A Program structure to drive Investment, Debt and Human capital to the Pakistani SME Sector

1. Kick starting the SME
Economy in Pakistan
A Program structure to drive Investment,
Debt and Human capital to the Pakistani
SME Sector
by Fahad Humayun
December 2016

2. The state of the SME Sector
• SME sector remains the most ignored segment by
the banking industry
• SME’s form 80% of all private business yet SME
debt is only 7.3% of total bank financing
• The result: SMEs struggle to survive and grow as
access to debt is difficult and expensive
• Bank’s consider SME as HIGH Risk
• SME sector has lower NPL ratio than Corporates
FahadHumayun
Clearly that
doesn’t add
up!!

3. Supporting the SME Ecosystem –
What’s being done?
• The SBP has set strict lending targets for banks
to lend to SMEs
• Banks are advised to have specialist SME Credit
teams
• SMEs are offered Credit Guarantees and special
interest rates
• SMEDA and SME Bank is setup to provide
customized training and funding solutions
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4. Why are current steps not enough?
• No SKIN in the game for
Lenders
• Large corporates fall with a
thump, SMEs go unnoticed
• Effort vs Reward ratio is not in
balance for Lenders
• SMEs unable to attract top
talent
• Business owners not qualified to
scale businesses
• Debt financing and training are
not customized
The Road to Scaling Up:
• Equity funding
• Corporate level Human Talent
• Governance and Controls
Managing SME Relationships
SMEs lack the corporate culture,
record keeping and auditing
practices that banks need to
monitor a client. Ask an SME
Account Manager and he will tell a
tale of going through raw data,
making multiple spot visits and
interviewing owners down to the
laborers to make sense of a client’s
performance
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5. The Concept
To create an eco-system that will drive INVESTOR money in to the SME Sector
to support growth
• Government and/or Corporate
based Guarantee program that will
secure debt to SME Funds (VC &
Private Equity)
• 1:1 Leverage against Investor
commitment
• SPV structure to acquire private
shares of target SMEs
• Fund tenor and Debt tenor will be 7
to 10 years
• Funds to invest in identified SME
sectors and monitored against KPIs
SME Fund
Pension Funds
HNWI
Investors Potential Guarantors
Asset Manager Bank / Lender
SMEs
Insurance Cos
Regulator Aid Agencies
Trade Bodies MNCs
Telcos Corp Groups
$1 Investment
$1 Equity $1 Debt
$1 Guarantee
$2 Equity
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6. Why to do it?
• SMEs as % of Private business = 80%; SME debt as % Private debt = 7.3%
• $1 of equity means $4 worth of Leverage capacity
• Fund Manager / Investors bring qualified board & managers to support growth
SMEs
• Limited offerings – Listed equities, Bonds, Deposits & Real Estate
• 60%+ of all Funds invested in a GoP instruments or deposits
• Poor growth – 18% / year in the last 10 years with only 8% growth in 2016
Asset
Manager
• Low Interest rates environment
• Taxation on Real estate; Low rental yields
• Self sourcing of private investment opportunities with no visible Exits
Investor
• Generate Employment
• Corporate Governance, documentation and increasing the tax net
• GDP Growth
Govt. /
Regulator
• CSR – Non funded commitment to support the SME sector
• Provide input in SME selection to finance and mentor your supply chain
• Grow SMEs for potential acquisitions
Corporate
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7. What’s in it for an Islamic Bank?
• Pakistani Banking industry average ADR as on
Jun ‘16 stood at 47% - Islamic Banks were below
this average
• Islamic Banking deposits are growing faster than
conventional banks
• Islamic Banks share of SME finance stood at a
meager 3.7%
• Treasury income and margins are sliding
• Islamic Banks are striving to innovate new
products
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8. -How the U.S did it?
-Saudi Arabia following suit
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9. How the U.S did it?
• The US Small Business Administration (SBA)
launched Small Business Investment Companies
(SBIC) in 1958 (https://www.sba.gov/sbic)
• The aim was to get professional money
managers to invest in to SMEs
• Supplying the VC & PE Funds with liquidity was
the game changer
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10. How the U.S did it?
SBA Guaranteed Loans
• The Guarantee started
with 1:1 leverage and
now offers up to 1:4
leverage to SBICs
• The result: SBICs went
on to fund Apple , , .
. & many more
• A great return multiplier
for Investors
SBA
Guarantee
SBIC – Small Business Investment
Company
Privately owned and managed investment
funds, licensed and regulated by SBA, that
use their own capital plus funds borrowed
with an SBA guarantee to make equity and
debt investments in qualifying small
businesses.
$1 $1
$2
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11. Saudi Arabia following suit
• Saudi Arabia’s economy relies over 70% on Oil
revenue
• Over 700,000 Unemployed persons (6%
unemployment rate)
• SME sector is under banked and scale-up &
growth stories generally come out of large
