, Capacity building can improve SME management capacity, market - - PowerPoint PPT Presentation

APPROACHES TO SME FINANCE

KOREA INSTITUTE OF FINANCE-THE WORLD BANK JOINT CONFERENCE

Isfandyar Z. Khan d l i Europe and Central Asia World Bank ikhan2@worldbank.org @ g

CONTENT CONTENT

Universe of SMEs The ABC of Government Intervention Various programs for support Key Takeaways

World Bank Group World Bank Group-

• Seoul April 3rh 2013

Seoul April 3rh 2013

COMPANY RISK, CAPITAL REQUIREMENTS AND TYPES OF GOVERNMENT

INTERVENTION Companies who work with new products have a longer development horizon (high tech segment – like life sciences, clean tech and IT) Risk profile is high, not suitable for debt financing Risk profile is high, not suitable for debt financing Companies that have a short development timeline and may already have a product and/or the first customers Risk profile is low, can typically be suitable for debt financing,

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CONTENT CONTENT

Universe of SMEs The ABC of Government Intervention Various programs for support Key Takeaways

World Bank Group World Bank Group-

• Seoul April 3 2013

Seoul April 3 2013

PUBLIC SECTOR INTERVENTIONS APEXES AND OTHER WHOLESALE FUNDING FACILITIES

Preconditions for successful application of an apex model include:

• Prioritize the development of sustainable finance providers

h i i i h i d d

• Ensure the apex institution has a strong independent governance structure
• Apply a funding policy based on clear selection criteria
• Apply commercial (not subsidized) interest rates
• Ensure the capacity to evolve and adapt its mission and products
• Introduce flexible and market reactive disbursement plans
• Ensure high quality operational management and staff skills

Ensure high quality operational management and staff skills

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PUBLIC SECTOR INTERVENTIONS PARTIAL CREDIT GUARANTEE SCHEMES SME BANK

Loan Application

Coverage ratios should ensure sufficient

t ti i t d f lt i k

SME BANK

Loan Disbursement, Repayment protection against default risk

Fees should be risk‐based and contribute

to financial sustainability Allocates Guarantees based

Example: FOGAPE, Chile

Payment rules should take into account

effectiveness of collateral and insolvency regimes

• n lowest %

covered(bidding process)

PCGs can support the capacity (skills,

systems, products) of banks to provide SME finance

Guarantee Program

Evaluation mechanism: to measure

• utreach, additionality and sustainability.

‐Fee varies by FI, depending on loss (claim) rate ‐Loss rates (default) less than 2% ‐FIs keep responsibility for analysis and collection

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FIs keep responsibility for analysis and collection

PUBLIC SECTOR INTERVENTIONS SME CAPACITY, CREDITWORTHINESS ,

Capacity‐building can improve SME management capacity, market knowledge expertise and make SMEs more attractive to finance providers

• Capacity building should customize content for specific groups of entrepreneurs

knowledge, expertise, and make SMEs more attractive to finance providers

• Both public and private organizations have a role to play in capacity building
• Donor support may be needed to ensure effective data and monitoring

mechanisms in benchmarking and program evaluation

Turk Economici Bank (private) Turk Economici Bank (private)

• Its capacity building support has resulted in a decrease in loan delinquency rates in its SME

portfolio, new client acquisition and greater customer loyalty.

• The primary goal of training is to build SME competitiveness and strategic planning capabilities,

helping SMEs to take a market‐centric approach to their businesses, giving them the tools to identify and respond to new opportunities for products and services.

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REGULATORY AND SUPERVISORY FRAMEWORKS ENABLING REGULATORY FRAMEWORKS FOR ALTERNATIVE SME FINANCE PRODUCTS: LEASING

A legislative framework for leasing should

Clarify rights and ibiliti f responsibilities of the parties to a lease Remove contradictions within the existing Clarify the rights

• f lessors and

lessees under existing legislation bankruptcy. Create non‐ judicial repossession Ensure tax rules are clear and t l p mechanisms neutral

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FINANCIAL INFRASTRUCTURE SECURED TRANSACTIONS

Develop simple laws and regulations based

• n best practice
• n best practice

principles Create unitary legal ST systems not Establish clear priority schemes for ST systems, not fragmented priority schemes for claims on collateral. Ensure a broad scope of secured transactions law Modernize movable collateral registries Allow all types of Simplify the creation Allow all types of assets to be used as collateral Simplify the creation

• f security interests

in movable property

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ARGUMENTS FOR GOVERNMENT INTERVENTION

