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Capitalizing Growth-Stage SMEs: Profile of a BAM Investment Company

Excerpt from the recently published BAM Global Think Tank report on Business as Mission Funding

Transformational SME – BAM Investor Profile

Transformational SME (TSME) was established in 2001, after two and a half years of market research and business plan development. Their goal is to capitalize growth-stage SMEs with patient, strategically integrated financial, intellectual and human resources to achieve economic, social, environmental and spiritual impact in the Arab world and Asia. 

TSME is a BAM company, composed of an investor-capitalized fund, which operates as a Bare Trust under UK law, and a professional fund management company registered in Canada. TSME provides primarily mezzanine loans to carefully screened, Christian-owned and managed SMEs which through genuine business as mission seek to achieve the so-called “quadruple bottom line”.

In addition to mezzanine finance, TSME provides mentoring and coaching to investee companies and a variety of technical advisory services, for example, pre-investment consulting to start-up companies, and a range of input to strategic mission partners such as mission agencies wishing to engage in BAM. They also engage in strategic talent search for key professional roles within BAM companies.

The vision, mission, strategy and operational practices of TSME are intentionally Christ-centred, and reflect the Judaeo-Christian worldview of the founders and all subsequent investors. A professional team of businessmen and women from around the world manages TSME with deep experience in all areas of business, finance, entrepreneurship and cross-cultural experience in the Muslim, Hindu and Buddhist world. 

The fund operates on an “evergreen” basis, with capital being continuously raised and returned, invested and repaid with a dynamic inventory model of investors, deal flow, due diligence and mentoring provided by TSME team members. Between 10-20% of TSME investors have served in a volunteer capacity as mentors and coaches to companies in the fund portfolio. 

Introduced through relationships with a strategic mission partner, the first two loans of $25k and $50k (US Dollars) were made in early 2002 to companies in Nepal and North Africa following a thorough review of their commercial and spiritual impact plans. By year-end 2014 TSME had made loan offers ranging from $25k to $400k, cumulatively in excess of $5.3 million, to 42 companies in 23 countries in 18 industry sectors. Numerous companies have successfully applied for sequential, supplementary loans. Compatible with its mandate, TSME has made one equity investment. To date only one loan ($25k) has been written off (made to a company in a very difficult country struggling with civil war and an archaic legal system). By year-end 2014, nearly $4.7 million had been invested in the fund by more than 200 investors from 16 countries around the world. Since inception, invested funds have been offered back to investors on an annual basis, with investments maturing broadly in line with expectations. Redemption rates are low (less than 7% by investor number), with most investors choosing to reinvest in the fund.

Loan applicants provide a coherent business plan, combined with a thoughtful spiritual impact plan reflecting their intentional BAM focus. Following a careful due diligence process by the TSME team, investment proposal are evaluated and decided upon by an independent Investment Committee. Interest rates and loan initiation fees are comparable to those available to SME’s in rich world countries despite the extremely high risk of making loans in marginal countries and economies. Loans are made to investee companies based on projected cash flow, and are not collateralised or securitised. This approach is a realistic one for the contexts in which these business owners operate, and is supported by very thorough due diligence and on-going mentoring. It is driven by a desire to honour Christ by not putting the owner and his/her family at personal financial risk beyond their already significant capital investment in the company. Loan agreements are carefully tailored to specific company needs, with appropriate conditions, fully documented, and framed in an atmosphere of trust befitting covenantal agreements between followers of Christ. 

TSME is grateful to God and its global community of committed participants for all that has been achieved over the past 14 years. Individuals and families have found and been taught the way of Christ, local congregations have been strengthened, government and other officials have been profoundly influenced, policies have been changed, corruption has been challenged, goods and services adding value to life have been made and sold, jobs with dignity have been created, marginalised individuals have been affirmed and liberated, a professional business culture with a Christian conscience has been stimulated, a responsible attitude to debt and equity has replaced a debilitating dependency upon financial handouts, mission co-workers have been encouraged, and above all, our Father in heaven has been glorified. There is much more to do!

Seven Lessons Learned:

1. There is a clear and present need and opportunity for patient mezzanine funding in the BAM space, certainly in the Arab world and Asia and likely in other regions as well. A related observation is that it is extremely difficult to do this well. That said, it is possible to invest with modest expectations of financial return into these most-difficult environments and, risk of loss notwithstanding, see a full return of capital and a modest return on investment.

2. BAM in the region in which TSME operates is still quite weak with relatively few, albeit a growing number of, companies being able to meet TSME’s rigorous standards. On the other hand, responsiveness to experienced input has enabled companies to grow and develop into better-managed and effective models of Christ-honoring business.  TSME has found that relationships, based on integrity and trust within the Christian community, bring remarkable risk-reducing benefits. Company owners are admirably open and honest in their applications and conduct of their business affairs, and often make significant personal sacrifices in order to serve Christ, and to honor the loan obligations of their companies.

3. A hybridized financial model is both a pragmatic necessity and apparently sustainable, in at least some contexts. A pragmatic necessity, if we are to reach the least reached particularly in less-affluent contexts, and sustainable, when motivated by an understanding of the eternal generosity of God. TSME team members operate on a variable compensation/remuneration basis, depending on personal circumstances, along a spectrum from pro-bono volunteer to modest ‘needs based’ income to paid staff.

4. There is a clear value proposition for investors and mentors in the BAM funding space. In the case of TSME, investors are offered back their capital invested in the fund, while simultaneously foregoing any additional incremental personal wealth derived from fund profits. In doing so, they are living out the injunction “to love justice, do kindness, and walk humbly with their God” as they steward a portion of their investible assets specifically for Kingdom-advancing BAM initiatives. Mentors (who are also investors in the fund) pay their way, in some cases with tax benefit, to serve companies in the TSME portfolio. This arrangement offers them an opportunity to have firsthand involvement in missional businesses in closed countries in order to utilize their God-given business-related gifting.

5. There is a compelling value proposition for BAM companies and their investors in receiving competent, wholistic mentoring. In the case of TSME, the mentoring provided has been vital in building relationships of trust with the companies, which then facilitated their growth and acceptance of TSME’s advice to their operations. TSME mentoring has been instrumental in early recognition of looming problems with timely solutions protecting against financial and other loss.

6. There is a subversive value proposition through investing and mentoring through increased interest in BAM with investors and mentors often becoming local advocates for BAM and world mission.

7. Several lessons have been learned in regards to the monetization of services provided to BAM companies and other strategic partners, among them:

    • Most company managers have commented that their cost of capital from TSME is more than justified by the value of the mentoring received;
    • Charging for consulting has proven difficult as many in the BAM space seem to believe that services from Christians should be provided for free;
    • Many companies and mission agencies have been willing to pay appropriately for services and recognize the logic of a commercial service in the BAM world.

Read more about Transformational SME at their website.

The BAM Global Think Tank report on Business as Mission Funding, ‘No Water, No Fish: Funding is Vital to Business as Mission Success and Sustainability’ was published on February 20, 2015 and is available at BAM Global Think Tank.