What We Do - English title

What We Do

Overview

Gazelle Fund provides growth-oriented risk capital to SMEs in the Eurasia region. Gazelle Finance successfully launched its first investment fund in March 2017, Gazelle Fund LP, with $42M in committed capital in place. The fund is currently active and investing in SMEs in Georgia and Armenia.  As Gazelle Finance raises more capital, it plans to expand further in the Eurasia region. 

Gazelle Fund provides growth-oriented risk capital to SMEs.  SMEs are positioned between microenterprises and large corporations, typically employing less than 250 employees and generating revenues in the range of $200,000 to $15 million in revenues. Gazelle Finance addresses the barriers to SME financing by offering an investment product positioned between bank financing and private equity. This hybrid approach addresses the constraints of market illiquidity that is typical of many emerging and frontier markets, while providing a combination of patient risk capital and the know-how of a strategic investment partner to allow SMEs to rapidly develop and grow their business.  

There are many types of SMEs, though Gazelle Finance specifically targets “gazelles,” defined as businesses growing at or poised to grow at 20 percent per annum for four years or more when provided with access to sufficient capital on reasonable terms. The companies in which we invest have a successful track record and the capacity to grow rapidly. Our investment officers work closely with investee management teams to provide a customized financing solution utilizing our standardized suite of investments and technical assistance products.

Traditionally SME investment funds are plagued by transaction cost inefficiencies and equity structuring impediments, namely targeting unrealistic third party exits, which limit the fund manager's ability to build large portfolios of investments and generate sufficient liquidity to distribute returns to investors. Our model closely aligns the interests of the investors and the entrepreneurs, as it simplifies the equity structuring process, offers strong protections for capital, and eliminates the need for a traditional private equity liquidity event. The investment model streamlines structuring so we can invest in more businesses more quickly. Gazelle Finance is uniquely positioned to scale up a large portfolio of small investments with defined exits, then reinvest the reflows into additional businesses. At Gazelle Finance, the velocity of money is what makes us different.

Investment Process Defined

Investment Process Defined


1. What kinds of companies do we finance?

We focus exclusively on gazelles with established or early-stage operating businesses that have a track record of generating revenues, demonstrate strong management, and possess a well-justified growth strategy, but lack access to bank financing, venture capital or private equity. Please see Who We Finance page for more information.


2. In which sectors do we invest?

We invest in a broad range of sectors typically focused on but not limited to agribusiness, light industry, transportation and logistics, healthcare and education, hospitality and tourism, retail and trade services. Gazelle Finance will not invest in industries typically excluded by development financial institutions such as weapons, tobacco, hard alcohol, and gambling.


3. What is our origination process?

Our investment officers are experienced investment professionals with deep ties in the communities in which they operate. They can do business in their country’s capital and can also reach into the regions of their given country to find the best entrepreneurs.


4. What is our financing strategy?

We provide a customized financing solution based on a set of two standardized financial products are long term (typically 5 years), that can be tailored to the growth trajectory of the company, that have repayment linked directly to the company’s cash flows, and for which a material portion of the investment is unsecured.


5. What are our financial products?

We offer two types of financial products, both of which typically have terms of five years, and which can be provided individually or in combination with each other.

1. Debt with an income participation component and collateral requirements significantly lower than those of banks;
2. Equity investments with pre-agreed terms for a share buyback by the company or its owners.

For well-performing companies, Gazelle Finance is typically able to offer follow-on financing as well.

Along with financing or follow-on 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. Gazelle Finance also provides strategic business support and some technical assistance itself (typically focused on improving financial management).


