NextBillion - A WDI Publication

Despite years of emphasizing the need to reach underserved businesses, the impact investing sector is increasingly focusing on lower-risk opportunities. According to GIIN data, mature, publicly traded companies have drawn the largest increase in impact assets over the past six years, followed by mature private companies, while seed-stage enterprises were the only segment to contract. The issue is not a lack of financial instruments designed to serve this segment: First-loss tranches, portfolio-level guarantees, concessional capital, and commercial debt and equity are among several existing options that can suit their unique needs. The problem is that the same thin set of investment-ready deals in high-income regions receive capital from fund after fund, while a vast band of enterprises with real revenue, real demand and real growth potential remain locked out of formal capital markets.

Consider a four-year-old dried food cooperative CARE worked with in West Africa: It has active export contracts to the European Union, audited financials, and a defaulted loan rate of zero. Its immediate financing need is $40,000 in working capital to meet seasonal demand. Yet it has struggled to acquire this funding, as there are few commercial products designed for that ask. The cooperative is too large for microfinance, too small for micro, small and medium enterprise (MSME) funds, and too aggregated for direct equity. So the capital does not flow.

This challenge goes beyond one cooperative. It affects an entire asset class that the impact investing field does not name, size or build products around: aggregated MSMEs. These consist of individual enterprises that have joined together to contract and borrow as one, either formally as a cooperative, or informally through a producer association or collective enterprise that brings multiple individual MSMEs together around a shared market, value chain or commercial activity.

At CARE, we work across all of these different forms of aggregation, and see them emerging across low- and middle-income markets. We help these MSMEs organize and strengthen their businesses, often leveraging funding from the savings groups we help them join or organize. We also support them through other producer and enterprise networks, and connect them to financial institutions and markets. As a result, we’ve had a direct view of both the investment opportunity these aggregated enterprises represent, and the reasons many funders are missing this opportunity.

The Asset Class Hiding in Plain Sight

Aggregated micro, small and medium enterprises exist in sectors like renewable energy, digital commerce and the care economy, but they have primarily been concentrated in agriculture, trade, processing and related services. Whatever their focus area, these aggregated MSMEs sit in a structural gap that current investing architecture has not been designed to fill, with loan needs that typically range from $500 to $50,000.

However, their financial behavior is becoming increasingly visible. For instance, Root Capital’s track record over two decades demonstrates that aggregated agricultural enterprises can be a viable lending segment when financing models are designed around their realities. As an impact investor, it has provided debt financing to hundreds of agricultural MSMEs, including some that aggregate smallholder producers, and evidence from its portfolio shows that many of its borrowers (42%) later gain access to commercial finance.

This ongoing traction with funders shows that the aggregated MSME segment includes viable borrowers with evidence of successful repayment. The missing piece is a recognition from other impact and commercial asset managers of these enterprises’ investment potential.

Why the Gap Persists

The impact investing field has organized itself around instruments rather than enterprise types. Conferences debate first-loss structures, guarantees, viability gap funding and concessional debt mechanics. Far less attention is paid to the question of what asset class those instruments are designed to serve, including at the bottom of the value chain. In the investment structuring conversations I sit in, the debate is almost always about the design of the instrument: where first-loss capital sits, how guarantees are priced, how the tranches stack. The questions of which borrower segment the deal is meant to serve — or whether anyone has even defined the segment — rarely come up.

The result is a market with sophisticated supply-side architecture but a less-developed demand-side infrastructure for aggregated MSMEs. The market lacks widely adopted underwriting standards specific to this asset class, as well as shared methodologies for sizing the addressable market, and for pricing and compensating the origination work required to quantify these borrowers’ informal economic activity so they can become investable. Of course, there are real frictions — like high transaction costs, currency risk, weak legal enforceability and limited exit pathways — that compound the problem and reduce investors’ incentive to solve it. These are not insurmountable, but they remain unaddressed because impact investing has not yet widely recognized aggregated enterprises as a distinct investable segment.

A recent piece in NextBillion by leaders at Pangea Africa and Social Finance International made an important contribution to the conversation around strengthening the broader impact investment pipeline, by proposing a financing model for business advisory service providers serving African MSMEs. The argument here goes one level deeper: Before investment facilitation can scale, the asset class itself needs to be defined. This requires a shared understanding of the enterprise type, common approaches to underwriting and measurement, standard risk and return characteristics, and the infrastructure to connect capital with investable opportunities. Without these shared definitions and connections, capital providers may continue to view these enterprises as fragmented, high transaction-cost opportunities that do not fit their established investment models.

What Building the Aggregated MSME Asset Class Requires

To build this asset class, the impact investing sector must focus on the three key priorities that would change the status quo and make aggregated MSMEs more visible and accessible to investors: formal definitions, underwriting standards and pricing the origination function.

First, a formal definition of the asset class — with sizing data — is needed. This will require a credible global sizing of the addressable market, along with consistent reporting categories that allow capital allocators to compare risk, return and performance across investment opportunities (including across geographies and aggregation models), and that facilitate portfolio construction at scale. The SME Finance Forum provides a useful precedent: By collating official MSME definitions and related data across economies, it has made a highly diverse segment more visible and measurable, even though national thresholds for what qualifies as a “micro, small or medium” enterprise vary. The Global Impact Investing Network, Convergence and leading development finance institutions already perform similar field-building functions across the capital ecosystem by convening market actors, developing common frameworks and aggregating data, making them well-placed to establish shared definitions, sizing methodologies and reporting categories for aggregated MSMEs.

