Iungo Capital’s Roeland Donckers tries not to use the phrase missing middle anymore.
“It has become too fashionable,” he tells ImpactAlpha. “It covers everything and nothing.”
Regardless of terminology, Iungo has made 100 investments, with an average ticket size of less than a half-million dollars, in small and growing businesses in Uganda, Kenya, Tanzania and Rwanda since 2016. That should prove that lending to African small businesses is commercially viable, he says.
Iungo has raised $12 million so far in debt and equity into a permanent capital vehicle that has deployed over $24 million into these businesses by recycling repayments into additional loans. The fund expects to reach $20 million in assets under management by next year.
“Being able to get to 100 investments is a huge milestone, showing that our model works and is needed especially considering that within the wider ecosystem, there’s actually less happening,” says Donckers, who is based in Kampala (Iungo is registered in the Netherlands). “Other funds that were there 10 years ago are either inactive or hardly active today.”
Iungo has been successful in recruiting investors such as family offices like the Dutch Good Growth Fund and Ceniarth, as well as the US International Development Finance Corp.
“When we started in 2016, we tried to approach local high net worth individuals to see whether they would be interested. But across the board, the return expectations are pretty high, and the risk aversion is not aligned,” he says in a video interview for ImpactAlpha’s series “Pathways to Growth.”
Iungo has secured grants to support its pre and post-investment processes, and opens up some deals to angel investors.
“We work with middle class and upper middle class professionals, entrepreneurs themselves.” His backers often have backgrounds in banking, accounting or specific industry sectors.
Revenue-based
Donckers already had experience in building solutions that address financing gaps in emerging markets. In Latin America, he’d built a rural and agriculture-focused microfinance known as Makipura Microfinanzas, which served over 5500 clients and later a venture building studio.
In Africa, he knew that most small businesses across the region were family-owned. This meant that equity investments were off the table as these businesses would want to retain full or substantial ownership of their businesses. Providing debt was the next best thing, but not without some iterations.
“We quickly realized that if we were going to focus on equity, it would shrink our potential target market, which is still the biggest market with unmet financial needs,” Donckers says.
Collateral requirements from banks were also too high for these small businesses. Large funds didn’t want to invest in them as they believed the cost of due diligence was too high and they wouldn’t get their money back.
Over the last decade, Iungo was open to diversifying the ways in which it offers capital. In its formative years, the fund tested revenue-sharing mechanisms which essentially tie a company’s debt repayments to future revenues.
Munich-based investment Uncap which launched in 2019 has supported 87 companies with a revenue-based financing model, across 7 countries. The firm launched a $30 million fund dubbed Unconventional Capital last year, to provide €20, 000 to €100,000 ($22,000 to $110,000) in revenue-based financing for small businesses. Funding to get it off the ground came from the Bayer, and Bill & Melinda Gates Foundation. Other players across emerging markets using this model include India’s N+1 Capital with a $100 million fund.
But by 2019, two years after Iungo made its first investment, it had phased out this model. Revenues were unpredictable and under-reported. The small businesses also didn’t have platforms that supported accurate financial reporting.
“Originally, we thought we would use more revenue shares than we effectively ever used,” he says, terming it as a “certain fairness mechanism.”
“The problem, we quickly learned, is that in an environment like East Africa, where small businesses were still heavily cash-based, not everything runs through bank accounts. Using revenue shares to get your money back is actually incentivizing the companies to understate their revenue.”
Iungo tried to combine fixed repayments and revenue sharing. It has since pivoted to offer loans of between $50,000 to $500,000, in tranches. These tranches are tied to the achievement of certain ESG milestones, worker welfare and minimum wage adherence or repayment behavior. Its technical assistance arm ‘Iungo XL’ provides the entrepreneurs with financial management skills and platforms, human resource practices and ESG implementation.
Track record
Iungo’s main goal from the outset was differentiating itself from traditional lenders and meeting small businesses with fairer terms. Collateral requirements in Africa have often been argued as the main impediment to credit access for these businesses, thus most alternative lenders reduce or eliminate the need for collateral.
“Banks are conservative by nature and they’re doing less than what they’ve done in the past,” Donckers says.
Iungo initially offered flexible, low-collateral loans. The firm has had to increase their requirements in light of delayed repayments. In Iungo’s case he argues, collateral has been necessary to establish relationships and repayment discipline, as opposed to acting as an exclusionary tool as it has been on the part of banks.
“Banks are requiring 150% collateral against hard assets. In our case, we’ve moved up to wanting to be 100% collateralized on the first tranche,” he says. “It gives us more time to really get to know the entrepreneur, the company, their integrity and so forth.”
Hitting this milestone also comes with questioning how such funds are viewed in the market. Fundraising has been a challenge globally; in emerging markets, fund managers also face investors’ perception of the risks of small business financing and investing and of managers who may not check traditional boxes for experience and credentials.
“Track record has traditionally been measured quite narrowly, often excluding talented professionals who haven’t yet had the chance to raise their own fund as institutional investors typically ask for audited fund track records,” Aruwa Capital’s Adesuwa Okunbo Rhodes told ImpactAlpha. “The reality is that strong investment experience can come from many places, whether it’s executing deals in investment banking, managing investments within another private equity firm, or building a portfolio as an angel investor.”
For Donckers, the tag of ‘first-time fund manager’ still hovers, a label pegged more on fund structure rather than operational experience.
“There are institutional investors that won’t invest in a fund that’s less than $50 million. The reason you’ve never deployed nor managed $50 million is that you’re still a first-time fund manager, despite the fact that you’ve done 100 deals now,” he says. “The perception of how much track record is enough to lose the ‘first-time fund manager’ stamp is very relative.”
The risks go both ways, he says. “There’s risks of GPs dealing with first time LPs too for the same reasons. It could be a change of strategy all of a sudden.”
“We can be creative on how we reach our own target segment, how we bring capital to the spaces where it hasn’t gotten before,” he sighs. “But when we deal with investors, we need to fit their boxes.”
