Venture capital funds by 2016
Development Bank aims to establish framework for funding, targets 100 SMEs beneficiaries
THE Development Bank of Jamaica (DBJ) aims to get two venture capital funds started by 2016.
It is focusing on removing the barriers faced by investors wanting to pool their funds and invest in small and medium-sized enterprises (SMEs), and has already secured the backing of the Inter-American Development Bank (IDB).
The IDB is putting up US$150,000 ($14 million) to match DBJ's US$128,000 for a project focused on the establishment of a "venture capital (VC) ecosystem".
"We anticipate [that] within three years, with the IDB's help, we will have launched two venture funds, provide capacity-building for some 100 SMEs, with at least 30 being market-ready, and at least five receiving financing," said DBJ Managing Director Milverton Reynolds.
But a lot of work needs to be done between now and then.
Issues, such as the legal framework and exit mechanisms for investors — possibly through initial public offerings on the stock exchange or strategic acquisitions — will have to be ironed out over the medium term, according to Joseph Matalon, DBJ's chairman.
"It needs to happen in the context of a dynamic ecosystem that provides transparent and easily replicable structures, which facilitate the pooling of capital and its investment," he said.
A broad range of government initiatives will also have to be undertaken.
"Addressing bankruptcy legislation and the continued fight against corruption are those benchmarked by international venture capital participants to assess our environment," said Matalon.
The DBJ has already signed the consultant, who was lead on establishing the INOVAR Programme in Brazil, where the VC environment is ranked second (behind Chile) in the region by the Latin American Private Equity Venture Capital Association (LAVCA).
LAVCA grades countries on the laws that oversee the formation and operation of VC funds, how they are taxed, minority shareholder rights, and strength of the judicial system, among other things.
Reynolds said that the initial phase of the project should be completed within the next 12 to 18 months, over which time the project team, led by DBJ's Audrey Richards, will assess the investment climate and the legal, regulatory and tax frameworks, with the aim of establishing a viable venture capital market.
"The comparison of best practices in other countries will serve to highlight the gaps which need to be addressed to establish a sustainable regime here," he said.
Jamaica's venture capital industry will be private sector led and managed, according to Matalon, who believes that "there are significant levels of capital which can be mobilised from within Jamaica, as well as externally".
It is still too early to determine how much capital will find its way in the first two venture funds, but the Multilateral Investment Fund (MIF), the arm of the IDB that focuses on private equity, suggests that the minimum critical mass for VC funds in the region ranges between US$20 million and US$50 million, depending on the size of the country.
"This is needed to provide several financing rounds to SMEs and to retain skilled staff at the fund management company," said a 2011 MIF report on bulding a local venture capital industry in Latin America and the Caribbean. "Since every country in the LAC region has very few seed and VC funds, each fund should have enough capital to provide several rounds of financing to the best SMEs and not rely on there being other funds providing subsequent rounds, as happens in the US and other developed markets."
DBJ and IDB signed the technical assistance agreement last Friday, months after the Jamaica Venture Capital Programme (JVCP) received approval in September.
The JVCP is a timely initiative based on the challenges faced by the Jamaican economy, in that it shifts the focus from debt to GDP growth, according to IDB country representative in Jamaica, Gerard Johnson.
"What is needed for the Jamaican economy is growth," he said. "And one way of doing this is for enterprises to move from the informal to the formal, so that they can export and help the economy to grow."