Home' Trinidad and Tobago Guardian : November 9th 2014 Contents SBG4 FINANCE
SUNDAY BUSINESS GUARDIAN www.guardian.co.tt NOVEMBER 9 • 2014
T&T s International Finance
Centre is spearheading a
prospective financing pro-
gramme for small and
medium enterprises (SMEs)
that has the potential to
overhaul and, perhaps
replace, this country s venture capital envi-
During an interview with the Sunday BG,
CEO Varun Maharaj said the development of
an entrepreneurial class in T&T was not only
important to him personally, but part of the
mandate of the IFC to assist with the devel-
opment of this country s capital market and
"There are a number of reasons for that
strong body of entrepreneurs. They ensure
the long-term viability of your economy. They
create most of the jobs. The oil sector does
a lot for our country, but in terms of creating
jobs, it is that cadre entrepreneurs ... We need
to build them."
Venture capital is a mode of financing for
entrepreneurs who are not able to access funds
to expand their business through forms of
equity, such as trading shares on the stock
market. Typically, the businesses are those
which are risky, but have the potential for
In venture capital environment, an investor
buys a stake in the company, providing the
entrepreneur with the much needed funds
and, in some cases, critical advice on business
operations and strategy. After a period of time,
the investor then exits, liquidating his stake
in the company, hopefully at a profit. But the
arrangement is also considered successful if
the company has reached the point where it
could be listed and its shares traded on the
A worst-case scenario, however, also exists
where the entrepreneur could be forced out
of his own business if he is unable to buy out
the venture capitalist.
Failure of venture capital
The IFC head revealed the inner workings
of the as-yet-unnamed initiative during the
Coalition of Service Industries National Serv-
ices Week in a workshop on SME Financing.
There, several of the presenters acknowl-
edged the apparent failure of venture capitalism
to create funding opportunities for SMEs, or
bring sufficient returns to investors locally.
"The approaches we have adopted in the
past have been approaches imported into the
country and do not really address the needs
of the entrepreneur in our environment," said
He drew reference to the US---one of the
world s most successful areas for venture cap-
italism---saying that for every Google or Ama-
zon, there were many failures.
"Even in the United States, when you look
at statistics, venture capital funds have not
fared well over the past ten years. You probably
have returns on the whole universe of funds
at 4.0 per cent."
"Venture capitalists generally do not focus
on expansion stage SMEs and seek out invest-
ments in companies that offer the potential
for exits at high multiples of the initial pur-
chase price. Exits from SMEs through sales
to third parties or IPOs, are not common,
making SMEs, unattractive to venture cap-
The new model---which Maharaj said is
being called the risk-capital model---was born
out of focus groups with interested parties.
"We brought together three key stakehold-
ers: the entrepreneur and the person who can
provide the capital. He was known previously
as a venture capitalist, but we don t think
that coming out of our discussions, we would
want to call it that. And we also brought the
people who can manage the funds, who have
done that in the past, just to hear their views
solely, to hear the vacuums existing out there."
The findings were telling.
The entrepreneurs were concerned with
whether they would be able to retain control
of their companies as the exit of the venture
capitalist approached. Those buying stakes
in the companies were worried about whether
their investments would pay off, given that
companies started through venture capital
programmes in this country rarely, if ever,
listed themselves on the exchange. The fund
manager, meanwhile, would have to find
methods of valuating the company worth and
its performance over the period.
Maharaj said the risk capital model solves
several of these problems by blending equity
and debt and having a pre-determined exit
percentage for investors.
The risk capital model
According to Maharaj, the countries with
the most successful venture capital environ-
ments had significant government involve-
ment. Using the US s Small Business Invest-
ment Company, Australia s Innovation
Investment Fund and the UK s Enterprise
Capital Funds as models, he said that gov-
ernment s investment must be 2:1 to that of
the private sector.
"This capital model that we are proposing
is a public private partnership and basically
it is a fund that is established, where the gov-
ernment will put in two-thirds of the money
and the private sector puts in one-third of
But this contribution is not in the form of
equity, or tax breaks to private sector investors.
Instead, Maharaj said government will make
funding available through long- term, low
interest loans to funds, responsible for holding
and managing the particular SME.
"The government will provide the fund
with a ten-year loan to the fund company
and they will have a one- or two-year mora-
torium in terms of paying back the principle.
Loans will be priced at around 2 to 2 1/2 per
But even though the government fronts
part of the money for the SME, Maharaj said
entrepreneurs can expect no interference from
the government, who he said will not be rep-
resented on the SME s board or executive.
Potential fund managers will be selected
"We have developed the RFP already. We
wanted to attract the most qualified individ-
uals. By qualified we mean the fund manager
would have had a track record of managing
funds such as a manager of a pension plan.
But one of the criteria also is that he should
be able to attract private investors to take a
stake in this fund company. For example, if
the government provides funding for $130
million, he has to demonstrate that he can
raise $65 million. The fund manager will be
obligated to manage the fund within the policy
guidelines set by the government."
The fund manager will also be responsible
for performing due diligence as well as select-
ing which SMEs receive financing and nego-
tiating and closing investments.
Exit amounts pre-determined
Another major departure from venture cap-
ital is that the exit amounts are pre-deter-
When we talk about venture capital, we
are always thinking about the exits and how
we will arrive at the exit price and would it
be that the entrepreneur would be giving up
too much. Would it be that he would not be
able to buy back his company in five, ten
years time, given what the valuation would
be? This model focuses on the entrepreneur.
It makes it easy for him after getting the nec-
essary financing to grow his business, to then
pay back the fund its monies in a very trans-
parent fashion. There is no need for investment
bankers. The model is very simple. You don t
have to do cash flow projections at the exit.
You don t have to arrive at the relevant dis-
count rate and there are not significant invest-
ment banking fees.
Illustrating, the IFC CEO said, "let s say
the fund provides the entrepreneur with
$100,000, it could be at the end of five or
seven years, it is agreed at that point, that
the multiples paid back to the fund will be
five to seven times the equity injection. So
the entrepreneur knows upfront that they will
have to pay the fund back $500,000 in five
to seven years."
Raising the curiosity of sceptics in the audi-
ence further, Maharaj said that based on pro-
jections, the fund would earn anywhere
between 10 and 20 per cent on what was ini-
"Giving somebody $100,000 and as an
SME and getting back $500,000 in five to
seven years doesn t appear to be a proper
trade off. I will demonstrate to you that it is.
What also exists in this model, there is also
the option for the fund to tag along should
the company decide that they are not going
Debt is the
New venture capital programme
projects returns of 10 to 20 per cent
CEO, International Financial Centre
PHOTO: JEFF MAYERS
Continued on Page 5
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