6. What is the income participation loan product?

Gazelle Finance’s primary product is the income participation loan (IPL). Our IPLs require significantly lower collateral coverage than do banks, and we offer longer term loan tenors than do banks (typically five years) with payment schedules tailored to the growth trajectory of the company (i.e., use of grace periods or other tailored schedules). Our IPLs have a base interest rate typically priced at prevailing market rates, but in exchange for this tailored, patient capital with a higher risk profile, we also secure a small percentage of the revenues of the investee for the term of the loan, similar to a royalty, making a portion of the loan repayment performance based and allowing Gazelle Finance to share in the upside growth of the company. Also reflecting the higher risk profile of our product, Gazelle Finance typically requires a minimum payment on the income participation component of the loan, based on a mutually agreed schedule of company growth projections. This arrangement provides a strong incentive for the business to forecast growth realistically and to work to achieve its revenue growth targets, since falling short of mutually agreed targets results in payments proportionately larger to revenues than intended


7. What is the equity investment product?

Gazelle Finance also offers an equity product, with a higher risk-reward structure than the IPL and allowing Gazelle Finance to be a partner in the business with a more substantial upside and downside stake in the success of the enterprise than with the IPL. Our equity ownership stake is typically less than 35 percent. This equity position gives Gazelle Finance a seat at the table, but not a controlling interest in the company.

The equity participation is exited in multiple tranches in the last few years of the investment period through the cash flows of the company, through a buyback by the company or its owners, on pre-agreed terms. The buyback terms are typically tied to a company performance formula (typically a multiple of revenues or another metric of growth performance). While Gazelle Finance requires a share pledge to guarantee the buyback, the equity product of course requires no collateral. Unlike traditional private equity, Gazelle Finance does not take forced sale or drag-along rights; that is, instead of forcing the entrepreneur/owners to sell the entire company to a third party (which is what traditional private equity investors do), Gazelle Finance simply requires the company to buy back its shares. Gazelle Finance does, however, assume tag along rights, so as to participate in the sale of the company to a third party should the entrepreneur/majority owners choose to do so.

Our investment officers work closely with the entrepreneur/owner of the company to ensure that the necessary company growth and cash flow generation occur starting years in advance so that the company is positioned to pay for the pre-agreed share buyback.

Providing an equity product that does not focus on the sale of the entire company to a third party to achieve exit is a critical and distinguishing feature of Gazelle Finance’s product. The countries in which Gazelle Finance operates lack the presence of larger companies in the market to acquire growing smaller businesses, and they also lack robust capital markets and stock exchanges that could offer a public listing option. Moreover, many of our SME clients are family-owned businesses that have little to no interest in selling their business or allowing an outside investor permanently to own a stake in their company. Gazelle Finance’s equity product, and its IPL product, are designed with these local market realities in mind.


8. What is the role of technical assistance?

Our clients are experts in operating their businesses in their home markets. However, there are often gaps in technical/managerial expertise that limit the company’s ability to grow or opportunities to enhance technical/managerial expertise that can enable more rapid company growth. For this reason, Gazelle Finance typically offers a parallel technical assistance (TA) package to its investee companies that helps them address technical expertise gaps. Our approach is first to leverage existing programs offered by others in a given country, then supplement any technical assistance with the technical assistance offered by Gazelle Finance, made possible by grants from donors interested in our mission. We provide direct strategic business support as well as this grant-funded technical assistance to accelerate growth and improve operational performance of investee companies. We believe that ownership of the technical assistance must come from the entrepreneur, and thus our investment officers work closely with our investees to develop a TA strategy that makes sense to all parties. In addition, we expect the entrepreneur to ultimately bear the cost of third party technical assistance to ensure his or her commitment to the TA plan and thus TA is typically provided in the form of zero-interest loans to the company.


9. Do gazelle finance’s investments come along with other conditions?

Yes, Gazelle Finance investment terms include covenants related to access to information, operational and financial reporting, anti-corruption and compliance with local laws and regulations, and application of Gazelle Finance’s Environmental, Social and Governance Policy.


10. What is gazelle finance’s environmental, social, and governance policy?

Gazelle Finance requires investee companies to comply with all local laws and regulations related to environmental, social and governance (ESG) matters. It also requires investees to sign on to a set of ESG principles. During due diligence, in cases where Gazelle Finance identifies gaps in ESG management or certain significant ESG risks, Gazelle Finance will require the company to develop and comply to an ESG Action Plan to address such issues.