A U.S. government–funded enterprise fund is an organization that is designed to promote the expansion of the private sector in developing and transitioning countries by providing financing and technical assistance to locally owned small and medium-sized enterprises. The U.S. government provides initial capital to an enterprise fund through a grant; the fund may then seek additional capital from the private sector to invest alongside the enterprise fund. Enterprise funds are modeled on investment management in the venture capital industry, in which venture capital is invested primarily in small companies during early stages of their development with the investors monitoring, advising, and following up on operational results. It is expected that some investments will fail, but successful ventures are intended to offset the losses over the long term. The U.S. government initially funded enterprise funds in the early 1990s to promote the development of the private sector in Eastern and Central European countries following the breakup of the former Soviet Union in December 1991. USAID invested $1.2 billion to establish 10 enterprise funds, covering 19 countries in Central and Eastern Europe and the former Soviet Union. In September 2013, USAID issued a lessons- learned report that documented the successes and challenges faced by the Eastern and Central European enterprise funds.concluded that while enterprise funds have demonstrated that they can be a successful tool in achieving positive financial returns and developmental objectives, results to date have been mixed, based upon the economic and political environment in which they operate along with the overall investment strategy and the specific investment decisions made by each fund’s board and management team. The report also stated that, in many cases, the enterprise funds in Europe and Eurasia took up to 2 years before they were ready to make their first investments. In early 2011, the events characterized as the Arab Spring renewed interest in the potential use of the enterprise fund model in the Middle East region as well as in other countries undergoing economic and political transition. EAEF and TAEF were thus modeled after the enterprise funds in Eastern and Central Europe. EAEF was incorporated in October 2012 and funded in March 2013, when the grant agreement between USAID and EAEF was signed. TAEF was incorporated in February 2013 and funded in July 2013, when the grant agreement between USAID and TAEF was signed. The Funds’ authorizing legislation allows them to achieve their goals through the use of loans, microloans, equity investments, insurance, guarantees, grants, feasibility studies, technical assistance, training for businesses receiving investment capital, and other measures. The Funds have a dual mandate, or “double bottom line,” in that they are intended to achieve a positive return on investment while also achieving a positive development effect. The authority of the Funds to provide assistance expires on December 31, 2025. The Funds are established as nonprofit corporations that do not have shareholders and do not distribute dividends. The authorizing legislation states that each Fund shall have a board of directors that is composed of six private U.S. citizens and three private host-country citizens. The authorizing legislation further requires that board members have international business careers and demonstrated expertise in international and emerging markets investment activities. According to a September 2013 lessons-learned report by USAID on past enterprise funds, identifying and recruiting the most experienced individuals to serve on the fund’s board of directors is the single most important element in achieving the fund’s long-term development goals and financial profitability. U.S. board members serve on a volunteer basis, while the Egyptian and Tunisian citizen board members are permitted to receive compensation for their time and services. The Funds’ boards are responsible for establishing their own operating and investment policies and directing their corporate affairs in accordance with applicable law and the grant agreements. EAEF has not made any investments in Egypt, as its first investment, to purchase an Egyptian bank, did not come to fruition. EAEF’s investment strategy had been to purchase a bank that would lend money to small and medium-sized enterprises in Egypt. According to the EAEF Chairman, EAEF envisioned that it would have a greater impact on the Egyptian economy by making one large investment rather than a series of smaller investments. In August 2013, EAEF made plans to purchase a small bank in Egypt and subsequently conducted due diligence on the bank by hiring a large U.S. accounting firm to review the bank’s financial situation, among other things. In June 2014, the EAEF Board of Directors approved a decision to acquire the bank. However, according to the EAEF Chairman, the Egyptian Central Bank rejected EAEF’s application to purchase the bank. As of December 2014, EAEF was considering other investment options. According to EAEF officials, the Fund is now conducting due diligence on potential