The importance of supporting women was one of the main leitmotivs of the Africa Impact Investing Leaders Forum, held in London on 27 Oct, 2016. Delegates asserted that this historically disempowered group plays a pivotal and well-documented role in augmenting positive social, economic and environmental outcomes – particularly when impact investments find their way into microfinance, agriculture, renewable energy and infrastructure sectors.

Women are integral to social impact investing

Speaking from the podium, Suzanne Biegel, founder of Women Effect, urged all investors to use a “gender lens” when considering impact ventures. And to ask some salient, due diligence questions, such as: “Where are the women in this investment? Are they on the product design team if the product concept is for women? Do they have a formal leadership or decision-making role where the project in question is targeting women”?

Caroline Mulwa, Kenya country manager of social impact investor, Oikocredit, agrees wholeheartedly with this view. Referencing the smallholder agriculture sector, she says: “88% of Africa’s female population live in rural areas; 70% of agricultural labour is provided by women; 90% of all food is produced by women, but women own less than 2% of the land. Yet women have a significant, measurable, positive impact on small business ventures, local communities and families. And they have been proven to reduce investment risks”.

Mulwa highlights one of Oikocredit’s microfinance partners as “exemplary when it comes to considering the roles and needs of Kenyan women from every angle”. She continues: “KWFT – Banking on Women focus single-mindedly on the unapologetic financial support of women” – a phrase which Caroline says inspires her.

Led by women for women, KWFT has provided financial services to unbanked women in Kenya for over 30 years. With 800,000 clients now on their books, KWFT offer a unique product range spanning microloans, savings accounts, insurance loans and financial literacy training. Products are designed around the specific needs of women, such as planning for healthcare during pregnancy and childbirth; saving to ensure their own financial independence, and setting up small businesses. In-branch, KWFT provide footstools for teenage girls so that they can be on an “equal level” with bank tellers, as well as baby-changing and breast-feeding facilities for young mothers.

Across Africa, Asia, Latin America and central and eastern Europe, 86% of the end customers of Oikocredit’s microfinance partners are women, meaning that vital access to finance and other support is offered to around 39.5 million women worldwide. Scott Brown, president & CEO of VisionFund International likewise emphasises the importance of women in the impact investing space, highlighting that over 70% of the end clients of VisionFund’s microfinance partners are women.

Client Protection Principles (CPP) are critical to the due diligence strategies of both Oikocredit and VisionFund, and partners are required to demonstrate an ongoing commitment to eliminating any potential exploitation of end clients.

The impact investing potential within African agriculture

Agriculture, a sector in Africa which some say may be worth $1tn (£816m) by 2020, was also a lively theme during the forum. A panel, comprising leaders from Africa Agricultural Development Company, Alpha Mundi Group, ScopeInsight and Oikocredit, all highlighted how impact investing in smallholder supply chains can create one of the biggest impacts on reducing poverty – the UN’s sustainable development goal one.

Agriculture, however, is often characterised by extraneous economic, financial and other challenges such as the impact of extreme weather; changes in global commodity markets, particularly price and currency volatility; shifts in government policies and weaknesses in local infrastructure. In order for the sector to mature, panellists discussed the need for higher levels of professionalism (including stronger due diligence and governance) and more innovative, public-private partnerships for impact investments.

Applying her own experience of managing risks, Mulwa says, “It takes experience: taking risks, making mistakes, but learning from those mistakes”. She adds: “It also requires us to look beyond the obvious and take a long-term view. So, we first consider the social mission within our investment decision-making, thereafter weighing up the risks in the context of the longer-term potential. I’m referring here to “patient capital” and a willingness to consider a project that may not look promising in the short term, but might bear significant financial and social returns in the longer term”. Patient capital is an investing attitude which all panellists agreed is vital for successful impact investing.

Showcasing this approach in the context of Oikocredit partner, Githunguri Dairy Farmers’ Co-operative in Kenya, Mulwa explains how, at first glance, their request for €1.5m (£1.3m) investment – to set up a processing plant for 31 dairy farmers and 200 employees; producing 15,000 litres of milk and generating a €0 return – looked risky. Other investors backed off, but Oikocredit saw the long-term financial and social potential and went ahead. As with many so-called risky ventures which Oikocredit supports, Githunguri paid off. Today, the co-operative has 15,000 members and employs 8,000 people across their entire value chain. They produce 220,000 litres of milk each year and, in 2015, reported a turnover of €52m (£46m).

