Enterprise Funds: A Private Sector-Led Model for U.S. Development Policy
by Cornelius Queen
Enterprise funds are an innovative tool of American foreign policy that represents the future of U.S. and private sector-led development. Enterprise funds are U.S. government-seeded investment funds that promote private sector development abroad. They help to strengthen the private sectors of local economies by providing equity financing to companies looking to grow their business and reach new markets.
While similar in function to traditional venture capital or private equity, enterprise funds have a dual mandate to generate financial returns and promote economic development in host countries. Moreover, these financial returns can be returned to the U.S. government, which means that enterprise funds help pay for themselves. As the Trump administration seeks to leverage the private sector to advance its foreign-policy agenda, enterprise funds could be the centerpiece of a new U.S. private sector-led development strategy.
Brief History of Enterprise Funds
President George H. W. Bush introduced the first enterprise funds in the early 1990s in former Soviet states and in Central and Eastern Europe. The funds were designed to strengthen the private sectors of these countries by supporting their transition from centrally planned to market-based economies. The Support for Eastern European Democracy (SEED) Act authorized the creation of the first two enterprise funds in Hungry and Poland totaling USD 300 million. Additional enterprise funds were later expanded to other countries in Central and Eastern Europe, the former Soviet Union, the Baltics, and Central Asia.
The first wave of enterprise funds was largely successful while a few funds faced challenges such as corruption and weak regulatory frameworks. According to a USAID study, the United States invested USD 1.2 billion in enterprise funds in Europe and Eurasia, which produced USD 1.7 billion in net proceeds. Enterprise funds also attracted USD 6.9 billion in foreign capital and helped sustain 300,000 jobs as a result of their investments and development impact. Additionally, the funds returned USD 225 million to the U.S. government. The remaining proceeds have been used to establish ten legacy foundations, which continue to promote private-sector and civil-society development in host countries after their liquidation.
Reintroduction of Enterprise Funds Post-Arab Spring
In 2011, President Obama introduced two new enterprise funds in Tunisia and Egypt to help address the underlying economic issues that drove the Arab Spring revolutions. Like their predecessors, these funds have a dual mandate to generate financial returns and promote economic development. Moreover, they are results-driven, entrepreneurial, and flexible, allowing them to develop investment strategies tailored to the needs of their local economies.
For example, the Tunisian American Enterprise Fund (TAEF) targets small- and medium-sized enterprises (SMEs), which are the backbone of Tunisia’s economy, accounting for more than 90 percent of private enterprise funds. The TAEF invests across the SME sector, from microfinance institutions to mid-sized and large SMEs and startups. The TAEF’s innovative, SME-driven investment strategy includes funding for Flat6Labs Tunis, a startup accelerator that targets early-stage companies with seed funding and technical support to jumpstart their operations, and the Tunisian American Search Fund (TASF), which helps entrepreneurs search for private businesses whose owners seek financial growth or new management. By the end of 2017, the TAEF had invested USD 38 million in Tunisian SMEs out of a total of USD 100 million in committed capital by the U.S. Congress, and helped sustain over 7,000 jobs.
The Egyptian American Enterprise Fund (EAEF), which operates in a different context than Tunisia, and initially faced distrust as a U.S.-backed investment entity, adapted a unique but equally robust investment strategy. This strategy included seeding a local asset-management company staffed entirely by Egyptian investment professionals with a deep understanding of the local market. Placing local citizens at the forefront of enterprise funds is critical to understanding the market and building trust in host countries.
EAEF targets investments that create jobs, improve Egyptians’ quality of life, and promote financial inclusion. In a country where only one in three Egyptians has a bank account, expanding access to financial services is critical for entrepreneurs seeking to expand their businesses and for improving Egyptians’ standard of living.
To address this challenge, the EAEF’s two biggest investments have been in Fawry, an electronic payment network, and Sarwa Capital, a consumer finance company. Fawry provides mobile wallet services to Egypt’s large unbanked population and allows citizens to pay utility bills and access government services via its 65,000 kiosks around the country. Sarwa extends credit to SMEs to grow their businesses and to young, first-time buyers to help pay household expenses. As a testament to the success of these investments, Sarwa will have an initial public offering (IPO) on Egypt’s stock exchange in late September 2018, generating a windfall of profits that can be reinvested in Egypt’s economy.
To date, the EAEF has invested USD 131 million in four companies and three investment funds. It has attracted an additional USD 149 million in foreign capital, which means that approximately USD 280 million has been invested in Egypt’s private sector because of the enterprise fund.
A Model for Private-Sector-Led Development
The Trump administration’s efforts to leverage the private sector present a unique opportunity to expand enterprise funds to countries of geostrategic importance to the United States. In fact, the BUILD Act, which has passed in the House and awaits a full vote in the Senate, allows for the creation of new enterprise funds alongside a new Development Finance Institution (DFI) that seeks to mobilize private-sector-led development.
Enterprise funds represent the best of the private sector. They are nimble, results-driven and flexible. They have proven to create jobs, generate financial returns, and attract additional capital to leverage U.S. government funding. With a growing consensus for the need to mobilize the private sector to achieve global-development objectives, including the United Nations Sustainable Development Goals, enterprise funds merit renewed consideration from U.S. policymakers as a pioneering instrument of U.S. foreign policy.
Image: Aerial View of Cairo
Courtesy of Andrew A. Shenouda / Flickr
Cornelius Queen is a second-year graduate student at The Fletcher School of Law and Diplomacy, where he concentrates in international business relations and the MENA region. Prior to Fletcher, he helped manage a humanitarian aid program for Syrian and Iraqi refugees in Lebanon. Previously, he served as a Legislative Assistant for now Senator Chris Van Hollen in Washington, DC. Cornelius has also served on election observations committees with the OAS and the Carter Center in Haiti and Egypt, respectively. He holds a B.A. in International Relations and Economics from Johns Hopkins University.