Financing Challenges of SMEs and New Firms in Latin America

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1 Financing Challenges of SMEs and New Firms in Latin America New Orleans, September 10 11, 2012 MARCO KAMIYA Vice Presidency of Public Policy and Development Strategies Division of Public Policy and Competitiveness

2 Four Decades of Presence in LAC Bolivia Colombia Ecuador Peru Venezuela Mexico (1990) Brazil (1992) Chile (1992) Trinidad & Tobago (1994) Panama (1997) Paraguay (1997) Jamaica (1997) Argentina (2001) Uruguay (2001) Costa Rica (2002) Spain (2002) Dominican Republic (2004) Portugal (2009) 2011 Letters of Intent: Guatemala and Italia 18 countries 14 commercial banks

3 Finance and SMEs in Latin America

4 SMEs, New Firms and Financing in LAC Many very small micro enterprises. One family firms driven by necessity. SMEs don t grow as it should and have low productivity. Low availability of financing for start up and firm expansion. and, despite the emergence of Multilatinas still few global corporations in most of the countries, so lack of anchor firms prevent expansion.

5 Cycle of Financing in LAC: Many Obstacles Availability of Capital R&D Cash Flow / Cash Flow + Weak Innovation Systems Seed Capital Financial Valley of Death Angel Investors Initial VC Insufficient Deal flow Start, Sustainability, Expansion VC for Expansion Last Stage of Stock Private Equity Markets, small and with few instruments Operation and Consolidation

6 Source: World Bank and Bank for International Settlements Stock Markets in LAC are Growing

7 but LAC Financial Markets lag Behind Source: Prepared by CAF with World Bank data. LAC: Argentina, Brazil, Chile, Colombia, México, Peru and Venezuela. Emerging Asia includes: China, South Korea, India, Indonesia, Philippines, Singapore and Thailand

8 and Financial Development is lower than expected Emerging Asia Latin America Source: Prepared with World Bank data.

9 Entrepreneurship and Nascent Firms Private Finance for New Ventures in Latin America and East of Asia LAC East Asia Start First Years Start First Years Percent of the Entrepreneurs funded by Private Investors 8,9 % 6,8 % 27,1 % 28,8 % Perfect of the Entrepreneurs funded by Venture Capital 2,8 % 1,7 % 8,9 % 15,0 % Source: OECD, CAF

10 Venture Capital in LAC: The Critical Mass Trap Total VC Funds Committed in LAC (2011) Investment amount low VC funds committed in LAC in 2011: US$6.5 billion, so PE/VC size in LAC is 5% of total in the World and number of deals too small Investment Deals in 2011, 173. But in some countries were less than 10. Source: Ernst & Young, LAVCA

11 High Growth SMEs: Very Few Winners Returns of Venture Capital Funds in the US Source: Lerner (2009) Note: VC Funds Return as of March 2008

12 Ecosystem, Institutions and Programs

13 Enterprise Development Ecosystems Sil Val Israel Sing Bra Chi Mex Colo Innovation Patents Universities Overseas networks Entrepreneurship Teaching techniques Training for Business plans, etc. Tech Transfer Centers Financing Angel Investors/Seed Venture Capital Equity Investment Source: CAF 2012 Developed Underdeveloped Incipient

14 Example: Institutional Ecosystem in Brazil Export Promotion Productive Development Finance International Business Centers SECOM Trade Promotion Offices Chambers of Commerc e Multilatera l Investmen t Banks National APEX Min. De Industria y Comercio Exterior Min. De Relacione s Exteriores FINEP SEBRAE Confederación de Industrias BNDES Agency for Industrial Development Local Public Estados / Municipio Oficinas Locales de FINEP Oficinas Locales de SEBRAE Conf. Industrias Locales BNDES Local Offices Private Public Private International Source: CAF 2012

15 Example: Instruments and Programs in Brazil R&D Start Up, Sustainability, Expansion Consolidation Research and Development Angel Networks Seed Capital Venture Capital Initial Venture Capital Expansion Exit to Market Instruments FINEP Nonreimbursable funds Innovar Seed PRIME Innovar Juro Zero Innova Brasil Instruments SEBRAE Negocio Certo PROIMPE Entrepreneurs fairs Instruments BNDES FUNTEC PROFARMA FINEM CARTAO BNDES Revitaliza FINAME CRIATEC Prosoft Comercializao / Prosoft Empresa Source: CAF 2012

16 Instruments and Programs to Expand SMEs Financial Access in Latin America

17 Public Credit to SMEs National Development Banks in LAC * Number of % Assets (US$) % First tier banks , Second tier banks Banks of 1st and 2nd tier , , TOTAL , (*) i.e. Chile CORFO; Brazil BNDES and FINEP; México NAFINSA; Colombia BANCOLDEX; Peru COFIDE; etc. Source: ALIDE data as of 2009 (Latin America Association of Financial Development Institutions)

18 CAF, IADB, World Bank, Governments Financial Development with Cluster / Value Chain o Cluster Development Operations Manaos, Ceará, Dominica Republic, etc. o City Development (Cities with Future) Comprehensive Approach CAF o Regional Innovation Systems In Santa Catarina Brazil, San Juan Argentina, Costa Rica o Value Chain and Finance Provinces in LAC countries

