helped 30 small businesses deepen their impact and nearly 60 emerging fund managers develop better management practices.
“Blending” capital can lower risks and boost returns of investments in developing markets. Overall, blending finance – leveraging public and philanthropic funding to attract private capital – has mobilized some $51 billion for global development since the 1980s.
Blended finance can help attract private capital to sectors critical to development. Effective technical assistance, alongside investment capital, can help businesses in those markets reach deeper, and serve clients with greater needs.