family groups
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12. Saudi Arabia following suit
The MUSHARAKA Program
• In 2015, TAKAMOL
launched the
MUSHARAKA program
with a SAR 1Bn Shariah
compliant Guarantee
• 1:1 Leverage against
Investor commitment
• Investment in identified
SME sectors
• KPIs such as Knowledge
transfer, Saudi
Employment, Female
employment
Qualifying Mutual Funds
Funds managed by licensed AMCs. Each fund
creates one or more SPVs to acquire private
shareholding of Target investments
The fund is critically assessed by a 3rd party
appointed by TAKAMOL to qualify for the
program
Investor Funds Lender
Guarantor
SAR 1SAR 1
SAR 1
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13. Saudi Arabia following suit
The MUSHARAKA Program
• 7 Funds totaling SAR 900Mn
• Riyad Taqnia Fund, 1st to attain financial close of
SAR 225Mn of Debt in June 2016 – Fund size
SAR 450Mn. The fund will invest in growth
SMEs to scale with a 7+3 Year investment
horizon (http://www.taqniainternational.com/what-we-do/rtf/)
• Target exits for the funds are Strategic sales, Sale
to other funds, Mergers and IPO
• Saudi Arabia considering launching a SMALL
STOCKS Exchange
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14. What results are sought with the
product?
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15. Financial Impact
• Multiplier effect
▫ PKR 1Bn Guarantee => PKR 2Bn Equity => PKR
8Bn Debt… PKR10Bn injected in to the sector
• Cross sells for Lender
▫ SMEs backed by Investment funds offer better Credit
risk
▫ Lender to the Fund becomes ‘Bank of Choice’ for
target SMEs
▫ Potential Non-Voting Board Memberships in target
SMEs provides Bank invaluable insight
▫ Interest rate hedging of Long Term debt to Funds
▫ First right to manage IPOs, Strategic Sales and Exits
for the Fund
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16. Eco-System Impact
• Initial funding targets
should be Large SME OR
MEs. These would be
companies that can result
in an Acquisition or IPO
over 3~5 Year horizon –
Private Equity Funds
• Subsequently funds could
move down to various
early stage VC Funding
• Each funding stage
provides an EXIT to the
lower stage fund
Startup and growth curve – J Curve
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17. Meeting Angels & VCs half way
down
• Pakistan’s Tech Incubation scene has been heating up rapidly
as tech education, Mobile and 4G penetration picks up
• With exports facing pressure due to slowdowns in EU & US,
domestic growth is key to driving GDP growth
• Tech & Non-Tech Angels and VC Funds are sprouting up and
placing their bets
• BUT Exits and Scale-ups are big question marks
• The proposed program promises moving down the ladder to
create an Eco-System that provides exits to investors at each
level of the investment cycle
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18. -A platform for the voice
-The Infrastructure
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19. A platform for the voice
• SMEDA or a similar trade body should be the
champion for such a program
• An independent company setup as a subsidiary
of the Guarantors or an Aid agency can also be
used to manage the program
• SBP can play a key role in rolling out the
program
• Corporate sector involvement for participating
at Guarantee level, Mentoring level and/or SME
identification level
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20. The Infrastructure
• Funding is only 1 leg, the full impact comes with
Incubators
ICT Incubators are present in all main cities
Generic business Incubators are need of the
hour
Training
Motivational Speakers, Mentors and
Professional trainers are all present
Shared Services
Shared Accountants, Tax Advisors, Legal and
HR are needed to maintain costs
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21. About the Presenter
In 2013, Fahad joined Riyad Bank, Saudi Arabia to manage the
bank’s NBFI portfolio. This was a time when Saudi Arabia was
implementing large regulatory changes in the Financial Services
sector. One such initiative was development of a Venture Capital
& Private Equity eco-system.
Fahad was engaged with Riyad Capital (subsidiary of Riyad Bank)
and TAKAMOL for the Musharaka program going through
rounds of finalizing the program, the guarantees, engaging law
firms & Shari’ah advisors, drawing internal process flows and
engaging executive management for approvals. He successfully
engaged multiple qualifying funds and achieved the financial
close for Riyad Taqnia Fund before heading back to Pakistan with
the passion to replicate what he had learned from this experience.
Prior to Riyad Bank, Fahad has worked in Corporate &
Investment Banking unit with Allied Bank limited and then
moved in to Financial Institutions Department at Standard
Chartered Bank, Pakistan. In 2010, he moved to United Bank
Limited where he led the set-up of the Non Banking Financial
Institutions team. During his career, he has closed multiple debt
and equity capital markets transactions.
FAHAD HUMAYUN
fahadhz@gmail.com
+92-332-2431715
www.deca.pk
MBA – MIS & Finance
IBA, 2005
BCS(Hons) – Software Engineering
IU, 2002

