Quick Facts IGNITE Fund
|Countries||Burundi, Kosovo, Liberia, OPT, Rwanda, Somalia, South Sudan|
|Part of||SPARK Access to Finance Solution|
|Objective||Bridging the financing gap for promising entrepreneurs from SPARK programmes, who need < €0.5 million funding but lack collateral required by local banks|
|Letter of Intent sent/Due Diligence conducted||26|
|Term sheet negotiation started||7|
|Term sheets signed||5|
|Financed businesses||None in 2014 (first businesses financed in 2015)|
The IGNITE Fund was formally launched in 2014 and is part of SPARK’s Access to Finance Solution (see also 3.2). SPARK identified a number of promising businesses in its programmes that are in need of less than €500,000 funding, but lack the collateral required by local banks. To bridge this financing gap, SPARK set up the IGNITE Fund.
In 2014, SPARK started building an internal investment management team by bringing in outside investment professionals, with a special focus on local investment expertise and business analysis skills. The main objective was to augment SPARK’s in-house skills and ensure SPARK has the expertise required to manage an equity investment vehicle.
One of the main challenges of designing the investment fund was the question of how to target as many SMEs as possible while being constrained by overall financial-return objectives as well as being realistic about the economics of the investment fund. Overcoming these challenges, the fund is now designed to apply innovative equity investment tools to mitigate difficulties typically faced in valuations and investment exits for SMEs in frontier markets.
IGNITE Fund is designed to tap into SPARK’s local technical assistance infrastructure to support portfolio clients to be operationally and financially successful. By marrying SPARK’s innovative deal structuring with tailored technical assistance, IGNITE Fund can deliver distinct financial and social-impact returns to its investors.
IGNITE invests in SMEs in FCAS. Through its rigorous investment process, the fund managers identify and invest in market-leading or potentially market-leading companies in their respective industries, which are managed by selected entrepreneurs. Special attention is paid to those businesses operating in agri-processing and light manufacturing with strong business fundamentals and secure cash flows. The IGNITE Fund places high priority on those businesses with great potential to create jobs and tangible economic benefits to help stabilise the fragile societies in which they operate – which contributes to stability and overcoming conflict.
IGNITE Fund Activities and Lessons Learned
The long-term goal of the IGNITE Fund is to be operational in Burundi, Kosovo, Liberia, Mali, OPT, Rwanda, South Sudan and Somalia. In 2014, the fund team focused on starting its investment activities in Kosovo, Liberia and Rwanda. In all these countries, SPARK started with screening the market for potential investees, in particular assessing the companies in SPARK’s MFS II network, acquired through its Business Plan Competitions, business advisory services, access to finance and other complementary services. The assessment of SPARK’s portfolio was undertaken together with MFS II partners. The businesses skewed on the small side of the SME spectrum. During the early stages of the fund’s due diligence process, many of the targets proved too small to meet the IGNITE Fund’s financial and impact-investment objectives.
Over the months, the local investment professionals screened hundreds of SMEs for possible investment. After the initial screening phase, the most promising companies were selected to enter the due diligence process. IGNITE Fund’s due diligence is an intensive process where the investment professionals spend a significant amount of time learning about the finances, business strategy and competencies of each company they are assessing. Internally developed competency-assessment, risk-assessment and impact-assessment tools are used to help understand these businesses.
Throughout this process, the sharing of analysis tools and exchange of lessons learned between the investment professionals across continents has been encouraged. By having the different investment teams bring fresh eyes to businesses being assessed, the due diligence process has been significantly strengthened.
The most promising businesses were then presented to the Investment Committee (IC) for approval. The first two deals were approved in the food-processing and agri-processing sectors in Rwanda. These deals were going through a closing process by the end of 2014.
The lessons learned during the first two deals have been used to improve the internal processes in order to conduct new deals more efficiently. Fund managers have been able to fine-tune the investment model, are now more familiar with the demands of the IC and are able to select and assess potential portfolio companies more efficiently.
The investment team in Liberia had an especially challenging experience. In August 2014, the Liberian government declared a state of emergency due to the rapidly deteriorating public health situation caused by Ebola. Many businesses were forced to operate at reduced capacity or to shut down completely. IGNITE Fund’s investment team left Liberia in August and did not return for the remainder of the year. As part of the response to Ebola, the IGNITE Fund team joined colleagues at SPARK for the SMEbola project (see 4.3) to provide loans to small businesses that were positioned to make an immediate impact in Liberia during the Ebola crisis. Those loans were made to companies providing general food security and delivering products and services to Liberia’s struggling health sector.
2014 was both a testament to the inherent risk of investing in crisis-affected states like Liberia and a validation of how important those investments can be.
In 2015, the IGNITE Fund could play a special role in Liberia’s post-Ebola economic recovery by building on lessons learned in 2014, while continuing to help other FCAS to recover after their respective challenges. Special attention will be paid to the need to take an active role in ensuring that SPARK’s programmes are preparing entrepreneurs to start and operate the highly scalable businesses that the IGNITE Fund requires.
IGNITE Fund is active in countries that are not considered easy environments for investment. These countries are generally underdeveloped, while regulations and processes are not as transparent as in developed economies, and legal enforcements are weak. Navigating in such environments requires strong understanding of the underlying economics and major macro-trends as well as skilful use of various risk-mitigation strategies. Despite these challenges, SPARK’s investment team, with decades of combined market knowledge, feels cautiously optimistic about the IGNITE Fund’s overall SME investment environment.
Market-specific assessments of the fund’s three key markets can be found on the IGNITE fund website: www.ignite-fund.org/post/117505908868/ignitefundreport