If you are interested in investing in the Oikocredit International Share Foundation*, please contact our UK office. Alternatively, if you are a mid-stage inclusive finance, agriculture, renewable energy or infrastructure venture looking for equity or debt financing in Africa, please contact our east Africa or west Africa teams.

*Capital at risk. Terms and conditions apply. 

By

Monica Middleton

national director, Oikocredit UK & Ireland

Join these organisations to scale impact and discover new opportunities at the next edition of the Africa Impact Investing Leaders Forum in 2017 by Registering your interest as a partner, delegate or speaker. >> http://aiilf.com/register-your-interest/ 

SoFi

The financial market has been going though many changes thanks to the growth of the digital economy and availability of app-based mobile devices. Mobile payments are one obvious area in which the financial industry is evolving. Square is a clear leader in the U.S., Canada, Japan and Australia, while companies, such as Ezetap in India, are cornering the market in developing nations.

Another emerging sector turning traditional banking on its head is online financing. San Francisco-based SoFi (which stands for Social Finance) is set to disrupt the banking sector through its unique approach to lending and wealth management. What launched in 2011 as a financial services company to refinance student loans has expanded to mortgages, mortgage refinancing, personal loans and wealth management. The company touts its proprietary technology, customer service and products, while marketing itself as a “non-bank.” Instead of going to a local bank branch to obtain a loan, SoFi allows members to apply online or over a mobile device—making it particularly appealing to Millennials.

What Sets SoFi Apart? There are other companies that offer online financing and wealth management, but SoFi’s management team and their ability to partner with major financial institutions give them strength and credibility. Japan-based SoftBank Group was so impressed with SoFi that they provided $1 billion in funding to help the company charge lower rates on student, personal and home loans, as well as help fund plans to expand into wealth management and deposits.

23andMe

I recently went to my doctor for a yearly physical. As part of the process, I underwent several blood tests and had a heart stress test. What if, in addition to these tests, my doctor could also analyze my DNA to better understand my genetic mix and its relationship with my health? He might be able to predict and help prevent certain hereditary diseases. That is the potential behind 23andMe.

For the last ten years, the company has been developing a suite of genetics tests to provide customers information on health, ancestry and traits. The company claims more than 1 million customers and says it has built one of the world’s largest databases of individual genetic information. Though not currently cleared to use genetic information to predict the likelihood of a disease, the potential is there and investors have taken note. The potential revenue of an FDA-approved test for diseases is so significant, the company could be well on its way to an IPO.

What Sets 23andMe Apart? The company’s success is tied to the persistency of founder and CEO, Anne Wojcicki, who spent a decade in healthcare investing, primarily in biotechnology companies, before co-founding 23andMe. She understands the market and has been able to navigate some major hurdles, including gaining FDA approval for the company’s direct-to-consumer genetic testing business. Though the company had to regroup a bit, 23andMe relaunched in early 2015 with guns blazing—and hasn’t looked back since.

Udacity 

Online education is making it easier for many people to learn new things or brush up on skills to help advance their careers. While many e-learning platforms, such as Courseraand Khan Academy, offer courses across a wide variety of topics, Udacity is focused on technology. Its mission is to “bring accessible, affordable, engaging and highly effective higher education to the world.”

Udacity was created almost by accident. Co-founder, Chairman and President, Sebastian Thrun, and Peter Norvig (currently the Director of Research at Google Inc.) offered an “Introduction to Artificial Intelligence” course online to anyone, for free. Some 160,000 students from more than 190 countries enrolled. Not long afterward Udacity was born.

Today the company focuses on teaching skills that industry employers need and delivering credentials endorsed by these employers—at a fraction of the cost of most traditional schools. One of those employers is Google. The company recently announced a partnership with Udacity to offer a Google Android Basics Nanodegree designed for people with no programming experience.

What Sets Udacity Apart? The Co-founder, Chairman and President, Sebastian Thrun, recognized the opportunity to monetize courses teaching the skills employers are looking for—and he seized it. He brought in the right team to make it work, including CEO Vish Makhijani who has years of executive leadership experience working with companies including Zynga and Yahoo. The market has taken notice. Udacity has received funding from major investors, including Bertelsmann, Charles River Venturesand Andreessen Horowitz. It is currently valued at $1.1 billion and is set to become a leading provider of educations services.

