06 Oct SME Investments Spur Growth and Reduce Poverty
On October 6, 2004, the Small Enterprise Assistance Funds (SEAF) will mark its 15th anniversary with the release of an evaluation report showing that its investments have significantly enhanced growth and poverty reduction, as well as achieving respectable financial returns (The Development Impact of Small and Medium Enterprises, VI.1and VI.2). The release coincides with SEAF’s 2004 Annual Meeting of its International Council of Advisors. At the same time, SEAF will also host a forum to discuss the evaluation report with representatives of the international development and investment community.
SEAF: key facts: SEAF-sponsored funds are one of the world’s most comprehensive portfolios of private equity investments in small and medium enterprises (SMEs). A not-for-profit corporation with a for-profit funds management company, SEAF sponsors the establishment and oversees the management of commercially sustainable, for-profit private equity funds investing in SMEs. Headquartered in Washington DC, with a separate foundation in the Netherlands, it has sponsored private equity funds totaling approximately $174 million of capital commitments, investing in 23 countries in Central and Eastern Europe, Asia, Central Asia, and Latin America. As of June 30, 2004, SEAF’s total invested capital exceeded $85 million through 213 completed small business investments.
Business strategy: SEAF funds provide SMEs in developing and transition economies with debt and equity growth capital and post-investment business support in financial management, marketing, and operations.
Though SEAF typically invests in areas of the global economy that are ignored by purely commercial investors, over its 15-year history its strategy has yielded good financial returns.
Strong impact of SEAF investments: The new report, made possible by grants from the Swiss development corporation, SECO, Ford Foundation, and the British development organization, DFID, shows that big multiplier effects are achieved by investing in small businesses. In-depth case studies of ten firms in Central and Eastern Europe and Latin America show that on average, every dollar invested by SEAF appears to generate at least ten additional dollars for the local economy. Nearly all ten firms have achieved significant economic rates of return, and even those investments with relatively low financial rates of return have had a significant economic impact. Two-thirds of the jobs in the sampled firms go to workers at low skill levels, and as companies have expanded, the proportion of low-skilled employees has tended to rise. The study also confirms that SMEs help their employees to build valuable skills and then increase their wages in order to retain them. Such skill enhancement and wage growth, along with other important contributions to the development of their communities, make SMEs a critical component of economic growth in emerging markets.
SEAF President and CEO Bert van der Vaart noted that, “As SMEs contribute to the rapid wage growth and skill base of unskilled workers, there is a surprisingly strong poverty alleviation impact. Likewise, over the longer term, security of employment helps workers accumulate tangible assets and save for children’s education, creating buffers to poverty and achieving lasting improvements in the quality of life.”
Current investors in SEAF: Current investors in SEAF-sponsored funds include the World Bank Group’s IFC; USAID; the Secretariat for Economic Affairs of Switzerland; the German Development Finance Corporation (DEG); the Finnish Fund for Industrial Development; the Norwegian Fund for Development; the Swedfund; the European Bank for Reconstruction and Development; New York Life Insurance Co.; the Ford Foundation; the pension fund for the German Lutheran Church in Hesse and Nassau; Calvert World Values Fund; Merifin, and other independent financial institutions, including most recently two Peruvian pension funds, AFP ProFuturo and AFP Integra.
SEAF history: SEAF was founded in 1989 by the international humanitarian organization, CARE. Following the receipt of an initial $300,000 grant from the United States Agency for International Development (USAID), SEAF developed rapidly with the fall of socialism in Central and Eastern Europe. In 1995, as SEAF made its first annual profit from current income in its Polish fund, CARESBAC-Polska, it separated from CARE to pursue a strategy focused on investing in commercially sustainable companies. SEAF is now an independent organization with 12 offices around the world.