What Makes Us Different
What sets the Gazelle Finance investment model apart from that of other providers of SME financing—and enables us to operate successfully where others cannot—is our financing product, which is similar in risk profile to mezzanine financing, but self-liquidating through pre-agreed re-payment terms for the investee. We have identified a market niche in the provision of SME finance, where we can operate on the risk-reward curve between banks and private equity funds.
Banks are highly regulated as a result of having retail depositors, and as such, are primarily asset-backed lenders, with their analysis focused first and foremost on security and collateral of their clients as opposed to analysis of their clients’ long-term growth strategies. This approach limits the ability to offer a risk capital product for successful, fast-growing SMEs, which often have already extended all of their available collateral to finance past growth.
On the other end of the spectrum, traditional private equity funds do provide risk capital, but they aim to generate their returns by selling their equity stakes in investees to third parties through trade sales or public listings. For the vast majority of SMEs in Gazelle Finance’s target markets, achieving exits through liquidity events such as these is highly unrealistic. Thus, Gazelle Finance vets its prospective investees and structures its investments to be sure that it can exit each investment position through the cash flows of the given investee.
Our financial products are similar to private equity products in that we provide risk capital highly tailored and aligned to time with the company’s cash flows and development needs and by serving as a partner to the investee. However, by focusing on two standardized types of products (each with a certain level of structuring flexibility) and streamlining our transaction processes, by taking some security (i.e., collateral, but at levels significantly lower than banks) and by structuring exits through the cash flows of the company, we operate somewhere on the spectrum between private equity funds and commercial banks. Likewise, we are able to invest in volumes greater than that of private equity funds, though still less than banks.
Gazelle Finance’s primary product is debt, in the form of an income participation loan (IPL). Our IPLs require significantly lower collateral security coverage than do banks, and we offer longer term loan tenors than do banks, typically five years. Our IPLs have a base interest rate priced at prevailing market rates, but in exchange for this tailored, patient capital with a higher risk profile due to lower collateral levels, we also secure a small percentage of the revenues of the investee for the term of the loan, similar to a royalty, allowing us to share in the upside growth of the company.
Gazelle Finance also offers an equity product, with a higher risk-reward structure than the IPL. Our equity ownership stake is typically less than 35 percent, allowing Gazelle Finance to have a seat at the table with our investees as a minority shareholder and to be a partner with a more substantial stake in the success of the enterprise than with the IPL. The equity participation is exited in multiple tranches in the last few years of the investment period through the cash flows of the company, typically through a buyback by the company or its owners, on pre-agreed terms, avoiding the need for third party sale.
Along with financing, Gazelle Finance also offers technical assistance to our investees, to enhance the capabilities of management to achieve company growth. Made possible by a special grant from donors interested in our mission, technical assistance is provided in the form of zero-interest loans, usually up to 10% of the total investment amount. These funds are typically used to engage consultants to address critical managerial or other business needs that can enhance the company’s growth trajectory.
By deploying a blend of these three deal elements---income participation loans, self-liquidating equity investments, and technical assistance---the entrepreneur and investor are essentially partners focused on achieving long-term growth of the company. Moreover, both entrepreneur and investor can focus on such growth without the distraction of preparing the company for sale of the entire business to a third party. We believe the Gazelle Finance approach to SME finance creates better alignment of interest between investors and owner-operator companies than is found among private equity investment and bank lending. Moreover, it addresses the gap in the SME market segment for active, hands-on investing typically associated with corporate private equity investing, minus the punitive nature of private equity redemption rights.