Oscar 

If you are confused about your health insurance policy and bills, you aren’t alone. The insurance market in U.S. is not working well, especially when compared to most other developed nations. We pay huge premiums and still have expensive medical bills—and that’s just for the insured.

Enter Oscar Health Insurance. The company was created in 2012 partially because co-founder Josh Kushner was frustrated over trying to make sense of a health insurance bill. He and fellow co-founders, Mario Schosser and Kevin Nazemi, wanted to use technology to improve how customers find health care. According to its website, Oscar is “reinventing how to manage care, process medical claims, control healthcare costs and provide transparency. With all the complexity hidden behind an easy experience for our members.”

What Sets Oscar Apart? Oscar is changing a broken industry by offering a common sense solution to health insurance. It uses sophisticated technology to make it easy for customers to find information and be able to make decisions. Though currently only offering plans in parts of New York, New Jersey, California and Texas, the company is growing rapidly. It currently has more than 145,000 customers and is valued at $2.7 billion. Investors include Khosla Ventures, General Catalyst Partners and Goldman Sachs.

WeWork

Great ideas don’t have to be all about technology, but they should be about the market and customer needs. If you can identify and solve a market challenge, you can win.Adam Neumann and Miguel McKelvey did just that when they founded WeWork back in 2010. Both were independently employed and were working out of a partially vacant office building. They convinced the landlord to let them rent out the empty parts as shared workspace—and WeWork was born.

Today the New York City-based company fills the need among entrepreneurs for a work space that won’t cost an arm and a leg. It currently serves close to 50,000 people in cities across the U.S. and around the globe. Part of the appeal of WeWork is that it doesn’t just provide an empty desk. Membership includes access to a number of perks, from free coffee and craft beer on tap to Wi-Fi, printing and even meeting rooms with ping pong tables. Just the type of hip appeal that many of today’s entrepreneurs and independently employed persons are looking for.

What Sets WeWork Apart? The company recognized that technology is not always the path to success – marketing is. It’s not just enough to offer office space for rent—it has to appeal to the mindset of the self-employed generation. Though this startup is not tech-based and has a pure and simple business plan, it’s attracted the attention of Benchmark, Goldman Sachs, Fidelity and T. Rowe Price, who have funneled $1.4 billion into the company—putting it at a valuation of $10.2 billion.

These five companies have all approached business a little differently and, in so doing, have made their way into the “billion dollar club.” One size does not fit all when it comes to building a company, but studying the approach of these success cases is a good way to find inspiration for your own business plan. Strong partnerships, a good leadership team, persistency, common sense solutions and a solid marketing plan can make the difference between an average company and one that takes the market by storm.

Build world class companies. Access finance for your projects! Click  on image to apply directly.

Africa’s power sector needs far exceed most countries’ already stretched public finances, making it crucial for governments to attract greater levels of private investment to scale up generation capacity. To reach the scale required, governments must provide a sound investment climate and enabling environment, the report finds.

 “Independent Power Projects in Sub-Saharan Africa – Lessons from Five Key Countries” draws on case studies carried out in Kenya, Nigeria, South Africa, Tanzania and Uganda – countries that have the most experience with IPPs in the region.

“Independent power projects now constitute the primary vehicle for private investment in the African power sector,” said Makhtar Diop, the World Bank’s Vice President for Africa. “The objective of this report is to identify key lessons that can help African countries attract more and better private investment.”

Currently, there are 126 IPPs in 18 Sub-Saharan countries, accounting for an installed capacity of 11 GW and $25.6 billion in investments. But to benefit more countries the report recommends these IPPs should be much larger and spread across the region.

Enabling factors for attracting more and better IPPs include:

1. More competitive procurement efforts from countries in Sub-Saharan Africa, which includes encouraging long-term contracts through a competitive bidding process. This can help secure reduced prices and help avert other issues, such as the possibility of a problematic contract. If direct negotiations are conducted, they should be done transparently.
2. Clear and conducive energy sector policies, structures and regulatory environment.
3. Systematic and dynamic power sector planning, including the ability to accurately project future electricity demand, determine best supply or demand management options and anticipate how long it will take to procure, finance, and build the required electricity generation capacity.
4. Financial viability of the public utilities is vital as they remain the principal off-takers of power produced by IPPs. Given the high-risk environment of most countries in Sub-Saharan Africa, it will be important to provide proper mitigation through financial guarantees and security measures to attract new investors.

