Baiting local investors into small business

Local investors are being urged to put their money into small, micro business because not only would this put faith in this fledgling sector, but also lure foreign investors in.

Teresa Barger, director, Private Equity and Investment Funds, International Finance Corporation (IFC) said this sector will only grow  if local investors invest in the market. “I think that the future for SME (small micro entreprises) sectors in countries like TT lies in the hands of local investors. What we have to start seeing is more local investors stepping up to the plate. If they are not willing to take the returns that are being invested why should foreign investors.” Barger was in TT recently attending a Private Equity Seminar which was organised by Development Finance Limited (DFL). The seminar brought together active practitioners in the private equity business in the Caribbean.
The seminar was intended to provide perspective for equity funds in the Caribbean in terms of international experience and trends; the needs of the SME sector and success factors for equity funds. Attendees included representatives from the major funding organisations including the Multilateral Investment Fund (MIF); European Investment Bank (EIB); IFC and the Caribbean Development Bank (CDB).

The seminar provided a forum for these as well as regional fund managers, regulators, and professional advisers to exchange views on private equity investing as it relates to the Caribbean. Key issues discussed included the international industry experience; the organisation of the industry (regulation, accountability, valuation of funds), the Caribbean experience and outlook for the future. In an interview with Business Day, Barger said while the IFC has been  investing in TT for many years, it has not been able to make an impact on the SME sector. “We do not have a fund that is dedicated to TT, but we do have a regional fund — Latin America and the Caribbean which has the capability to invest in countries.” The IFC is an affiliate of the World Bank Group. Headquartered in Washington, this group manages one of the largest portfolios of emerging markets investment funds in the world. The IFC makes both loan and equity investments in all types of companies in developing countries.

Barger said because IFC is not a local institution it is very hard for the institution to make small investments efficiently. She said the IFC usually invests in local banks in various countries, by giving them a line of credit intended for the SME sector. The IFC is working globally to find ways to stimulate the SME sector using the same procedures and systems that banks use for larger companies — but with smaller loans. The organisation has not met with much success, Barger says, noting the IFC is yet to see big banks target the smaller companies.

Barger explained that in TT, instead of just putting equity straight into companies, people are using a variety of financial instruments for investments. She said private equity is an important part of the spectrum of financial instruments and markets because companies will not be able to get bank loans unless there is equity in their capital structures. Barger added that for economies to develop there must be a way to access equity. “The number one way that any company can get equity, especially in the SME sector is through friends and family. There should not exist a private equity or venture capital industry in a market if friends and family are not willing to put their money in first.” She added that the IFC has not set up an individual equity fund for TT because there has to be growth in the economy or a particular sector. “Banks have interest rates, but professional equity managers want high returns as high as 20 or 30 percent when investments are made.”

With this in mind, private equity has to be put into companies that are going to grow and grow fast. She noted that studies around the world indicate that five to ten percent of companies in the SME sector grow to any significant level. Barger added that the IFC is very selective about its investments, because it is the biggest investor in emerging markets.
 “We look at about 200 fund proposals per year and we invest in about eight and we are one of the biggest investors in the world.” Additionally, it is very hard to raise money for private equity because it is a very risky financial instrument. Most institutional investors in the United States  like pension funds or insurance companies will put between two and five percent of their assets in private equity and the rest will be enlisted equities in fixed income and corporate bonds and other instruments.  She explained because private equity is usually invested in growing companies, there are managerial, operational, market and corporate governance risks. That’s because most of these companies are betting on gaining more market share. “That is much more risky than going with an established company that has good systems in place. In small companies you are creating all of that and so you have a risk.”

Barger said the IFC is always open to funding projects in TT, stressing the institution can only invest up to 25 percent at any one time and therefore needs co-investors. “This is the worst fund raising environment that the world has seen since 1994, so we could only invest in a fund if there are about five other investors who are also interested in investing,” she says. Right now, she adds, it is almost impossible to raise money for a single country fund. This is where local investors come in, she says.