Written evidence submitted by Grofin
INTRODUCTION
This submission of evidence details the support that
GroFin has received over six years from CDC. GroFin is pioneering
a scale-able and replicable business model to address the finance
needs of the "missing middle".
THE CHALLENGE:
SUPPORTING THE
"MISSING MIDDLE"
The "missing middle" is the space between
Microfinance and Private Equity and refers to a target market
that requires from US$50,000 to US$1,5 million in finance to start
or grow a business. This underserved market not only suffers from
the lack of access to capital, but is also deficient in the skills
required to sustain a business. This problem is particularly acute
in Africa and other developing countries. Failure rates for small
businesses are widely publicised the world over, with between
60% and 90% failing before they reach their third year.
A lack of finance, entrepreneurial and management
skills and the high failure rates of small and medium enterprises
(SMEs) has a significant negative economic and social impact in
the developing world. No country can truly experience economic
growth and wealth creation without the existence of a strong SME
sector acting as a key job creator and provider. The social and
economic benefits that flow from a strong SME sector are well
known and documented in OECD countries that have sufficiently
nurtured this sector However, a historic lack of institutional
support for the "missing middle" has contributed to
the absence of a thriving, sustainable SME sector in Africa and
other developing nations.
As with Microfinance and Private Equity, a new asset
class must be developed to effectively address the needs of this
segment. This emerging asset class is known as Growth Finance.
With the assistance of CDC and others, GroFin continues to play
a key role in the establishment and promotion of this new asset
class, which is of critical development importance.
A CAUSE ALIGNED
TO CDC OBJECTIVES
The support that GroFin has received from CDC since
2004 is evidence of an initiative that is directly aligned to
the CDC objective:
- To invest in the creation and growth of viable
private businesses in poorer developing countries;
- To contribute to economic growth for the benefit
of the poor; and;
- And to mobilise private investment in these markets
both directly and by demonstrating profitable investments.
CDC'S SUPPORT
FOR GROFIN
AND GROWTH
FINANCE
In the following paragraphs, more detail will be
given in support of this statement detailing the contribution
CDC has made to date and why we believe CDC should continue to
support initiatives such as GroFin and growth finance funds.
GroFin was established to address the need that exists
in the market for the development of an SME focused value add
financier model that addresses the finance and business support
needs of small (not micro) businesses and entrepreneurs. The GroFin
business model was conceptualised and brought to market by Jurie
Willemse, founder of GroFin, with the support of the Shell Foundation
in 2003. Shell Foundation supports the development of commercially
scale-able, replicable and sustainable models that addresses key
development challenges.
GroFin acts as a financier and support provider to
entrepreneurs, increasing the ability of SME's to succeed with
a solution that extends beyond finance. Their support lies in
the provision of access to GroFin's expertise for the duration
of the finance relationship. This solution-based approach is necessary
to address the high failure rate that keeps commercial investors
and financiers from serving the needs of this enterprise segment.
GroFin and Shell Foundation approached CDC in 2004
to explore a possible partnership in pioneering a new solution
for the "missing middle". Prior to GroFin's inception,
the market experienced a void of solid, scalable business models
that can effectively address the needs of these entrepreneurs
in nearly all developing countries. For a long period of time,
banks with the assistance of IFIs, DFIs and others, tried to address
the needs but with no success, as secured bank finance without
business support could not address the market need. Private Equity
was already well developed, but lacks the ability to serve the
$2m market segment. Microfinance, although flexible and development
orientated, is restricted to supporting individuals and small
entities. Venture Capital offers the seed funding so desperately
needed by start-up businesses lacking a track record, but is confined
to an early stage, high growth business models that can easily
be scaled. The market needed a new solution and the key was in
developing a new intermediary model able to effectively serve
the needs of entrepreneurs and channel large sums of monies from
investors.
GroFin set itself the goal of developing into a focused
value add financier for entrepreneurs that need between $50,000
and $1 million in start up and growth finance. As a viability-based
financier, it makes decisions to invest on the basis of the entrepreneurial
ability and viability of the business plan, and thus overcomes
the constraints of insufficient track record and collateral that
most entrepreneurs face at this stage of their business development.
The model effectively overcomes the constraints that other financiers
face in serving this substantial market segment.
The aim was to develop the business model over a
period of 10 years to a point where it can successfully demonstrate
the ability to deliver positive returns to investors. In so doing,
a new asset class will be developed that will gradually attract
commercial investors. This will unlock major capital and, through
the replication of the business model, will address the issues
that restrict SME development through a sustainable commercial
model. It goes without saying that to pioneer a model that will
have a global impact is no small task and can only be achieved
through committed and knowledgeable partners. CDC's partnership
with GroFin began in 2004, with the establishment the pilot GroFin
East Africa Fund (GEAF). Understanding the market and the need
to address the missing middle sector CDC was interested in the
new ground breaking venture and, after value adding due diligence,
committed $3m as an anchor investor to the fund. CDC played a
leading role, together with FMO, GroFin and Shell Foundation to
bring a group together that committed $25 m in capital and $18
m in co-finance to establish the model in East Africa. This group
included four commercial banks, four foundations, five DFIs and
GroFin. It was a clear demonstration of how a diverse group with
a common interest of solving the "missing middle" challenge
can work together in a pilot fund to establish a new finance model.
