Private equity grows, but micro firms still face funding gap
O n one level, development bankers are satisfied with the continuing maturity of the private equity and venture capital markets, which the Development Bank of Jamaica, DBJ, has spent the last seven years nurturing.
But at another level, they concede that the small deal flows for micro firms are not as robust.
As evidence of the growth, head of the venture capital programme at the bank, Audrey Richards, is pointing to the US$340 million, or J$47.4 billion, for investment in Jamaica and the Caribbean raised over the period by fund managers, many of them trained under the venture programme to understand and promote these types of assets.
The Jamaica Venture Capital Programme was launched in 2013 with assistance from the Inter-American Development Bank, IDB, to bridge the gaps in getting financing to micro, small and medium enterprises, MSMEs. Under the programme, entrepreneurs get the opportunity to pitch their business ideas to fund managers for financing.
These alternative investment vehicles channel cash to businesses, many of which find it hard to access financing for operations and growth.
Typically, small firms with annual turnover of between $15 million and $175 million, as well as medium companies with gross revenues of $75 million to $454 million, get in on the private equity action. However, microenterprises, especially start-ups, generally have to look to venture capital and other facilities for funding.
The guiding policy of the government-owned Development Bank of Jamaica is that private equity is a private-sector activity.
“Our focus has been on getting the private sector to continue leading the development of the private capital markets. We have acted as a catalyst, and we believe that the private sector must provide leadership,” Richards told the Financial Gleaner in an interview, noting that listed equity and real estate are the main investment types competing for financing.
The increased take-up of private equity and venture capital opportunities has been helped by the entry of pension funds following the recent regulations amendments permitting their entry into these alternative investments.
The DBJ’s catalysing of the private equity market has involved investing US$4.25 million, or little more than $590 million, into five of these funds, namely: Portland Private Equity that invests in growth projects, including in Colombia; Caribbean Mezzanine Fund that, while being quasi-equity, is more tailored to debt financing; Sygnus, which also offers private credit; MPC Caribbean Clean Energy Fund, which invests in energy infrastructure; and SEAF Caribbean with investments in Jamaica and the Caribbean.
Some of these funds and also invest in Central America. And Sygnus recently launched its private equity fund in collaboration with Sagicor Investments Jamaica Limited.
There is now a call for proposals for fund managers interested in raising small and medium enterprise, SME, funding. The fund is being kick-started with US$5 million from the Government, with another US$10 million to the raised by the fund manager.
“We don’t invest directly in businesses. Our strategy is that this is a private capital industry. Our focus has been to get the private sector up the curve in understanding the asset class, getting new fund managers able to establish funds and raise capital from private capital sources and international development partners,” said Richards.
The DBJ official emphasises the importance of fund managers matching their investor’s money with the particular assets types that suit the individual or group’s risk appetite. As such, she was careful to make the distinction that private equity as an asset class was not homogenous.
Infrastructure-type funds that invest in a power provider with a solid agreement with a utility company, covering 20 years of steady and guaranteed earnings, are akin to fixed-income investments, she said, while a venture capital company investing in a technology business is more uncertain, and therefore more risky, although the returns could be phenomenal.
“So, it is important that when a fund manager comes to raise capital, the potential investor is able to interrogate their strategy and be very clear which end they are and them match their investment appetite to the fund type,” she said.
For Richards, building the capacity of private sector-led funds provides the avenue for the creation of value in companies.
“What a private equity fund is now looking for is possibly family businesses that are going through some kind of restructuring, or companies that could benefit from capital, or from professional management ... a private equity fund will look for these growth-type companies and invest, and then after a period of investment and restructuring, they can list them as IPOs,” she said.
None of the DBJ-invested funds have had exits in terms of IPOs, but Richards says this could happen in the near future.
The DBJ consultant says that there remains a gap in terms of funding at the micro and small business levels. Initiatives pursued by other departments within the bank are said to focus on bridging that gap.
In the meantime, the angel investor networks are making an important mark in this area by taking stakes in small businesses beyond start-up that are deemed scalable, she said. Of some 90 micro and small businesses that have participated in weekend investment pitches over the past year, several are said to have received equity investment totalling more than $70 million.
Additionally, the Government is about to roll out as part of the 2020-21 Budget, a programme to seed start-ups from a $50 million allocation.
A $12-million pilot project is also about to get under way within the DBJ to seed 12 tech start-ups over 12 months, with each receiving $1 million in addition to mentorship.