The report also finds that renewable energy IPPs are becoming more promising and can be viable if procured competitively.

The report concludes that all sources of investment need to be encouraged and for IPPs to flourish, countries in Sub-Saharan Africa need dynamic, least-cost planning linked to the timely, competitive procurement of new power generation capacity. This must be accompanied by effective regulations that encourage distribution utilities that purchase power to improve their performance and prospects for financial sustainability, thereby widening access to electricity.

By the World Bank

Click on image to submit your project on energy or other sectos for financing and scaling up.

The experience inspired Nyankamawu to create Volta, a company that builds solar power projects for health clinics, schools and farms across Ghana.

Volta’s customers pay for 25% of the capital costs upfront, and the rest via monthly payments over two years. None of Nyankamawu’s customers have ever missed a payment, Nyankamawu said.

“Our model works best when it’s a substitute for people who are already using diesel generators,” he added. “They’re saving up to 45% on their costs by switching to solar.”

I met Nyankamawu at the Clean Energy Ministerial in San Francisco earlier this month, an annual gathering of energy leaders from 23 countries and the European Union. The meeting marked the first time the ministers met since more than 170 countries signed the Paris climate agreement to limit the global temperature rise to under 2C, a goal that won’t be met without strong domestic policies that give the businesses incentives to invest in a low-carbon future.

I often hear criticisms that businesses, which account for most of the manmade emissions that are causing global warming, aren’t doing their part to keep the rising temperatures in check. Surveys and anecdotal evidence show that many corporate leaders don’t see their role in this global effort.

But that’s not what I have seen. A growing number of companies are turning to renewable energy to reduce their carbon footprint. I am impressed with entrepreneurs like Nyankamawu and other business leaders who work on making renewable energy affordable and accessible. And they represent progress. Putting money in renewable energy, whether through power purchase agreements with big solar and wind farms in the US, or tiny household-sized solar projects in Africa, was a rarity even just five years ago.

Many Fortune 500 companies recognize a direct connection between climate change and their financial wellbeing. Earlier this month, a half-dozen major companies, including TD Bank and Interface, joined RE100, a coalition of businesses that are switching to 100% renewable electricity. The shift has been especially strong in the US, where large corporate buyers contracted a record 3.2 gigawatts of renewable energy last year, nearly 20% of the 16.4 gigawatts of renewables added to the US electric grid overall. That means tens of thousands of workers rely on solar and wind power to do their jobs, and that number will only go up.

One of the most impressive efforts I heard at the San Francisco meeting came from Lisa Jackson, who leads Apple’s environmental and social initiatives. Jackson talked about the company’s effort to use solar and wind energy to run its own global operations and the factories in China that make its iPhones and iPads, including a plan to bring online 2,000 megawatts of green energy there. The company would work with its suppliers there to build those projects.

Some of the most compelling stories came from Africa. Home to the world’sfastest growing population, the continent is a key front in the Paris climate agreement’s quest. In Tanzania, Off-Grid Electric allows homes and small businesses to install solar systems and pay for them via mobile phone payments. Off-Grid says it’s currently installing more than 10,000 solar units every month in Tanzania and Rwanda, and recently raised $70m from San Francisco-based DBL Partners and other investors to help hire more staff and expand operations.

More businesses will switch to renewable energy if they are able to finance it. We saw a record $329bn in global clean energy investment last year, but that falls short of the estimated $1tn that will be needed every year through 2050 to help achieve the 2C goal. A major emission producing country such as India, which aims to install 175 gigawatts of wind and solar power by 2022, will need anestimated $200bn to reach that milestone. The country attracted $10.9bn in clean energy investments last year, according to Bloomberg New Energy Finance.

There is one group of investors who could help fill that gap, but they have yet to value renewable energy investments: institutional investors. They manage public pension, insurance and other funds that are worth trillions of dollars. These investors are dipping their toes in clean energy in US and Europe but remain on the sidelines in emerging markets, which they consider particularly risky.

Michael Liebreich, founder of Bloomberg New Energy Finance, likened the challenge of fighting climate change to climbing Mount Everest: “We’ve just reached base camp.”

No doubt, getting to the top of the mountain will require huge participation from the business community globally.

