Given the fact that WilmaFund itself is a new type of company in Africa, and that it will be investing in enterprises that carry high human as well as economic risk, it is expected that WilmaFund's anticipated revenue stream will be subject to much uncertainty.
In response to its risk exposure, WilmaFund is building into its investment program a multi- faceted strategy for risk management. WilmaFund will first endeavor to diversify its risk by making investments in businesses across a number of sectors that add value to the local economy. These will include investments in "vertical" enterprises, ensuring that every link in the market chain is viable, i.e., production, processing, reliable transportation, and distribution.
WilmaFund will manage its aggregate risk by sequencing its investments in a way that gives sufficient priority to relatively sure, fast returning enterprises. WilmaFund, supported by WILMA, will take remedial action quickly if an enterprise encounters correctable problems. These entities will in every case act to preserve and restructure enterprises that are at risk of failure.
WilmaFund will also build into its operational projections a Provision for Investment Loss. As indicated in the Projections Table (PDF, 148kb), this reserve will be built up through annual increments equal to 20% of investments financed by borrowing. This reserve will be available as a form of self-insurance against losses of physical and financial capital invested in the enterprises. It may also be used as a fund for paying exceptional costs of helping enterprises in financial distress to restructure and continue, thus preserving the value of capital that the Fund has already invested.
Profits (after payments to WilmaFund and CDAs) generated in WilmaFund enterprises in the early years will normally be reinvested. However, as majority owner of the equity in these enterprises during their first five years, WilmaFund will reserve the right to use profits from successful enterprises to cover losses from those that may fail.
The first line of compensation for loss at the enterprise level will be other enterprises in the same Community Enterprise LLC. The enterprises constituting a community-based cluster will help one other, being closely linked both economically and socially. The second line of compensation will be the capacity of WilmaFund to shift resources across LLCs and/or adjust portfolio-wide parameters (such as the targeted average rate of return that guides the calculation of royalty rates). WilmaFund will normally use its influence on LLC boards to prevent dangerous accumulation of member debt to outside lenders in the early years.
Unlike conventional equity funds investing in markets that are well served with protective government regulations, reliable legal institutions, insurance and other services, WilmaFund will be making investments in poor and marginalized communities where management skills are few and service institutions hard to access. In order to generate successful enterprises, monitor them, and protect their assets, WilmaFund will need to invest substantially in institution-building. It must develop a network of local partner organizations that have a direct stake in the success of the businesses and whose capacities to monitor them and take responsibility of ownership can be built over time. Led by a world-class management team, WilmaFund will exercise enterprise-specific control of its new enterprises through contracted local business managers. This enterprise management, located within WILMA-certified CDAs, will be the foundation of WilmaFund's strategy for risk management.
The value of all of the enterprises built over the years, and hence the value of the equity conferred to the CDAs, will depend on the overall profit of the WilmaFund portfolio. Furthermore, the success of each individual enterprise will depend on the capacity of WilmaFund and its NGO partners to monitor, preserve and protect its assets. This mutual dependency of the CDAs, the businesses, and WilmaFund is expected to be the basis of their strength.