What’s the unique proposition with SMEs and why haven’t others pursued this?

Question from investor

For me it would be helpful to have the opportunity around SMEs highlighted in more detail eg. some case studies of the types of businesses, why there is a funding gap, what sort of return %’s and loss rates have been seen historically, why other financiers have shunned this segment but Wholesum can make it work where others haven’t been able to etc. That seems like the unique value prop. For the other asset classes, I understand the need to have those in the fund for diversification but I personally don’t find them differentiated enough to feel compelled to bet on a new manager.

Response

SME Deep-dive

  • Funding gap: It is well documented in literature including World Bank that there’s a significant global credit gap to micro, small and medium-sized enterprises (MSMEs). Some key facts about what this gap represents:
    • 40% of MSMEs in developing countries, representing 65M firms have an unmet $5.2trillion dollar financing gap each year
    • We are currently active in two regions currently (expanding to Latin America next year): East Asia/Pacific (which has the largest share of under-funded MSMEs at 46% of the global gap) and Middle-East and North Africa (MENA) which has the highest demand to supply gap (88%) [reported in the link above]
    • In the GCC, Deloitte reports the following market potential and gap ($250B USD per year) 
  • Reasons for a funding gap: The World Bank report summarises: “SMEs are less likely to be able to obtain bank loans than large firms; instead, they rely on internal funds, or cash from friends and family, to launch and initially run their enterprises.” Other practical reasons:
    • Limited number of lenders offering SME loans
    • SME lenders unwilling to offer unsecured loans
    • SME lenders charging high-interest rates
    • SME lenders setting strict minimum lending criteria
    • SME lenders taking 2-3 months to process a loan request
  • Case study of a business: We are currently conducting diligence on this new business that we are excited about known as White Lion Foods (a global, vertically integrated agribusiness). They produce unique products like Brazil nuts that are grown in the Amazon where sustainable and responsible practices are to enhance livelihoods and conserve the natural environment. From their evaluation, every $1M that is invested in the Brazil Nuts business creates the following impact:

Other invests vs. Wholesum

  • I’m not sure exactly if other fund managers have shunned this per se. Most fund managers including fintechs like Spaceship/Raiz are focused on stock marketing investing or bonds (e.g., Blossom). These are the traditional assets (in addition to property funds). Those assets are their wheel house and there are large investible markets there no doubt. If we go up the value chain, very few business and finance degrees study SME and microfinance investing within emerging markets so there are few professionals with the requisite expertise. I founded Wholesum after 10 years of working in the SME and microfinance space. I have a PhD in microfinance studying the regulatory landscape in Bangladesh and Indonesia. Here’s a picture from my work with the Clinton Foundation (right after McKinsey) where I developed supply chain investment strategies in partnership with Unilever (as off-taker) to connect thousands of coconut sugar farmers to Unilever’s Bango Kecap sweet soy sauce product. I’ve also consulted with agribusiness SME operations with Mars and McDonalds through my freelance work with Rogers MacJohn (founded by a McK Alum, Richard Rogers who is also an angel investor into Wholesum). The culmination of those experiences, insights and the direct access to tried and tested investment partners has given proprietary advantages for Wholesum. We live and breathe these asset classes and opportunities.
  • Historical testing: The investment thesis and proposition is not just theoretical. After initially testing with my own money in 2016-2019, 50 investors joined various short-term fund placements with a cumulative $800k+ invested over 5 funds. The returns from the SME investing strategy are provided below – even adjusting for currency gains, the returns were phenomenal (~11%) which provides comfort in the underlying strategy.
  • Loss rates: As a highly diversified fund across multiple partners, jurisdictions, currencies and asset classes, our total loss exposure is largely mitigated. To provide a range of data points, here are a few:
    • GCC SME platform (investing in dozens of SMEs within their network): 1.9% bad debt vs. 10.7% average net yield (after fees and losses)
    • White Lion Foods: no losses nor delayed payments in the 10-year history of operations (typically achieving 15-18% yields)
Investing in other assets

  • The unique assets for this portfolio is actually 85% as you’ll see in the allocation breakdown below. When one bets on a new investment manager, not only is it for the investment strategy but to ensure the fund mechanics are viable and sustainable. To achieve the unique value proposition of impact-focused investments via SMEs and microfinance, we also need to ensure there’s a balance of liquidity (because those assets typically have longer tenures). Hence, the 10% highly liquid ETF allocation and 5% into cash funds helps us to pay out redemptions and distributions while not impairing the yield strategy of the core portfolio.

Thank for you asking these great questions! If there’s anything else I can help you with – let me know.

To summarise why Wholesum is worth checking out. As a savvy investor, you may have a sophisticated portfolio at hand. However, is there allocation (albeit tiny) for consideration of a globally diversified impact-focused fund?

With a single allocation (that will save you time and money on research, rebalancing and allocating – including taxation reporting) you’ll be:

  • Supporting job creation and poverty reduction around the world
  • Partnering with a carbon-positive investment fund that also donates 1% of gross revenues directly to charity
  • Helping a social fintech get off the ground to generate even more impact around the world