19 Guarantees Credit Bureau Successful Instruments and Programs for Financial Access Country Chile Colombia Mexico Several countries Name Banco Estado FOGAPE BANCOLDEX Fondo Nac. Garantías (FNG) NAFIN Garantías Públicas i.e. Chile, Peru Factoring Mexico NAFIN Reverse Factoring NAFIN Cadenas Productivas Seed Capital Outsourcing of Banking services Several countries Brazil Mexico Brazil FINEP Inova, Chile Sercotec, Uruguay Red Emprender, Costa Rica, etc. Caixa, Banco do Brasil BANSEFI Banco de Ahorro Nac. y Serv. Financ. Source: Prepared by CAF with data from CAF, ALIDE, World Bank

20 CAF s Role in SMEs Finance and Support of New Firms

21 CAF: Higher Credit Ratings than the Owners Standard & Poor's Fitch Ratings Moody s Investment Grade AAA AA+ AA AA A+ Chile Chile A A BBB+ BBB Mexico, Peru, Brazil Brazil, México, Peru BBB Colombia, Uruguay Colombia Chile Mexico Brazil, Peru Colombia, Uruguay Noninvestment grade BB+ BB BB Venezuela B+ Bolivia, Paraguay B Argentina B Ecuador CCC+ CCC CCC Uruguay Bolivia, Venezuela Argentina, Ecuador Bolivia, Paraguay Ecuador, Venezuela Argentina Source: As of August 2012

22 CAF Investing in Microfinance Funds Mexico Banco Compartamos Panama Microserfin Banco Delta Colombia Banco WWB Colombia (Cali) 2 Fundaciones del WWB (Bucaramanga y Popayán) Ecuador Banco Procredit Peru MiBanco CMAC Arequipa CMAC Tacna Financiera Crear Arequipa Edpyme Nueva Visión Edpyme Confianza Edpyme Edyficar Caja Nuestra Gente Argentina FIE Gran Poder Regional Funds: (i) (ii) Paraguay Banco Regional Visión Banco S.A Banco Amambay Uruguay Microfinanzas del Uruguay S.A. LOC Fund Solidus Investment Fund (iii) Microfinance Growth Fund (iv) Próspero Microfinanzas Fund Bolivia BancoSol (2 operac.) Banco Los Andes ProCredit Banco FIE (2 operac.) FFP Prodem FFP Fassil Eco Futuro (2 operac.) Cooper. Jesús Nazareno ONG Crecer

23 CAF investing in Seed Capital, PE/VC Mexico Fondo Pronafim Ignia Fund Latin Idea Fund II New Growth Fund I Costa Rica Banco Improsa Financiera Desyfin Dominican Republic Trust Capital Semilla Panama Trust (FCS) Spain Fondo Axon Trinidad y Tobago Dynamic Equity Venture Fund Venezuela Dynamic Equity Venture Fund Product: Regional Funds: (i) (ii) Venture Capital Guarantees Value Chains Colombia Fondo Escala Capital FCP Colombia Opportunity Fund Fondo Nacional de Garantías Ecuador Fideicomiso Inver. Agrop. Fondo País Ecuador Aureos Latin America Fund Cleantech Fund (iii) CASEIF Corporation II Peru FOGAPI Argentina Cap Ventures FOGABA Fondo Pymar CGM Leasing Brazil Fondo Burril Brasil, FMIEE CRP VI Venture Fundo Mutuo Paraguay Visión Banco S.A. Bolivia Fondo Fortaleza PYME Fondo Emprender Uruguay Uruguay IVC Partners Fondo Emprender

24 Supporting Productive Transformation COLOMBIA: Support to Competitiveness Strategies Cluster Development COSTA RICA Support to Public administration efficiency and Public reform ECUADOR: Business Registration Program Value Chain in rural zones Support to Entrepreneurship PERU: Corporate governance in Public firms Young Entrepreneurs program Local Productive Development Regional supply chain SME networks CAF Technical Cooperation to SMEs PANAMA Panama Competitiveness Program Innovation studies, entrepreneurship VENEZUELA Network Venezuela Sí Compite Incubators and Universities Support to Start Ups (SACEV) ARGENTINA Entrepreneurship Cluster Development Tourism Development BOLIVIA Bolivia Cost Index Cluster Development Development Agency City Development

25 Conclusion: The Road Ahead Many obstacles to SMEs and new firms in the cycle of financing. So firms don t grow and new ventures are lower than they should be. So, public policy have two tasks: In 5 to 10 years, keep building the ecosystem with better public capacity In the short term, think in terms of efficient and flexible instruments and programs. In alliance with the private sector, combine provision of financial access with technical cooperation to SMEs. And finally, engage multilateral financial institutions (i.e. CAF) in policy design and facilitation.

26 New Orleans, Thanks! MARCO KAMIYA Vice Presidency of Public Policy and Development Strategies Division of Public Policy and Competitiveness