Solving Market Failures:  Our Work in the Design, Creation and Management of Investment Funds

Small and medium size enterprises (SMEs) frequently struggle to raise investor capital, not because they are sub-standard, but they fall outside the requirements for investment from venture capital (VC) and private equity (PE) funds.  Lack of investment results in these firms missing market opportunities and growing to less than their potential, resulting in growth rates and P/E ratios unattractive to generate public market or strategic buyer interest required for VC or PE.  

The inability to access investor capital results in less wealth creation for founders, employees, investors and the ecosystems they reside in––market failures which Innovative Ventures fixes for our investors and clients––Governments, sovereign wealth funds, development finance institutions and institutional investors.

We deliver two solutions to increase the flow of investment to SMEs and funds. 

Value #1:  Investment and Fund Management

Innovative Ventures designs, creates and manages funds to invest in underserved and underfinanced entrepreneurs including: 

  1. Medium growth SMEs with strong cash flow, yet without the hockey stick growth required to raise VC
  2. Family held SMEs, even those with rapid growth, since they reject involvement of outsiders and 3rd party capital from non-family members
  3. SMEs in countries with less-than-efficient capital markets, e.g., USA;  companies in local markets must be bigger and more profitable to go IPO on domestic exchanges.  Until these firms achieve scale, liquidity is challenging, resulting in financing needs which remain unfilled

Our multi-asset funds don’t just satisfy companies’ demand for capital; our solutions increase the supply of capital too.  We overcome the structural limitations of VC/PE with hybrid fund strategies and deal structures which: 

  1. Better manage the ROI-to-risk uncertainties in VC (fund success requires 2 unicorns compensating for the write-offs and investees that return less-than-invested capital in a portfolio of 10 investments)
  2. Access new capital/investors to advance technology adoption/purchase in new ways, e.g., cost savings from advanced mfging is return of capital + profit for subsidizing customer purchases
  3. Attract new (institutional) investors as many are unable to invest (or underinvest to assets managed) in VC/PE funds as their mix of liquidity and risk needs are a mismatched to the liquidity/risk characteristics of VC/PE funds

Demand and supply issues solved by our funds can be seen thru the web links below. 

  1. Create Long-Term Investment Returns: USA, $4MM AUM
  2. Increase the Supply of Capital and Improve Total Returns: Canada, $C100MM AUM
  3. Implement Strategies for Emerging Market VC: Sub-Sahara Africa, $280MM AUM
  4. Eliminate Waste and Learning Curve Costs: W. Europe, $5MM AUM
  5. Increase Market Share thru Quasi-Equity: France/Germany $5MM AUM
  6. Catalyze Investment into Emerging Markets: East Africa $5MM AUM
  7. Develop Emerging Markets for Private Sector Investment:  Kazakhstan
  8. Invest in a Country’s Economic Restructuring: South Africa $30MM AUM
  9. Build Staff Skills in Emerging Market VC: Russia $32MM and $440MM AUM
  10. Increase the Supply of Capital to Finance Tech and SMEs: Croatia €20MM AUM
  11. Make Technology ‘Customer and Investor’ Ready: Kazakhstan $75MM AUM

The design and creation of new funds requires three initiatives. 

  1. Map the Potential Investment Portfolio: Assess Demand Side Issues as Inputs to Fund Design

Innovative Ventures investigates and evaluates a select # of SMEs in the target geographic region;  then we take a macro view to conclude what segments, industries and SME niches are ripe for investment and what we will to achieve with a new fund. 

We analyze (conduct due diligence) on a sample of 30-40 SMEs (diversified industries, age/stage of growth, etc.) in a region, evaluate them as we do due diligence for investment, determine who they are, what their needs are; amounts, types of capital needed, for what uses, terms, management team, etc., and preferences for one type of capital vs another (many SMEs prefer debt because they know it, equity is still a black box to many); is education needed thru TA in the implementation of a new fund? 

SME criteria to be evaluated includes, but not limited to: 

  • age/growth stage of SMEs
  • operating histories and risk characteristics
  • customer/market/industry/technology segments
  • hard (physical) and soft (IP) assets
  • financials (if possible, if no confidentially issues experienced)
  • proof of missed growth opportunities due to lack of capital (internal/external), factual vs hypothetical uses of capital
  • criteria debt/equity providers (in the region) use to invest in SMEs in the country/region and SMEs’ abilities to satisfy these requirements
  • time to IPO/liquidity, LBO, MBO, other

We evaluate SMEs’ customers, quality and quantity.  Low population countries frequently have too few customers to generate meaningful scale, disqualifying them for VC/PE investment. One needs to investigate if management teams see expansion to neighboring countries as viable, e.g., entry to neighboring countries, E/W Europe, N. America, etc., how viable is such a strategy, can the management team really execute?