CDC not only committed capital to the pioneering
fund, but also made available expert advice that proved to be
invaluable over the past six years. CDC has a wealth of experience
derived from decades of development finance activity, which proved
extremely valuable in the development of the GroFin business model.
CDC is also respected in DFI circles as a result of their professional
and successful approach in mobilising development finance. When
they lend their support as an anchor investor, the finance community
appreciate the value of the fund and the fund manager. This is
owing to the widespread knowledge that their decision to participate
in a fund is based on the stringent business and development criteria
which is recognised by all in the industry.
The GEAF pilot fund proved the concept of growth
finance and the GroFin business model sufficiently to attract
more support. Today, the business has more than 100 staff in nine
developing countries, eight of which are in sub-Sahara Africa.
GroFin is now the biggest growth finance organisation, with more
than $260 million under management and has assumed a pioneering
role in commercialising a new asset class that is of major developmental
importance. CDC played a large part in this and, apart from their
anchor investor role in the GEAF, also played an anchor investor
role in the GroFin Africa Fund (GAF), a pan African fund for growth
finance currently investing in seven countries. CDC chairs the
advisory committee of this fund and continues to play a lead role
among investors to ensure that a new asset class is born similarly
to how micro finance was developed over the past 30 years.
No positive economic returns have yet been gained
for the benefit of investors, as Growth Finance is still at an
early stage of development. All indications from results to date
however, point to positive returns that over time will improve
to the extent where it will draw in private investors. CDC's investment
in GroFin funds and growth finance as an asset class is financially
additional, i.e. it plays an ever important role in creating a
new paradigm as far as sustainable SME development and resulting
job creation goes.
CDC'S POSITIVE
IMPACT ON
THE SME SECTOR
In addition to its contribution to GroFin funds,
CDC is acting as a catalyst for the sector; over time attracting
(crowding-in) private investors by demonstrating that profitable
and responsible investments can be made in very challenging business
environments in developing countries. Very few organisations exist
that are prepared to put their scarce capital toward addressing
a significant development opportunity that, if correctly addressed,
will draw in billions of dollars of private capital in the near
future. CDC is doing just that for the growth finance sector.
CDC's total capital commitment of US$ 33 million
of which US$ 9 648 400 have been drawn down has already resulted
in the start-up and growth of approaching 200 businesses, sustainably
employing 4,878 people. These numbers speak for themselves when
it comes to questioning the impact of development finance and
the resulting development returns derived from successfully executed
initiatives.
The results to date, the development of the new business
model, as well as the economic and development results achieved
through the investments made, has also been recognised internationally.
GroFin was awarded the Africa Investor Award in support of the
millennium development goals in both 2007 and 2008. In 2010, GroFin
received the UN World Business and Development Award. The awards,
launched by the International Chamber of Commerce in 2000 and
now run in partnership with the United Nations Development Programme
and the International Business Leaders Forum, is one of the central
events in 2010 to recognise the contributions of the private sector
to development. It places particular emphasis on recognizing those
private companies that have successfully promoted the Millennium
Development Goals (MDGs).
What has been achieved to date cannot be done without
the collaborative efforts of several organisations. We experienced
CDC as an innovative leader among the IFI and DFI community. This
community would be much poorer without a CDC that values partnerships
and subsequently the developing world, and specifically Africa,
would lose a key contributor to poverty reduction.
What has been achieved to date cannot be done through
direct investment. No DFI has the ability to do small transactions
in volume and nor should they do it and thus crowd out specialized
service providers. The best way to achieve significant results
at the broad end of the pyramid is through support of initiatives
such as GroFin and GroFin funds. Direct investment has its place,
but inevitably means that only bigger investments can be supported
and thus effectively results in single private equity investments
that ignore the largest part of the market that lack access to
finance. The focus must be broadened to include more than Private
Equity and CDC has already started to do this with investments
such as GroFin. As this segment grows more and more opportunities
will arise to channel more capital towards it in support of CDC
objectives.
With CDC capital so invested, harvested and reinvested
effectively, a growing development accelerator is created that
generates sustainable employment and thus lasting economic growth
and wealth creation. Through its investment and support of GroFin
and GroFin funds, CDC has contributed to economic development
and poverty reduction in eight poor countries
| 
