GPCA: Community Investment Management (CIM) first began investing with a US-only focus in 2014. Can you describe how the firm’s investment thesis has evolved since? What helped you gain conviction to launch your emerging markets strategy in 2021?
Jacob Haar: CIM decided to expand its demonstration-and-scale debt financing thesis to emerging markets (EM) in late 2019 after tracking the growth of EM fintechs for nearly a decade. Despite uncertainty from the global pandemic, CIM launched its EM strategy in early 2021, initially focusing on Latin America and South/Southeast Asia.
In fact, the pandemic accelerated the adoption of the innovative tools that fintechs possess to scale financial inclusion beyond brick-and-mortar microfinance and traditional banks. By embedding finance and lending into the emerging digital infrastructure, these tech-enabled lenders have been uniquely positioned to serve the “missing middle” by reaching SMEs and consumers in a more customer-centric and efficient way.
Much like in the United States several years ago, the EM fintech ecosystem has become a buzzing laboratory of innovation. Despite some global macroeconomic headwinds, there is still significant VC funding, essential spending on infrastructure and regulatory improvements across key EM geographies. In order for EM fintech entrepreneurs to enter the financial mainstream, there is a widespread need for strategic debt capital.
CIM was confident it could leverage its success and scale in the US to expand into the EM fintech ecosystem by virtue of the prior work history of the firm’s founders in EM microfinance, as well as CIM’s eight-person EM-dedicated team (including Partner Bernhard Eikenberg) in Colombia, Indonesia, India and New York. Collectively, we have networks and local market expertise across 40+ countries, allowing us to accelerate the growth and impact of these responsible lenders in the EM geographies most conducive to our strategy.
We understand that CIM’s offering is distinct from typical venture debt. Can you elaborate on your financing approach?
Unlike venture debt lenders that provide working capital to fintechs, we generally provide much larger debt facilities backed by loan receivables that enable the fintechs to demonstrate and scale responsible innovation in lending. CIM lends against the credit portfolios of responsible fintech lenders so that they can reach more creditworthy but overlooked borrowers. We typically structure these facilities as off-balance-sheet, bankruptcy-remote SPVs with first-loss protection in the form of equity from the fintechs. This senior-secured position – combined with over-collateralization, credit enhancements and short underlying loan duration, allows us to support early-stage entrepreneurs at a lower risk level in terms of potential principal and yield impairment.
What is your view on the current role of alternative financing for tech startups in global markets? How does a lender like CIM think about partnering with equity investors to support VC-backed startups?
The ongoing market reset has caused VC investors to become more focused on unit economics and profitability as opposed to growth, and this has generally contributed to tougher equity fundraising conditions. Similarly, this negative financing sentiment exists on the debt side, where many markets experienced an increase in absolute debt costs and longer timelines to raise debt capital.
While these market conditions are not without risks, it highlights the need for a strategic debt provider such as CIM which seeks to partner with the highest quality fintechs with sponsorship by prominent VCs. Despite the fundraising challenges, the most innovative, experienced and successful fintech teams have managed to raise ample VC capital – but still must raise a substantial multiple of their equity financing in the form of strategic debt capital in order to truly scale.
Looking at the big picture, global digitalization has resulted in many EM SMEs and consumers adopting e-commerce for the first time. The lack of traditional financial services has created enormous demand for the products of these EM fintech lenders. The most attractive emerging markets have established reliable fintech regulations and policies to provide clarity and predictability for credit investors. These are the emerging markets that appeal most to CIM – namely Mexico, India, Colombia and Indonesia, among others.
CIM has backed fintechs such as Konfio, Stori, Xepelin, Finkargo, Amartha and Zolve. In your view, what is currently the biggest opportunity within fintech? Are there any common themes across the markets in which you invest?
Given the pace of innovation and the number of underbanked customers in emerging markets, there are numerous areas where digital infrastructure is changing the face of finance and access to credit. SME finance is the main focus for us. This category has often been referred to in international development finance as the “missing middle” with its associated multi-trillion-dollar credit gap. Perhaps the biggest area of focus for CIM is in the SME embedded finance space, characterized by high velocity, short duration, data-rich type assets – often focused on the B2B and B2B2C space – particularly as linked to e-commerce ecosystems and embedded payment solutions. Nevertheless, we are incredibly excited about other big opportunities in loans, credit cards and credit lines, charge cards, advances, subscriptions, revenue-based financing, receivable factoring and other alternative credit arrangements. We also prioritize digital payment solutions and short-duration credit for underserved individuals, such as credit cards, embedded digital checkout platforms and education finance, as well as asset-backed financing with collateral that may be recovered.