Investment vehicle design considerations for the delivery of technical assistance
In this second post of our three-part research series on design considerations for investment vehicles, we look at models for technical assistance (TA). In 2020, Small Foundation commissioned Open Capital Advisors to explore TA delivery, and we are excited to introduce their report alongside our own key learnings.
Rural-impacting micro, small and medium-sized enterprises (MSMEs) in the agricultural sector have the potential to significantly improve local economies and livelihoods. However, agribusinesses often struggle to generate attractive returns due to low margins, high operating costs, multiple risks and difficulties in achieving scale. These MSMEs frequently lack access to talent, leading to critical capacity limitations in strategic thinking, financial planning, operations, and other core business functions. TA can help mitigate these constraints, but how can this be delivered in a way that truly meets the needs of MSMEs while being provided sustainably and at the scale required?
Open Capital Advisor’s report presents a range of design and delivery mechanisms, using compelling case studies to showcase how provision of TA facilities can address challenges and stimulate growth for agribusinesses and other MSMEs. While their potential for impact is evident, a major constraint for TA facilities is that they are often fully grant subsidised, limiting their ability to scale.
Through this research, Small Foundation sought to explore whether TA can be deployed in a more sustainable manner through recycling of capital. The report identifies several factors to consider in TA facility design which affect its recycling potential and long-term viability.
A key finding for Small Foundation is the importance of shared incentives for TA deployment for both funds and agribusinesses, to minimize downside risk and improve business performance. Shared incentives should drive design decisions and contribute to a fund’s vision to attract future investors.
Further, the report findings lead Small Foundation to prefer a solution that integrates the TA pool and fund as a single unit, so the TA package is included in the investment price and repaid via the underlying investment mechanism. This helps to align incentives for stakeholders and requires investors to take a longer-term view on the recycling of capital.
For the full range of findings and insights please find the report here. We welcome further engagement with readers across these three reports. Our previous post exploring liquidity mechanisms for investment vehicles can be found here, whilst the third and final post in this series will examine design considerations for managing currency risk.