• Leads to principal-agent problems such as moral hazard,
• Investors and banks are not able to correctly assess the differences

A t i

• Investors and banks are not able to correctly assess the differences

in risk adverse selection leads to “adverse selection”

• lead to market imperfections and sub-optimal allocation of

capital Asymmetric information cap ta

• Guarantee schemes have assumed a crucial role to help maintain

the flow of credit to SMEs and support the growth of these companies A id “d d i ht” ti f th l hi h ld h Credit Rationing

• Avoid “dead weight” proportion of the loans which would have

bee granted anyways and constant reassessment

• Completely or partially remove some of the cost of a “first-mover

Experience building disadvantage”

• Focus on maximizing the spill-over effect
• Ensure a high degree of residual of experience and knowledge. .

Externalities

• Socio-economic returns to society

Wheel of fortune for viable and sustainable innovation finance market….

Management Management Management teams Management teams

I t i I t i Able to raise Able to raise Invest in companies Invest in companies Able to raise new funds Able to raise new funds Promoting a positive spiral Companies grow Companies grow Good track record Good track record Positive Exits Positive Exits 11 11

..need a right environment…

A viable and sustainable long-term market for innovation finance and a proficient investment climate requires a strong interplay of a variety of factors:

A healthy enabling environment often require:

convincing regulatory framework and institutional set-up. contract enforcement, adequate intellectual property legislation regimes tax code promoting business R&D as well as entrepreneurs and investments. enforced limitations on institutional investors allocating capital to riskier asset

classes and capital requirements.

Strong deal flow and commercialization of projects promoting a strong pipeline of Strong deal flow and commercialization of projects, promoting a strong pipeline of

high tech innovative start-ups

A professional and well-functioning investor market often require:

base of investors in the region that adequately address the needs of companies at base of investors in the region that adequately address the needs of companies at

the various developmental stages

investors with local attachment, integrated with the innovation cycle as well as

having a global network (syndication network) functioning as mentorship

access to adequate financing to close finance gaps throughout a start-ups

development process and be able to draw on (international) syndication partners.

strong partnership between companies and investors.

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…...and a long term game plan

• A viable exit-market often require:

− Companies and investors require a viable exit market (exit refers to the process of an p q ( p investor exiting the investment and thereby trades an illiquid asset (shares in a private company) for a liquid asset (e.g. cash). Exits can mainly be pursued in two forms: initial public offering (IPO) or trade sale (merger/acquisition by a another company). − Successful exits can ensure the financing of the next generation of innovative companies as a positive track record is developed making more investors interested. Without positive exits the investment cycle can be impeded and in the long run it could p y p g result in the depletion of the eco-system.

• These above-mentioned factors are prerequisites for a comprehensive

development of a viable market for innovation finance.

• In the short run, innovative SMEs often need to resort to government

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g programs or if possible foreign equity markets for financing.

• When considering government intervention the entirety of the investment

cycle should be reflected.

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CONTENT CONTENT

Universe of SMEs The ABC of Government Intervention Various programs for support Key Takeaways

World Bank Group World Bank Group-

• Seoul April 3 2013

Seoul April 3 2013

JEREMIE - JOINT EUROPEAN RESOURCES FOR MICRO TO MEDIUM ENTERPRISES

• Offers EU Member States to use part of their EU Structural Funds to finance small

and medium-sized enterprises (SMEs)

• equity, loans or guarantees, through a revolving Holding Fund acting as an

umbrella fund.

• The JEREMIE Holding Fund can provide to selected financial intermediaries. SME-

f d fi i l i t t i l di t t d t focused financial instruments including guarantees, co-guarantees and counter- guarantees, equity guarantees, (micro) loans, export-credit insurance, securitisation, venture capital, Business Angel Matching Funds and investments in Technology Transfer funds Flexibility: Contributions from the Operational Programmes to the JEREMIE Holding Fund will be eligible for interim up-front payments by EU Structural Funds, Benefits of a portfolio approach: The Holding Fund will be able to re-allocate the Benefits of a portfolio approach: The Holding Fund will be able to re allocate the resources to one or more financial products in a flexible way, depending on the actual demand over time Recycling of funds: The Holding Fund is of a revolving nature, receiving y g g g , g repayments from the financial intermediaries for further investments in SMEs Leverage: Engage the financial sector either at the Holding Fund level, with additional capital from financial institutions, or at the level of financial instruments