  1. Map Potential Investors:  Assess Supply Side Issues as Inputs to Fund Design

Next we assess the sources of capital to finance demand from SMEs; funds with capital, amounts, their investors, by what structures, types of companies/transactions, terms and conditions, investment policies, liquidity/risk characteristics by product, minimum/max amounts invested/deal by SME stage and demand side deal characteristics etc. What is lacking in the supply side of capital? 

  • Determine where mis-matches exist between demand for and supply of capital; what are the gaps/holes that exist, and which need to be filled?
  • Identify and map out potential anchor investor and follow-on limited partner (LP) investors
  • SWOT analysis of similar direct funds in peer states
  • What is an acceptable fund structure to satisfy a wide range of LPs and which perhaps, enables the fund to be listed?
  • Existence of other investors in the region, their investment focus, asset allocation to VC/PE, deal structures, criteria for investment, assess potential of crowding in private investors by way of retail investors
  • Evaluate requirements/abilities to exit SME investments by IPO/strategic buyer, barriers present in the structure of equity which limits liquidity and thus VC/PE investment?
  • Domicile of fund to appeal to LPs? In a tax haven, e.g., Cyprus, Channel Islands? Other?
  1. Prepare documents to capitalize the fund

Lastly, we create the docs for fund raising to commence.  These include not only the private placement memorandum (the PPM, detailing the fund’s strategy, investment gaps to finance, fund structure by deal structure, terms and conditions, deal sizes, life of fund, size of fund {$ AUM} and legal jurisdiction), but also the RFP (fund management tender docs) and contracts (to both international and local legislation).  

Value #2:  Building Fund Manager Capacities

IVI builds new capabilities in investee funds of institutional investors, to improve their effectiveness and efficiencies in fund operation, directed not just to each individual activity, but also the interactions and impacts realized between each. 

  1. Team Formation and Foundational Skills:  Conduct diagnosis of teams, backgrounds, accomplishments, strengths/assets and weaknesses/liabilities.  What are the achievements which each team member/investment officer and support staff created independently (thru their own hands) vs. the hands of others? 
  2. Governance/Policies and Procedures/Documentation:  Organize a suitable and functional governance structure given a country’s legal regime, relevant policies and procedures and proper documentation/archiving. CRM tool and relevant deal tracking systems is established (if not already). The intent is to create an efficient functional structure, being flexible and pragmatic in decision making and fund operation. 
  3. Funding and Investor Relations with Limited Partners (LPs):  Planning on funding/fund size, expected capital commitments and LP agreements (LPAs) and PPM to execute. Delayed or defaulted investors are to be considered in the fund’s policies and operations. Fund and investor reporting are key elements for transparency and communication with LPs. 
  4. Portfolio Mgt:  Expected pipeline and deal flow (type/size of investments), processes of due diligence, relationship mgt with investees, set-up of portfolio level reports. 

Life cycle of fund is considered: specific phases of operation (fundraising, investment phase, divestment phase) in view of pipeline development and investment/divestment process. Define and keep follow-on investments in mind. Interactions with LP funding to be planned for, process for capital calls and investment drawdowns aligned to ensure liquidity. 

  1. Liquidity and Foreign Exchange Management
  • Cash management and distribution policy with goal to enhance fund performance but to ensure being sufficiently liquid (drawdown reserve) and fund manager able to meet periodic calls for investments/follow-on investments. 
  • Fund investments, follow-on commitments/drawdown-mechanisms. Follow-on investments (current and forecasted), investee business plans or drawdown/investment pattern and projected loss rates to be considered. 
  • Fund budget, e.g., operating expenses, management fees and carried interest.
  • Cash flow/reflows/distributions (waterfall): 
      • projected gross returns for fund and projected net returns for investors
      • projected reflows of capital to fund from investees, how are reflows used (distributions: when expected and define/track of potential recalls)
  • Liquidity management model to determine capital calls to LPs, impact of foreign exchange: determine foreign exchange exposure/risk (funding/investment side), for modelling cash flows, cash in bank with opening balance and closing balance considered.
  1. Impact and ESG Management, UN Sustainable Development Goals (SDGs):  For impact intended, do fund managers understand and measure social and environmental performance that can help to minimize risk from social and environmental impacts and to drive growth of the revenue?

“Consider IVI as your investment advisor and partner in planning and executing new investment schemes. We can help you avoid the learning costs that even skilled investors inadvertently incur when executing new investment programs.”