PE and SMEs: Southeastern bind

Investors could be forgiven for seeing the Singapore government’s new plan to invest $5 billion in private equity as part of the city-state’s sprawling and aggressive innovation agenda. The program was unveiled last month at a fintech festival by Peter Ong, chairman of Enterprise Singapore, who made liberal references to venture-oriented technology without specifying where the capital would be deployed.  

The vagueness suggests there may be more rudimentary economic uplift in mind. Ong went so far as to say the money would back funds that in turn support “a stronger platform for growth finance and infrastructure development.” This will be pursued in concert with a sister program known as Match, which will help channel global capital into tech start-ups and small to medium-sized enterprises (SME) across Southeast Asia. 

One of the main tenets of the overall program is that SMEs are denied access to funding due to cost pressures around going public and poor support among traditional lenders. While PE and VC investors are keen to fill this role, price discovery is a challenge and making the practical connections, especially in the fragmented and heterogeneous ASEAN region, remains a significant bottleneck.  

The urgency to solve this problem can be inferred by a number of sub-regional efforts to develop the SME sector. They include investor engagement vehicles in the vein of the ASEAN Strategic Action Plan for SME Development 2016-2025 and programs, such as the ASEAN Patent Examination Co-operation system, intended to transform SMEs into more value-added businesses. 

Various grants and investment entities have likewise sprung up to support the sector by integrating more women. Earlier this year, the International Finance Corporation, for example, backed Indonesian lender Radana Bhaskara Finance with the stated goal of supporting women-owned SMEs.

The problem with much of this momentum is that while it recognizes SME policy goes hand in hand with private sector development, it does little to connect local businesses and investors in a way that results in genuine and mutually satisfactory risk mitigation. For many industry participants, the noblest efforts at government level often fail to acknowledge that the costs of setting up a deal across banks, auditors and public exchanges remain the key stumbling block to growth.   

Historically, the more successful initiatives tackling this issue have included the JOBS Act in the US, which launched in the wake of the global financial crisis and brought SMEs closer to high net worth investors without need for intermediaries. Later iterations of the legislation have even incorporated technologies such as crowdfunding. 

A JOBS-style program from ASEAN would face considerable challenges, however, around language, regulation, and culture. Solutions, therefore, must have a local flavor. Singapore’s Match program appears to be a promising start, but it remains to be seen how it will do in reducing bureaucracy. 

One private service provider in the region is hinting at how this could work by operating a platform that offers unlisted securities in pre-IPO companies to a network of investors, including VCs, PE firms, and family offices. Singapore-based Fundnel, which has bases in Malaysia, Indonesia and Brunei, occasionally takes LP stakes but mostly acts as a facilitator.  

A critical differentiator of this approach is that it leverages technology to realize deals with companies that are largely brick-and-mortar affairs. This offers a subtle reminder that ASEAN’s next stage of growth may have less to do with its ballyhooed innovation drive than the governments seem willing to admit. 

“It’s really about enabling SMEs to get access to growth equity and alternative financing, which is a more sustainable way to weed out the private companies that are more deserving of private capital,” Kelvin Lee, CEO of Fundnel, told AVCJ. “Let the market decide who should survive and who it wants to set up a chain of bakeries or supermarkets. It’s really about going back to basics.”

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• Topics
• Southeast Asia
• Advisory
• Regulation
• Singapore
• SME
• Venture
• Growth capital