Next, we need to build underwriting standards for aggregated enterprises, not just individual ones. Aggregation changes the underwriting calculus in ways that traditional MSME credit models do not capture, because characteristics that exist at the collective level — group governance, cooperative financial discipline and verified repayment behavior — become material indicators of creditworthiness that may stand alongside or in place of some indicators used to assess individual enterprises. These signals should be formalized into standard underwriting frameworks that ultimately apply to both impact investors and commercial lenders, so capital providers can assess aggregated MSMEs’ creditworthiness and price these loans more consistently, extending the pool of available capital beyond specialist lenders.

Finally, it is imperative to price in the origination layer. The work of moving enterprises from early-stage and financially underserved into investable form is typically financed by donor-funded technical assistance and business development services rather than through a market mechanism that explicitly prices the origination function. These funding sources will remain important, but they should be only one part of the financing model, particularly as concessional resources become scarcer. Origination has a price that ought to be considered, structured into deal architecture, and rewarded as a critical component of the capital deployment process. If the functions that create investment-ready enterprises remain uncompensated, they will continue to be underprovided despite the value they create for capital providers. Origination fees, technical assistance funding structured within deal architecture, and performance-based payments tied to capital deployment are all workable models worth exploring.

A Working Example of How to Finance Aggregated MSMEs

My perspective on how best to finance aggregated MSMEs comes from leading CARE’s Rise platform. At the heart of Rise is a simple observation: Many financially underserved microenterprises become investable when they are aggregated through savings groups, producer organizations or cooperatives and connected to financial institutions as a visible, assessable pipeline.

CARE has enabled access to savings groups for over 30 million people across 67 countries, with about 25 individuals in each group — many of whom use these funds to establish individual and group enterprises. Aggregating these MSMEs into producer associations, cooperatives and other organized enterprises creates an investable unit that can be assessed, strengthened and connected to commercial finance. These aggregated MSMEs form a pipeline through which enterprises can access growth capital from financial institutions, and enter commercial value chains by engaging with input suppliers and buyers.

We work in both directions to build this pipeline: On the MSME side, CARE helps enterprises strengthen governance, achieve investment readiness and digitize their financial records. On the funder side, we work with financial institutions, buyers, governments and local partners to improve market access and connect enterprises to appropriate financial products. Where aggregated MSME markets have not yet matured, we use instruments such as time-limited first loss guarantees, origination incentives and structured technical assistance to help bridge the costs of market entry. Taken together, these activities (among others) perform the origination function by transforming fragmented enterprises into investment-ready opportunities.

Our results illustrate what building an asset class looks like in practice. For instance, CARE partnered with Kazi Yetu, a Tanzanian tea social enterprise, to help women tea farmers move beyond primary production into value addition and formal markets. As part of this effort, members of some of the local savings groups we facilitated evolved into a cooperative that collectively invested in tea processing, developed stronger demand linkages through an auction, and participated in a women-led processing factory. The cooperative increased its income by 546% by selling processed tea rather than green leaves, and the Government of Tanzania committed to replicating the model through five additional processing factories. Women also gained stronger links to formal business registration systems and financial services, making future access to capital more feasible.

In Vietnam, CARE supported women coffee farmers’ efforts to organize into producer groups, leading to the formation of the Ara Tay Cooperative, which leverages regenerative agriculture, enterprise development, technical assistance, market intelligence and commercial partnerships to move producers into higher-value specialty coffee markets. As part of this work, we recruited an international coffee expert to provide onsite coaching in processing and roasting techniques, enabling the cooperative to meet specialty coffee standards and compete nationally. Rather than financing individual farmers in isolation, this aggregated approach led to the creation of a commercially viable cooperative enterprise capable of producing, marketing and selling higher-value products.

In both cases, CARE performed the aggregation, enterprise development and market linkage functions that helped turn fragmented producers into viable, investable enterprises. Yet despite the value it created for market actors, our work was subsidized by donor funding rather than financed as part of the investment process. These experiences support our broader conclusion: Building an investable asset class requires more than financial instruments. It requires deliberate investment in aggregation, enterprise readiness, standardized underwriting and origination. Once those market functions exist, guarantees, blended finance and commercial capital become considerably more effective because they are financing enterprises that have already been organized into a form the market can recognize.

Conclusion

The aggregated MSME asset class is not waiting to be invented. The borrowers exist, the demand is documented, and the capital is sitting on the sidelines waiting for a market to receive it. What remains is the work of defining the asset class, building standards around aggregated enterprises, and pricing the origination work that makes deployment possible.

That work is unglamorous, but it is the precondition for everything else. Until the field treats these enterprises as an asset class, the impact investing market will keep recycling through the same deals, and cooperatives, producer associations and savings-group-graduated enterprises will remain systemically overlooked.

Dr. Adanna Chukwuma is Associate Vice President for Economic Growth and Private Sector Engagement at CARE USA.

Photo credit: Sebastian Soto