investments in the food and beverage, healthcare, and consumer finance sectors. The Chairman stated that he anticipates investing $60 million to $90 million in these three areas. Additionally, the EAEF Chairman told us that EAEF plans to consider investments in firms varying in size from SMEs to larger firms. USAID has obligated $120 million to EAEF, of which approximately $588,000 has been disbursed. Costs associated with performing the due diligence review constituted the majority of EAEF’s expenditures through 2014. Specific categories of EAEF’s expenditures include professional (e.g., legal) fees and travel expenses. Thus far, EAEF has spent less on administrative expenses than the approximately $3 million estimated for the first year in its preliminary budget. USAID has obligated $60 million to TAEF, of which TAEF has disbursed approximately $1.6 million, for administrative expenses and investments. TAEF plans to promote private sector development in Tunisia by investing in (1) a private equity fund that supports SMEs, (2) direct investments in SMEs smaller than those targeted by the private equity fund, (3) microfinance institutions, and (4) start-ups. In 2013, TAEF established a subsidiary company in Tunisia—the TAEF Advisory Company—that directly oversees TAEF’s efforts in these four areas. In June 2014, TAEF committed to its first investment of over $2.4 million in a private equity fund that invests in SMEs in a variety of industries, such as telecommunications, agribusiness, and renewable energy. TAEF is one of several investors in the private equity fund; other investors include foreign donors. According to the TAEF Chairman, aggregate investments in the Fund from all sources total approximately $20 million. TAEF officials told us that the Fund will have representation on the equity fund’s advisory committee. According to TAEF officials, the Fund has not yet made any investments in the remaining areas of direct investments in SMEs smaller than those targeted by the private equity fund, microfinance institutions, and start- ups. According to the TAEF Chairman, TAEF is in the process of conducting due diligence on two microfinance entities. Thus far, TAEF has spent less on administrative expenses than the approximately $900,000 estimated for the first year in its preliminary budget. Since their inception, EAEF and TAEF have made progress in establishing key administrative infrastructures necessary to support their investment operations. The Committee of Sponsoring Organizations of the Treadway Commission’s (COSO) 2013 internal control evaluation tool establishes a framework for assessing management structures. As shown in table 1, EAEF and TAEF have made progress in establishing structures for administrative infrastructure, corporate governance, internal control, and human capital management in line with key elements of the COSO framework. Administrative infrastructure Administrative infrastructure refers to the basic systems and resources needed to set up and support organizations’ operations— which also contribute to developing a culture of accountability and control. Since being funded in 2013, EAEF and TAEF have focused on establishing essential administrative infrastructures. EAEF set up its headquarters in New York City, New York. In July 2014, EAEF hired its first employee to occupy the position of Chief of Staff and Director of Policy Planning. According to the EAEF Chairman, EAEF plans to hire an investment manager and a chief financial officer in the future. TAEF has a U.S. office located in Washington, D.C., and a Tunisian office located in Tunis, Tunisia, both of which are led by a managing director. TAEF plans to hire two investment officers in the future. EAEF and TAEF administrative expenses thus far have mostly consisted of professional fees (e.g., expenses for legal and consulting services), travel expenses, and so forth. Corporate governance Corporate governance can be viewed as the formation and execution of collective policies and oversight mechanisms to establish and maintain a sustainable and accountable organization while achieving its mission and demonstrating stewardship over its resources. Generally, an organization’s board of directors has a key role in corporate governance through its oversight of executive management; corporate strategies; and risk management, audit, and assurance processes. The Funds have established bylaws and other rules for corporate governance. The bylaws cover the purpose of the Funds, voting rules, and the duties and responsibilities of corporate officers. The boards of both Funds have met regularly since their inceptions. In addition, the Funds have established corporate policies and procedures, which USAID has approved. In November 2014, the EAEF Board of Directors established several committees, including an investment committee, a governance and nominating committee, an external relations committee, and an audit committee. EAEF and TAEF each have to fill two vacant board member positions, one for a U.S. citizen and the other for a host country citizen. EAEF and TAEF are currently considering potential candidates to fill the vacant positions.