Access to affordable long-term finance is one of the biggest barriers to development of small and medium enterprises. Growth oriented small and medium enterprises face a momentous challenge of raising capital. Debt finance is not only expensive and difficult to get, but also inconvenient given the relatively short maturities of loans.
Equity finance offers an opportunity for SMEs to raise capital, share risks, complement knowledge and skills, etc. Yet, it is grossly underdeveloped. The private equity industry has not sufficient adapted to the local institutional environment in developing economies.
Positive signs
The dynamic and growing segment of SMEs is growing but little is documented about it. Investors are taking increasing interest in investing in developing countries SMEs.
However, local investments in equity are largely confined to starting companies, in which a principal shareholder takes the lead and invites friends or acquaintances. Second stage external equity is still very much a preserve of foreign owned equity firms. Some of these have social mission driven sector focus (renewable energy, microfinance, community enterprises)
Does scale matter?
However, most are primarily interested in sectors and firms with high prospects of returns. Others exclude some socially undesirable sectors (alcohol, tobacco and mining). Scale matters for equity firms as it is seen as one of the indicators of viability, scalability and ability to absorb overheads associated with the investment. Family or non family ownership does not seem to matter.
Investors face many challenges, including difficulties in identifying good investee, slow communication from investees after investment and dishonesty. Investees sometimes spend a lot of time with investors without realizing investments.
Joshua Smith
Unfortunately, they are strongly restricted in accessing the capital that they require to grow and expand, with nearly half of SMEs in developing countries rating access to finance as a major constraint.
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Christine Stewart
The overall result is absence of a well-functioning SME lending market, and SMEs are impeded in their growth, with negative consequences for innovation, economic growth and macro-economic resilience in developing countries.
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Chintan Patel
With targeted interventions, IFIs play an important role in closing this gap
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John Ramandhali
Financial and social sustainability is further enhanced by judiciously selecting and screening intermediaries, applying strict lending standards and carefully calibrating controls and incentives.
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Rose Weston
Additional research on the overall impact of capital provision to (different types of) SMEs on economic and social indicators would be helpful for the overall advocacy for SME interventions.
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Hugo@SMEsDeVNations
Research on the optimal structure of interventions would help to further increase the financial and social sustainability of SME interventions.
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