The challenges of funding SMEs in Asia-Pacific

No such thing as free money? Some small- and medium-sized enterprises in Hong Kong are getting precisely that, thanks to the Crunch Time Instant Relief Fund. The HK$1 billion ($128 million; €116 million) initiative to support SMEs in the food and beverage sector was set up in November by the Li Ka Shing Foundation, a non-profit organisation whose eponymous founder is Hong Kong’s most famous billionaire, with assets under management sized at HK$26 billion as of 31 October.

The scheme’s purpose of saving troubled businesses reflects the stressed situations in which many companies in the territory are finding themselves. The latest statistics from the International Labour Organization, a UN agency based in Geneva, also show a decline in SME ownership across Asia. ILO data as of 30 October show that the percentage of employers, own-account workers and contributing family workers has been greater than the share of employees across Asia and the Pacific, South-East Asia and South Asia since 2010. However, the statistics also show a gradual decline, in percentage terms, of the self-employed and related populations across the region over the same period.

Looking across the region’s two largest economies – China and India – slowing economic growth prospects and stressed situations within large corporates have been fuelling investor concerns.

India: Subdued liquidity, more distress

India is one of numerous countries in the region where liquidity in the banking sector has been more subdued over the past year. Since non-bank lender Infrastructure Leasing & Financial Services defaulted on its loans in September 2018, banks in the region have shown an increasing reluctance to lend.

Catalyst is one of the alternative lenders that invests in performing credit in the country. The managing director and chief investment officer of its SC India Credit Funds, Siddharth Bhargava, tells PDI that most banks and NBFCs in India are focusing on consumer lending and have shied away from lending to SMEs, other than through providing traditional working capital and cash management services. “If you look at the increasing distress in the large caps, there is a trickle-down effect on the SMEs as well,” he says. Bhargava adds that the real estate, textile, telecommunications and automobile sectors are the ones showing increasing levels of corporate distress.

The SC India Credit Funds are structured as five-year closed-ended vehicles. Under a joint venture with Dubai-headquartered Samena Capital, Catalyst invests in performing credit with a focus on mid-market companies in India.

“Because of the recent defaults, governance issues and lack of funding for the NBFCs from banks and mutual funds, we need to have more rigour and discipline on portfolio asset management,” says Bhargava. “We are increasingly comparing notes and collaborating with [commercial] banks and other credit funds to see if they are seeing stress signals across sectors and credits.”

China: Risk profile makes SMEs tricky

Dignari Capital Partners and SSG Capital Management are among the private credit fund managers active across the greater China region. Both firms have seen increasing demand for loans from Chinese borrowers, though these have tended to be large corporates rather than SMEs.

“Our borrowers are typically industry leaders in their own market segments,” a Dignari spokesperson tells PDI. “We tend not to deal with small enterprises, especially small enterprises in Asia, as their risk profiles do not lend themselves well to our underwriting approach.”

Dignari has been lending to Chinese corporates offshore. Its privately negotiated debt instruments are backed by collateral in developed markets with legal processes that protect foreign ownership and security interests.

Across the markets that Dignari focuses on, transactions in Australia were priced the most aggressively, as of October, followed by other developed parts of China and elsewhere in Asia. The spokesperson adds that lending transactions in Australia and developed parts of Asia are expected to deliver returns in the high-single digits to low-teens, whereas developing markets in Asia are projected to deliver returns in the low to high teens.

Edwin Wong, SSG Capital Management’s managing partner and chief investment officer, says his firm’s approach to lending is sector-agnostic, but that the main lending opportunity he has seen in China has come from the property sector. “The real estate sector is the active space that we are deploying capital into,” he says.

PDI understands that SSG Capital manages two pan-Asian direct lending funds: SSG Secured Lending Opportunities Fund I and II, both of which invest in performing credit. It also has five flagship funds that invest in special situations.

Wong notes that the wider credit spreads between the public high yield market and private debt facilities benefit his investment team to a degree. “But this is very deal-specific as well,” he says. “We need to look at being more active in deploying the capital when the rates are widening.”

Venture debt steps into gap

Venture debt investor InnoVen Capital Partners is expanding in South-East Asia because of what it sees as a lack of funding for high growth start-ups across the region.

Chief executive Chin Chao says the firm – which has offices in Singapore, Beijing and Mumbai – completed its first deal in Vietnam in Q1 when it lent an undisclosed amount to e-commerce company Tiki.

According to reports by Nikkei in June, the investee company is thought to have amassed as much as $100 million in its most recent round of equity funding. Existing investors, as of June, included venture capital and private equity firms, as well as Chinese e-commerce company JD.com.

InnoVen’s loans are typically structured as amortising medium-term notes, with 24- to 36-month maturities. Its typical transactions range from $500,000 to
$15 million. The firm provides a non-convertible and non-dilutive financing option to start-up founders and existing shareholders. Its loan amount to the investee company is typically capped at 20 or 25 percent of the value of the company’s latest round of equity fundraising.

Chao says InnoVen over the last four years has shifted its focus towards earlier stage companies across its target geographies. The firm’s primary lending targets have changed to companies in their “pre-series A and series A rounds” from “series B and C”.

“I think part of it is demand,” he says. “The companies in the earlier cycle look to minimise the equity dilution. We get the earlier stage because the impact that we can provide is greater.”