Big Fund for Small Businesses

Finally, a private equity fund for small and medium enterprises

By Gail J. Pelayo

SMEs comprise 99.6% of all registered firms nationwide, employ 70% of the labor force, and contribute 32% to total economic production

Small- and medium-scale enterprises (SMEs) play anything but small and medium roles in the country’s economy. Aside from comprising 99.6% of all registered firms nationwide, SMEs employ 70% of the labor force, and contribute 32% to total economic production. Government knows this just too well and is therefore very keen on instituting mechanisms that will help these businesses prosper.

In the corporate sector, SMEs can also count on a number of institutions to support their development. Two respected institutions have recently joined hands to set up the first private equity fund for the Philippines’ budding small and medium businesses. These are Philippine-based Planters Development Bank and foreign-based Aureos Capital Ltd.

The Partnership

The Plantersbank-Aureos tie-up is a destined partnership. Plantersbank, led by its chairman and chief executive officer Jesus Tambunting, has been operating in the Philippines for over 40 years, focusing its services on the SME sector. Prior to the partnership, Plantersbank had already been contemplating creating an SME private equity fund and had talked to another fund manager to undertake the venture. However, the partnership did not push through.

On the other hand, Aureos is a joint venture between Actis, partly owned by the British government through the Department of International Development (CDC Group), and the Norwegian Investment Fund for Developing Countries (Norfund), which is wholly owned by the Norwegian state. Aureos’ mission is to become the leading provider of private equity funds to SMEs in emerging markets. Taking note of the lack of equity capital for SMEs in the Southeast Asian region, Aureos Capital established the Aureos South East Asian Fund (ASEAF) in 2002.

This paved the way for the teaming up of Aureos Capital – through ASEAF – and Plantersbank, and the creation of the Philippines’ first small- and medium-enterprise private equity fund, the Plantersbank-Aureos SME Equity Fund.

Discussions for the partnership started in the first quarter of 2003 and culminated with the signing of a parallel investment agreement by Aureos South-East Asia Fund LLC, the Aureos South-East Asia Managers Ltd., and the Plantersbank Venture Capital Corporation in December 2004. The fund was formally launched on 27 January 2005.

Part of a Bigger Plan

The first item in the 10-point agenda of President Arroyo is to create 6 million to 10 million jobs within her term. One of the ways her administration aims to reach this goal is by helping SMEs prosper because they have the ability to disperse economic activity in the countryside and in places where there is high unemployment. SMEs have demonstrated promising growth, but many are hampered because of limited capitalization.

The Plantersbank-Aureos SME Equity Fund provides crucial support to the government’s economic program by making much-needed capital available to SMEs and, consequently, generating jobs for the unemployed. The fund will bring US$25 million into the country in the next four years, of which US$5 million will come from Plantersbank and US$20 million will be brought in by the CDC and Norfund as anchor investors to the ASEAF.

Fund Mechanics

The fund will provide equity financing to SMEs that demonstrate strong potentials for growth and profitable development. It will provide risk capital (common shares, equity-linked instruments, and shareholder loans) to businesses that have strong commercial potential and proven management capability.

Generally, the fund is inclined to invest in enterprises that are planning to expand or those that will undergo a change of control or management buy-out. This criteria provides better protection to investments made by the fund since established companies are more likely to have a capable management team that will ensure the profitability of the business and the safeness of the investment. The fund is generally averse to start-up enterprises or those in turnaround situations.

The fund is willing to invest US$500,000 to US$5 million in any one company for a significant minority stake of 20% to 49%. It requires a board seat for each investment in an enterprise. Interested enterprises have to submit a business plan, or what bankers call an information memorandum. The plan must include a description of the company and its products, services, markets, management team, shareholders, and funding requirement. Applicants are also required to submit a soft copy of the financial model that will show five-year financial projections.

Furthermore, interested SMEs also have to present a credible exit strategy, as the fund will exit from the investment after three to six years. It could be in the form of a trade sale, a sale back to the company, or a public listing.

Transcendent Factor

Discussions are already underway with about 10 companies applying for an investment from the fund. The companies are involved in a broad range of businesses – software services, retail and consumer products, resource-based export, electronic manufacturing services, and renewable energy. Most of these companies are long-established and have capable management teams.

Plantersbank and Aureos Capital are firmly committed to their mission to help small and medium enterprises carve their niche in a competitive world. In a speech delivered soon after the two groups signed the agreement to set up the equity fund, Tambunting explained why his group has not wavered in this commitment over the years. He said, “In focusing on SME lending, we were aligning ourselves with an indispensable force for our country’s economic development – the small and medium enterprises in our countryside. Throughout our support of the Filipino entrepreneur, there was always this transcendent factor that we were not only doing business and making a profit, but we were also contributing in a vital way to national progress.”

Related story: Plantersbank Model