The window of time to summit is now – and they’ll need to move quickly.

By Peyton Fleming

The Finnish arm of Sweden’s Nordea Bank will be the first Nordic bank to offer businesses access to the crowdfunding market by launching a technology platform in the summer of 2016.

The technology will enable investors to provide capital for growing businesses through automated processes – a major change for a bank as it will not be providing the capital but enabling other organisations or individuals to do so.

Startup businesses are increasingly turning to crowds for financing – the European crowdfunding market topped €6bn in 2015.

“Digitisation is transforming the banking industry and we want to be part of that transformation,” Topi Manner, CEO of Nordea Bank Finland, told Computer Weekly. “We will offer startups and growth companies the chance to find funding through a digital platform and bring together investors and companies in need of financing.”

Despite the internationally recognised importance of SMEs, African small businesses often have difficulties accessing financing from the formal financial sector. Almost 50 percent of African companies identify lack of access to finance as a major constraint to doing business. The cost of ?nance, including investment ?nance, is higher in Africa than any other part of the world, and the access for SMEs is particularly limited. Very few commercial banks do small-enterprise banking in Africa. Furthermore, SME financing is often considered by many financial sector players in Africa to be a risky activity as promoters quite more often than not, fail to come up with the collateral levels required to secure bank facilities.

Low-level financing
Studies done by the World Bank and other organisations have revealed very low levels of bank financing to SMEs in Africa when compared to other developing countries. It is also often noted that SMEs represent a ‘missing middle’ in African private sectors as these are dominated on the one hand, by (mostly informal) very small (micro) enterprises, and by large companies on the other.

The missing middle is particularly pronounced in sub-Saharan Africa, where the unmet need for credit by all micro, small, and medium-size enterprises (MSMES – enterprises that typically have fewer than 250 employees) is in the range of $140-170bn, approximately 70 percent do not use external financing from financial institutions, although they are in need for it.

These studies have attributed low levels of bank financing to SMEs in Africa to both supply and demand. While the lack of effective business plans and adequate skills within SMEs are a problem on the demand side, the supply is constrained by lack of capacity in the ?nancial sector to do business with smaller companies; inadequate information resulting in high-risk assessments; lack of collateral and collateral registries; poor protection of creditors; and lack of availability of longer term funds.

Rising to the challenge
It is in response to these challenges, the African Guarantee Fund for Small and Medium-sized Enterprises (AGF) was created in by the African Development Bank (AfDB), the Government of Denmark through the Danish International Development Agency (Danida), and the Government of Spain through the Spanish Agency for International Development Cooperation (AECID). AGF was imagined and designed primarily as a response to a development challenge as the need to foster innovation, growth companies and provide employment opportunities in all economies is essential to long-term and sustained growth.

Today, Africa is enjoying unprecedented growth and the world is awakening to the opportunities that the continent offers. AGF’s job is to be part of the effort to ensure that the benefits of that growth are fairly shared at all levels of the society.

Through its guarantee facility, AGF assists financial institutions partially cover the risks associated with SME financing and thus enable them increase their portfolio in that asset class. Its guarantee business also enables financial institutions to raise long-term resources for SMEs long-term needs. AGF also offers capacity development facility enable partners financial institutions enhance their SME financing capabilities and thus to execute their growth strategies in that sector with ease. A combination of AGF’s guarantee and capacity development facilities, allows partner financial institutions to bring their SME financing business to the required scale that would not only enable them bring down transaction costs significantly, but also increase returns on investment. AGF is the missing link that enables partner financial institutions execute their SME financing strategies effectively, while enabling SMEs to play their expected role in fostering African economic development.

Since its official launch in 2012, AGF has gained over $300m of financing to more than 300 SMEs in Africa. Through its partner financial institutions the company operates in more than 20 countries in Africa.

AGF anticipates in its strategic plan that it will guarantee approximately $2bn of new lending in the medium term and enable over 10,000 African SMEs to have access to finance. This would help to secure and create millions of productive and better jobs for the youth across the continent.

By Felix Adahi Bikpo, CEO, African Guarantee Fund

A report from EY and the MasterCard Center for Inclusive Growth highlights the fact that while global youth unemployment is on the rise and is expected to remain unchanged through 2018, some businesses are discovering the dividends of offering work and employment opportunities to young people.