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FINANCING SMES AT A REGIONAL LEVEL WITH JEREMIE- LANGUEDOC-ROUSSILLON (FRANCE) • POPULATION: 2.5 MILLIONS • GDP : € 60.5 BILLION Market failures

• Financing gaps for innovative businesses
• Difficulties for financing standard growing SMEs
• Difficulties for financing standard growing SMEs
• – Tangible assets / equipment
• – Commercial development
• – Working capital

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MANUFACTURING SECTOR SMES

MAS (Manufacturing Advisory Service) – UK

• Highly skilled advisors
• Experience of both shop floor working and management skills
• Many services are free and supplemented by appropriate grant funding

Manufacturing Extension Partnership (USA) g p ( )

• The nationwide network provides a variety of services, from innovation strategies to

process improvements to green manufacturing

• MEP field staff has over 1 300 technical experts –
• MEP field staff has over 1,300 technical experts
• For every one dollar of federal investment, the MEP generates nearly $20 in new sales

growth and $20 in new client investment. This translates into $2.5 billion in new sales

• annually. For every $2,100 of federal investment, MEP creates or retains one

manufacturing job.

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DANISH GROWTH FUND

The Danish Growth Fund has its own legal framework.

The mission statement is as follows:

“Promote innovation and new business solutions to

• Promote innovation and new business solutions to

secure a greater socioeconomic return”.

Set-up as an evergreen-fund (recirculating capital) with

it l b f 0 5 b USD ( t t b fit bl ) a capital base of 0,5 bn USD (yet to be profitable)

SPECIFIC EQUITY INSTRUMENTS EMPLOYED

Fund-of-funds:

• Leveraging private funds alongside a syndicate of

institutional investors: often cornerstone investor; first institutional investors often cornerstone investor; first time teams; leveraging institutional investors

• Funding closed-end funds (10 year + 2)

Direct In estments:

• Direct Investments:
• Investing directly into early-stage companies with equity

alongside business angels and other funds; often in areas h i li d f d f i where specialized funds are not focusing

LEVERAGING THE MARKET AS A FUND-OF- FUNDS

O h Other Other Other Other Investo r Other Investo r Other Investo r Other Investo r Other Investo r Other Investo r Other Investo r COMPANIES r r Private managed funds DGF Institutional Investors Investors

MANAGEMENT SELECTION

Indirect funding: The board has hired a specialized fund-of-funds team The team locate investment opportunities

• team. The team locate investment opportunities

through standard investment proposals. Investment proposals are presented to the board for their

• approval. Standard remuneration in the funds (2,5 %

and a carry split). Direct funding: Shadow fund established inside the DGF Team has

• Shadow fund established inside the DGF. Team has

investment requirements. Capped carry. Option to become a spin-out if they can raise private capital.

CROWDFUNDING

Process of funding your projects by a multitude of people contributing a small amount in order to attain a certain monetary goal. Goals may be for donations or for equity in a project.

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ENABLING REGULATORY LANDSCAPE

Small business investment bill (USA)

• Legislation to help startup companies raise capital by reducing some federal

regulations

The legislation combines six smaller bills that change Securities and Exchange

Commission rules so small businesses can attract investors and go public with less red tape and cost. It eases rules on advertising and permits startups to use the internet and other social media to solicit a large number of small-scale investors. The centerpiece of the bill is a measure to reduce costs for companies seeking to go public by phasing in over five years SEC regulations that apply to “emerging growth companies.” That status would be in effect for companies with annual gross revenue of less than $1 billion. h ld S C l i i ll b i f i The measure would remove SEC regulations preventing small businesses from using advertisements to solicit investors, raise from 500 to 2,000 the number of shareholders a company or community bank can have before it must register with the SEC, and allow smaller companies to sell up to $50 million in shares, compared with $5 million now, without filing some SEC paperwork.

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CONTENT CONTENT

Universe of SMEs The ABC of Government Intervention Various programs for support Key takeaways

World Bank Group World Bank Group-

• Seoul April 3 2013

Seoul April 3 2013

KEY TAKEAWAYS

Each stage of company

th d t il d

A

growth needs a tailored solution W ll f i l

Age Appropriate interventions

Well run professional

management for any government intervention

Menu of S M

government intervention program is a must & private sector leveraging

Fl ibl instruments M E s

private sector leveraging

Peer to Peer (p2p) lending

and crowd funding will

Flexible regulations to allow new k t

and crowd funding will challenge current regulation.

markets

regulation.

Balancing act between

growth and investor growth and investor protection key

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