Micro-Equity for Microenterprises
Many microenterprises in developing countries have high returns to capital, but also face risky revenue streams. In principle, equity offers several advantages over debt when financing investments of this nature, but the use of equity in practice h...
| Main Authors: | , , |
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| Format: | Working Paper |
| Language: | English |
| Published: |
World Bank, Washington, DC
2019
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| Subjects: | |
| Online Access: | http://documents.worldbank.org/curated/en/647381554128100263/Micro-Equity-for-Microenterprises http://hdl.handle.net/10986/31494 |
| Summary: | Many microenterprises in developing
countries have high returns to capital, but also face risky
revenue streams. In principle, equity offers several
advantages over debt when financing investments of this
nature, but the use of equity in practice has been largely
limited to investments in much larger firms. The authors
develop a model contract to make self-liquidating,
quasi-equity investments in microenterprises. This contract
has three key parameters that can be used to shift risk
between the entrepreneur and the investor, resulting in a
continuum of contracts ranging from a debt-like contract
that shifts little risk from the entrepreneur to a pure
revenue-sharing contract in which the investor absorbs much
more of the risk. The paper discusses implementation
choices, and then provides lessons from a proof-of-concept
carried out by an investment partner, KGC Equity, which made
nine investments averaging $3,800 in Sri Lankan
microenterprises. This pilot demonstrates that this new
contract structure can work in practice, but also highlights
the difficulties of micro-equity investments in an
environment with weak contract enforcement. |
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