23

# **Annex 1 Definitions: Micro-, Small, and Medium Enterprises, Technical Assistance, and Private Equity**

## **a).  Definition of Micro-, Small, and Medium Enterprises**

SMEs lack a universally accepted definition among stakeholders in the SME PE market, and so this study relies upon the definition put forward by the IFC in the _Interpretation Note on Small and Medium Enterprises and Environmental and Social Risk Management,_ dated January 1, 2012. This note defines SME in terms of three variables: revenue, size of the labor force, and total assets. In order to qualify as an MSME, an enterprise must demonstrate two of three indicators in Table A1.

## **Table A1 Definition of SMEs**

|Indicator|Micro-enterprise|Smallenterprise|Mediumenterprise|
|---|---|---|---|
|Employees|<10|10–50|50–300|
|Total assets|<$100,000|<$100,000–3,000,000|$3,000,000–15,000,000|
|Total annualsales|<$100,000|<$100,000–3,000,000|$3,000,000–15,000,000|

_Source:_ IFC.

## **b).  Definition of Technical Assistance**

In developing markets, specifically among businesses operating in the SME space, entrepreneurs are held back by a lack of business training, expertise, and market networks, which translates into missed opportunities and deficient financing. TA refers to a set of services provided to businesses, including for the purposes of this study, the companies in which PE firms invest, also known as portfolio or investee companies. Such services, whether provided by either the PE or VC firm or third-party service providers (technical experts or financial/transaction advisors), essentially serve to accelerate the investment and enhance the commercial viability of the business.

## **c).  Definitions of Terms Specific to the VC and PE Industry**

The following terms are helpful to understanding the PE and VC industry in the markets discussed in this study:

- _Private equity (PE):_ PE refers to investments in established, often medium or large, companies. Frequently, however, the term “private equity” is used to generally refer to all private capital investments (inclusive of PE and VC).

- _Venture capital (VC):_ VC refers to investments made in start-up and very early stage companies. In developed markets, VC typically refers to technology-related investments, but in developing markets, the definition often includes any early-stage or start-up enterprise.

- _General partner (GP):_ VC and PE firm structures differ depending on geographic and other considerations, but a fund manager is typically known as a general partner.

- _Limited partner (LP):_ Investors in VC or PE firms, whether they be foundations, endowments, HNWs, medium-net-worth individuals, or DFIs.

- _Management fee:_ A fee charged by a VC fund or PE firm to compensate the manager for its expertise and role and to cover other items such as investor relations, operations, and administration costs of the fund. In developed markets, this fee is usually equal to 2 percent of funds under management, but for smaller funds in developing markets, it may be higher.

- _Carried interest:_ A share of profits that the GP receives if the fund yields a positive financial return. Typically, managers receive 20 percent of fund profits in excess of a minimum hurdle rate (such as 8 percent). Some impact or funds in developing markets do not have hurdle rates, so the GP shares in all profits. Funds also may be structured so that their carry is partially determined by predetermined social impact measures and targets (e.g., job creation).