THE Government in the Budget Debates indicated an intention to establish “a regulatory mechanism to create a proper framework for venture capital financing” in the hopes that resources from institutional, corporate and individual entities will be mobilised to achieve growth.

The term “venture capital” refers to equity financing and not debt financing. The venture capitalist therefore, unlike a lender, will be looking to the success of the business venture for its return. Venture capital is invested in exchange for an equity stake in the business and therefore return is dependent on the growth and profitability of the business. The return is generally earned when the venture capitalist “exits” by selling its shareholding to another owner.

The concept of venture capital, therefore, is that it refers to financial capital provided to high-potential, high risk, companies. Due to the high levels of risk involved however, venture capitalists tend to examine very closely the proposed venture and expect very high returns.

Venture capital is normally sought during the early stages of a business especially at a time when the entity has difficulty accessing the capital markets or securing bank loans — generally therefore, new, start-up, growing or troubled businesses with lots of potential for returns.

Typical venture capital transactions will include: (a) Traditional Start-up Transaction: related either to providing seed money (that is, financing a potential business which requires preliminary steps to get the business to the point where it is able to begin revenue-generating activities) or early stage financing (that is, where the business is at the stage where it is ready to actually begin or has recently begun the revenue-generating activities); (b) Growth-Equity Transaction: this relates to an existing business which needs money to expand or to finance a recapitalisation; (c) Troubled-Company Turn-around investment: being an investment into an existing business which is suffering losses, over-leveraged and/or is experiencing other financial or business reverses.; (d) Leveraged or Management Buyout: where the venture capitalist raises the funds necessary to buy the already established business, with the goal of holding the business for 3-7 years, improving the business’ performance and then reselling the business at a substantial profit; and (e) Industry Consolidation: where the venture capitalist determines that a fragmented industry exists (many small or relatively small competitors and no or few market leaders have appeared) and will then amalgamate the buyouts and startups into a regionally or nationally important player in the otherwise fragmented industry.

Venture capital financing can take place now and to some extent already has taken place within the Jamaican market. The Income Tax Act currently extends special tax reliefs to approved venture capital companies. For the venture capital industry however to thrive, experience in other countries show that governmental support is needed, not only to serve as a catalyst through the provision of funding or guarantees but also by setting in place an effective regulatory and supervisory framework as the backdrop for incentive programmes.

The proposed solution is therefore that with the right framework venture capitalists will be encouraged to jump-start businesses leading to increased levels of business and employment and culminating with increased spending and increased tax revenues.

Hilary Reid is a Partner at Myers, Fletcher & Gordon and is a member of the firm’s Commercial Department. Hilary may be contacted via hilary.reid@mfg.com.jm or www.myersfletcher.com. This article is for general information purposes only and does not constitute legal advice.