Gazelle Fund LP

Gazelle Finance makes growth stage investments to bridge the funding gap facing underserved SMEs in Europe and Asia including increasing wages and employment opportunities and business opportunities for small farm holders.

Gazelle Finance is establishing a $70M fund to make growth stage investments in underserved small and medium enterprises (SMEs) in the Eurasia region. Gazelle Finance is positioned to achieve a first close at a minimum of $27.5M by mid-2016 (with $27.5M committed to date). The Fund will have a second close within 1 year thereafter.

The fund will invest in ~150 fast-growing SMEs (“gazelles”) in Georgia, Armenia, Moldova, and Kyrgyzstan, in the form of income participation loans and self-liquidating equity investments, ranging $100k-$1M per deal. Gazelle Finance’s high-volume royalty finance model for SMEs is based on BPI, a reputable firm investing in Africa with $300M AUM.

The fund has a double-bottom-line goal: commercial financial returns and development impact on local economies through investee growth. While there is some DFI capital in the region to support SMEs, it is almost exclusively allocated to large commercial banks. Such capital misses fast-growing SMEs that lack the collateral banks require. Gazelle Finance’s provision of risk capital to SMEs (with <$4M in annual revenues) addresses the “missing middle,” a segment poised to drive value addition, import substitution, exports and economic growth.

Financial description

We provide a tailored, patient (5-yr) financing solution based on the SME cash flows using 2 product types: (1) Income Participation Loan (IPL): Our primary product, this is structured as a term loan with a fixed interest rate comparable to bank rates plus an income participation (% of the company’s revenues). While banks typically require collateral well over 100% of loan value, we typically require 25-50%. The income participation. component represents a premium on pricing in exchange for the higher risk profile of the loan. Denomination will be USD (though the income participation has no denomination), but local currency loans may be considered depending on future market dynamics. Target gross IRR for IPLs is 17-23%. (2) Equity investments: Minority investments with pre-agreed buyback terms. We will not invest with the intention of achieving a 3rd party exit, as this is unrealistic in the target markets; nor will it take drag-along rights. A put option will require the owners to buy back the shares progressively over years 3-5.Target gross IRR for equity investments is 25-30%.
The Fund will be close-ended, with a 10-yr life (optional 1-year extension), including a 5-year investment period (option 1-yr extension). Investment reflows will be reinvested in years 1-5. At a $27.5M fund size, the management fee will be 4%, decreasing progressively to 2.75% for a $70M fund size. Projected Net Fund IRR is 10.4% for $27.5M fund size and 13.9% for $70M.