How does your proposed innovation leverage public intervention in catalyzing private SME finance?
The PCV will transform more than 20 years of public-private partnerships to catalyze private financing to SMEs. Public intervention will support the development and launch of the PCV, while a public anchor investor will provide the backstop that will attract a wide variety of new private investors to SME finance. Such public intervention will help establish a vehicle that will provide the sustainable private SME financing needed to scale up SME investment and growth.
SEAF is seeking public support to co-sponsor Phase II of its work in designing and taking to market a Permanent Capital Vehicle. Over the course of the past year with the support of the Rockefeller Foundation, SEAF has researched, modeled and gauged the marketability of a PCV. In Phase II, SEAF will solicit investors through a road show and bring the PCV to market, initially through a private placement. SEAF is seeking a co-sponsor to support this phase of implementation, joining Rockefeller Foundation, which has financed the first phase of work.
In addition, SEAF seeks a public anchor investor to provide a small subordinated capital tranche to encourage early investors while the PCV scales up. Such a commitment would enhance the PCV’s marketability by promoting confidence in a new investment model.
SEAF anticipates completing Phase II and privately placing the PCV within 12 months of the receipt of Phase II financing. A junior anchor investment in the early phase of the PCV will support investor confidence as the PCV grows its assets and builds a track record for a few years prior to considering a listing on a public exchange. Such support is expected to build investor confidence in a private SME finance model with an unlimited time horizon and the capacity to catalyze hundreds of millions of dollars to SME risk capital finance.
Public support would be highly leveraged. SEAF estimates that a $1 million implementation grant and a $10 million junior equity commitment to the PCV would catalyze at least $200 million in private finance by the time of the PCV’s listing. Public support in this initial phase will enable investments in approximately 200 firms with an initial average of 40 employees each. As investments are exited, the PCV will utilize proceeds to finance additional SMEs. Furthermore, the vehicle’s scalability will enable SEAF to offer more shares in response to investor demand, further increasing the PCV’s size and long-term financing to SMEs.
As the first permanent capital vehicle investing globally in SMEs in developing countries, this PCV will demonstrate the innovative benefits associated with this investment model in this asset class. A positive demonstration effect will enable the PCV to induce systemic change, unlocking further private growth capital for SMEs.
What barriers does your proposed solution address?
Asymmetry of information, Lack of collateral, Lack of financial capacity, Lack of SME access to skills / knowledge / markets, Unavailability of financial products tailored to SME needs, Lack of institutional capacity of financial intermediaries, High transaction costs for financial intermediaries to serve SMEs, Lack of competition / incentives for financial intermediaries to serve SMEs, Underdeveloped local capital markets (term local currency funding, exit options for SME equity), General barriers to SME development related to investment climate, Lack of financing to women entrepreneurs, Specific barriers to fragile and weak states.
If you checked any of these barriers, describe how your solution addresses them
A Permanent Capital Vehicle will address numerous barriers to SME financing. The PCV is expected to reduce barriers at the firm, financial intermediary and investor levels, while increasing the volume of growth capital available to SMEs.
SEAF’s investment process is structured to remove firm-level barriers. SEAF’s “on the ground” presence and close engagement with portfolio companies reduces the information asymmetries faced by many international investors. SEAF’s local investment offices also work closely with portfolio companies to design financing packages that, where necessary, reduce the need for collateral. As a private equity investor, SEAF often seeks investments in SMEs that lack financial capacity, and access to skills, knowledge and markets. SEAF provides technical assistance designed to build skills and the financial capacity necessary to grow each portfolio company.
In addition to removing these firm-level barriers, the PCV will make available a financial product tailored to SMEs’ needs. Many SMEs require growth capital beyond the time horizon of the average private equity fund. An infinite-life PCV enables long-term financing, ensuring that portfolio companies have sufficient time to reach scale and achieve a developmental impact.
Importantly, SEAF’s PCV model also addresses barriers to private SME finance at the financial intermediary and investor levels. First, the PCV model improves the incentive for financial intermediaries, such as SEAF, to invest in the SME asset class. By reducing both the cost of raising capital and the transaction costs associated with setting up many separate country funds, the PCV model reduces the cost of investing growth capital in SMEs. These costs savings will significantly increase net profits, and will attract additional intermediaries and investors to the SME asset class, building institutional capacity. Lower costs will enable investors to resist size creep and continue to focus on SMEs rather than moving to larger and potentially more profitable investment opportunities.
Second, the PCV structure reduces the need for financial intermediaries to continually raise new investment funds and makes SME development less vulnerable to economic downturns. Third, the PCV will invest globally in developing country SMEs. Global investments will provide increased diversification benefits to investors, and enable SEAF to more easily invest in fragile and weak states. By removing these barriers, SEAF intends the PCV model to catalyze significant financial intermediary and investor involvement in the SME asset class.
Finally, with additional growth capital available to SMEs, the PCV is expected to positively impact local capital markets and women entrepreneurs. As a result of more available finance, additional SMEs will grow and seek public listings, which will bolster local capital markets. The availability of dedicated financing will also benefit women entrepreneurs who often find it doubly difficult to access commercial sources of capital.