Investing in Emerging Market SMEs
December 13, 2006
New York

The Milken Institute and the Boston College Institute for Responsible Investment co-hosted this Financial Innovations Lab on investing in emerging-market small and medium enterprises (SMEs). Attendees included institutional investors, emerging-market analysts, private equity funds, corporations, foundations, rating agencies, capital aggregators and international development agencies.

A robust SME sector can contribute significantly to the growth and stabilization of emerging-market economies. Expansion can generate strong returns for investors, and these firms create jobs and wealth. Additionally, they often produce solutions to a country's pressing social and environmental challenges.

However, despite increasing investor interest, challenges in accessing information and mitigating risk limit the ability to tap this opportunity, attendees said. The session examined these challenges and, most importantly, generated solutions and action items that participants and others can pursue.

During the day-long session, participants explored mechanisms for increasing investment in emerging-market firms. These included, among others: definition of terms related to emerging-market SME investment, increased partnerships between aggregators and investors, developing common standards for reporting, and clarification of the SME business model and value chain.

Participants worked through specific investment instruments designed to increase capital flows to SMEs and produce financial and extra-financial returns. Some highlights:

  • Christine Eibs Singer of E+Co, a capital aggregator investing in clean-energy enterprises, described her firm's successful blended value investment model. This model focuses on triple-bottom-line returns on investment: financial, social and environmental. She also spoke of the need for technical assistance for SMEs.
  • Andrew Gaines of Gaines Partners discussed risk mitigation strategies to combat the three "C's" associated with investing in emerging market SMEs: country, currency and credit risks. Using a single portal that harbors a variety of insurance tools would help investors reduce their risk.
  • Noah Beckwith of Aureos Capital described the challenges of private equity investment in the SME space. These include legal, financial and scaling constraints that make private-equity investment costly and cumbersome. However, as the market grows, so may the tools to mitigate these constraints.

Other participants suggested various innovative tools, including creation of a SME trade association; establishment of a global currency, credit enhancement and/or technical assistance fund; increased reporting; and a shared services platform to reduce costs. Participants also noted the importance of local partnerships, in particular citing empowerment of local banking institutions as a key to serving SMEs.

The findings and results of this lab will be summarized in a report to be published in 2007.