In addition to the 358 million young people (aged 16–24) not in education, employment or training (NEETs), a further one billion young people will enter the labor market between today and 2030. In addition to the unemployed, millions of young people are engaged in part-time, temporary or “zero hours” contracts that offer no security, few development opportunities and little autonomy.

In the Middle East and Africa, for example, 80% of young workers are employed in the informal sector. Youth under 25 and living in Spain or Greece have a 50% chance of being unemployed.

These are the headline data: a global crisis of challenging proportions.

There is no silver bullet to solve this crisis. Youth unemployment is not a one-dimensional challenge. But there is some good news.

Hiring young people, whether as temporary interns or full-time, can provide the essential foundation on which the next generation can begin to build sustainable paths into the workplace. And they offer tremendous value to companies as wel, providing new ideas, new perspecitves and insights, and a digitally native mindset that can help companies become better attuned to a growing customer base.

But to be successful requires a reciprocal relationship.  In exchange for the benefits companies derive, they have a responsibility to help young people grow their careers.  To encourage them to take thoughtful risks.  To access educational opportunities and provide resources for them to improve.

The private sector can play a big role in helping prepare young people for success in the 21st century workforce, and through those efforts help deliver greater inclusive growth.

Culled from http://mastercardcenter.org/action/creating-high-impact-employment-experiences-youth/

While crowdfunding and other financial technologies do not represent a cure-all or complete replacement of traditional methods, there are areas where both crowdfunding and traditional finance and investment banking will work in tandem to effect major change within small business finance. There are also downsides, some of which we discuss more in-depth here.

Speed of Transactions

In almost every instance, when technology touches a market, it increases both speed and efficiency. Corporate finance is no exception. With the help and encouragement of both regulators and technologists, companies are seeing much more rapidity in investment cycles. Services like digital signatures, escrow, accredited investor confirmations and bad-actor checks are all becoming more streamlined. The push for direct, internet investing is adding fuel to the fire to make this happen with more efficiency.

As the various required regulatory items in capital transaction see drastic reductions in their hurdle speed, transactions flow more smoothly and deals get done more rapidly. It’s a win-win for all involved.

Accounting & Disclosure

For equity & debt crowdfunding deals, information will be key to avoid things like fraud and ensure investments are sound for both non-accredited and accredited investors alike. While traditional investment banking requires disclosures, there is enhanced discipline that comes to a market that involves retail investors. Regulators require greater exposure to information about the various issuers’ businesses. This is good for everyone within the industry.

Yes, institutional investors will require deep-dive due diligence on the companies they may see as targets, but much of that is a “back end” ask and not a regulation-required front-end give. Investment bankers may complain about the SEC, but they serve a very important purpose, part of which to increase scrutiny of the issuing companies. Crowdfunding will only help enhance the increased exposure and information available, especially for private, operating companies.

Efficiency & Discipline

In an age where search, information and privacy are a simple click away, many are concerned. There is at least one benefit to capital requisition and direct capital investing, especially in the information-sharing economy: discipline and efficiency.

Discipline is also enhanced by the expansion of accounting and disclosure, mentioned above, but perhaps the greatest contributing piece to increased discipline among private, crowdfunded companies is the accountability. Private company owners are now accountable to shareholders. While their numbers may be few, they will likely want to know more about the successes and failures of their investment.

My expectation is that this will create discipline for company founders and operators. This in turn has a trickle-down effect on investment bankers seeking quality deals to contribute to and represent. It should have a very positive impact on the future pipeline of investment banking deals as it will likely increase quality and quantity of deal-flow.

Decrease in Margins

With the rise of computers, the typical stock broker saw the margins within his/her business substantial decrease. It was the perfect example of creative destruction. Private investment bankers have been continuing to enjoy healthy fees for the work they perform in the issuance and underwriting of corporate debt and equity securities. As efficiencies creep in, brought about in part by the introduction of crowdfunding, it is likely the higher margins incident in many smaller, private boutique investment banks will ebb over time. The savings again will be passed to the investors and issuers.

Reduction in People

It likely goes without saying, but a decrease in margins within the private investment banking world is likely to negatively impact both the supply and demand of labor in the market. That means one thing: more jobs will be shuttered.

People may not be replaced by machines, but the demand for people to perform many of the tasks incident to analysts and associates will be passed to the world of automation.