23. SOURCE: https://www.sba.gov/sites/default/files/articles/sbic_program_overview.pdf

24. SOURCE: https://www.sba.gov/sites/default/files/articles/sbic_program_overview.pdf

25. TAKAMOL
• TAKAMOL Holding (www.takamolholding.com) is a
Subsidiary of the Human Resource Development
Fund (HRDF)
• It was setup as an operative arm providing
Incubation, Shared Services, Innovation and
Industry activation services
• The company supervises the Musharaka program,
College of Excellence program and the Technical &
Vocational Training Centers across KSA
• HRDF is a multi-billion riyal fund that is focused on
growing employment of Saudi locals
FahadHumayun

26. The J-Curve
• A Startup cycle moves through a series
of stages. It commences with informal
investing by family, friends and
sometimes business angels. If the
business needs more money it will
proceed through a series of stages
until it might go to the open market
via an initial public offering (IPO).
• Many Small business run out of cash
at an early stage when Entrepreneurs
don’t realize how much money & effort
will be needed to break-even – Valley
of Death
• Funding is needed at every point
where the company reaches its max
potential and needs a capital
investment to increase capacity. The
entrepreneur at this stage has to
choose to maintain the status quo or
find the funding
FahadHumayun

27. Impact on returns
• Illustration is for a Single Asset
5 year investment showing how
50:50 Debt Equity ratio
impacts the investment returns
• Assumption is a fixed
Profit/Interest rate of 10% over
the life of the investment
(achievable through hedging)
• In loss scenarios, the Lender is
able to call on the Guarantee,
hence downside risk for the
investor is not multiplied
• Important to understand that
Investor Yield is enhanced with
investing half the amount he
would invest without leverage -
1,000,000
2,000,000
3,000,000
4,000,000
5,000,000
6,000,000
7,000,000
-20%
-10%
0%
10%
20%
30%
40%
50%
60%
70%
80%
Guarantee Call Un-Levered IRR Levered IRR