Portals Over People

More emphasis will likely go to the growing presence of direct investing portals, including those used in crowdfunding. The financial regulators are also allowing for the existence of limited-representative persons and companies that manage these portals. That is, many of the debt and equity crowdfunding portals will be required to become what one might call a “lite” version of a broker-dealer.

Regulation on Representatives

Consequently, the registered representatives (anyone registered with the Self-Regulatory Organization or SRO a.k.a. FINRA) will likely increase slightly, but only for purposes of assisting on transactions. This small bump will have an impact on more startups and portals that want to play in the crowdfunding space. Registration includes all the fun pieces like tracked/archived email, continuing education, etc.

The upside is that it should at least slightly increase the knowledge and professionalism within crowdfunding and investment banking alike.

Equity Financing

Regardless of whether an issuer is raising money for the acquisition of a business or a commercial real estate property, there is often a meaningful missing component in the transaction: equity. In today’s liquid financial market, debt is somewhat easy to come by, particularly for companies or individuals with assets they can easily pledge as collateral to secure the loan.

Crowdfunding is likely to grease the skids for equity-based capital raises. The SBA may be a great resource and provide excellent terms on buying a business or nabbing a quality commercial building, but the crowd is likely to help fill the gap where the business owner could not. It may help to paint a specific, but fictional example.

John has about $1,000,000 in committed equity capital he would like to use to supplant the purchase of a $10,000,000 privately-held company. He has terms from a debt lender that allow him to purchase the company from the seller with 5% seller carry, 20% equity (cash required at close) and the rest to be carried by the debt instrument from a third party SBIC or other debt financier. John is short by exactly $1,000,000. Most investment banks would shy away from such a small raise as the effort-to-compensation ratio would likely not pencil (unless the deal was a slam dunk).

Instead, John can source the capital using either Title II or Title III equity crowdfunding. In this case, the entire job of the traditional investment banker was supplanted by some attorney & accounting fees, a little marketing and a couple listings on major crowdfunding portals.

Debt Financing

Debt financing should be considered separately from equity for the following key reasons:

1. Debt often brings a different type of investor that is more conservative in his/her approach.
2. Debt can add a layer of protection, often in the form of collateralization
3. Debt often provides immediate and regular payouts.

While debt is not all that appropriate for startups as it often requires immediate payments of both principal and interest, I expect many existing, profitable private companies may well source debt financing at some point from the crowd. The equity markets pale in size to the bond markets. You never know. We could see a crowdfunding world in the future where debt greatly overpowers equity—in both size and scope—for crowdfunded offerings.

Reaching Down to Retail

With crowdfunding comes the ability for general solicitation as well as general investment from a large swath of retail investors. This increased pool of investors, while advantageous from a sheer numbers perspective, has its downsides as well. Retail investors, as a general rule are less educated and more emotional when it comes to the placement of funds. The trade-off for many issuers may be worth it to have immediate to a liquid pool of eager retail, main street investors.

Crowdfunding is likely to impact many aspects of the investment banking world, but perhaps the area of greatest impact will be on the investment bankers themselves. As such, we as the bankers will likely need to stay more abreast and be more prepared for what occurs relative to crowdfunding than any other individual market. It is likely that a peaceful coexistence between crowdfunders and investment bankers will occur, but will likely not happen without experiencing some growing pains and industry consolidation.

By Nate Nead, a licensed, middle-market investment banker. 

We’re following these developing market issues on our Market Integrity Insights blog, as well as our European Investment Conference blog. They are also issues we’re bringing to our members, live, at events like the most recent EIC in London, where Josina Kamerling, head of regulatory outreach at CFA Institute for EMEA, moderated a talk with Lars Kroijer, founder and managing director of AlliedCrowds, on  “Crowdfunding: An Alternative Funding Source for Developing Markets?”

Crowdfunding: ‘How I Got Hooked,’ Hurdles, and Blockchain

While at the conference, Kamerling also did a video interview with Kroijer. Introducing him, she draws parallels between what Idowu Koyenikan, author of Wealth for All Africans, says: “When money realizes that it is in good hands, it wants to stay and multiply in those hands,” and what Kroijer does.

Watch the video to see Kroijer share what he feels are chief among the challenges to crowdfunding (regulation, fraud prevention, and transitioning from a predominantly donation-based model to more for-profit investments), why they are challenges, how he “got hooked” on alternative finance, and why he’s so keen on blockchain technology.

By Rebecca Arrington