Loan Guarantees: An Effective Instrument for Youth Start-ups? Multilateral Investment Fund (MIF) Inter-American Development Bank

Transcription

1 Loan Guarantees: An Effective Instrument for Youth Start-ups? Multilateral Investment Fund (MIF) Inter-American Development Bank Nobu Otsuka Lead Specialist Global Youth Economic Opportunities Conference September 13, 2012

2 CONTENT 1. BASICS 2. FUND IN NUMBERS 3. SUSTAINABILITY ANALYSIS 4. COMPARABLE SEED CAPITAL MECHANISM 5. CONCLUSION

3 Logic of Loan Guarantees It is a form of insurance that covers a lender - typically commercial bank - against default on its loan. Why a guarantee? Bank finance is collateral-based and risk averse. Start-ups have no asset to pledge. But, Partial credit guarantees mean that banks need to assess borrowers. Second best can be justified only if the first best is not available.

4 Models & Examples Direct/Individual model Fund SBLC, Cash deposit, Pledge Banks Entrepreneurs Indirect/Portfolio Model Banks Capital Markets Fund Financial Intermediaries Examples: MFI driven-guarantee fund (ACCION) Rwanda s Women Guarantee Fund Nigeria s Agricultural Credit Guarantee Scheme Fund National Guarantee Fund (Colombia) FOGAPE (Chile) Portfolio Entrepreneurs Entrepreneurs Entrepreneurs Effects on growth, jobs, productivity?

5 Logic of Loan Guarantee Fund May be infinite risk? Bank s perception Risk Real risk/return Need to have some gap so that guarantees provide value added. Return

6 Only one bank (first come first serving) PROBIDE Fund Structure US$1.04 million Trust Fund (Fideicomiso) 50% CASH COLLATERAL (MIF/IDB) 50% PRIVATE SECTOR GUARANTORS (Pledge) (13 FIRMS) Manager PROBIDE Certificates 67% OF LOAN AMOUNT Partner Banks Youth Entrepreneurs years old

7 Deal Source & Financing Condition Business Plan Competitions Support for business plan development Due diligence by PROBIDE and San Ignacio de Loyola University Negotiation with banks and follow-up by PROBIDE

8 Numbers at a Glance (1) (Contest 1)* Contest 2 Contest 3 Contest 4 Contest 5 Total (2-5) Projects presented (A) (453) 788 3, ,695 Number of Finalists (B) (104) Number of Winning Projects (C) (32) Loan Approved (D) (18) Loan Disbursed (E ) (11) Effectiveness E/B (10.60%) 15.20% 24.20% 91.80% 36.95% 36.80% Default (F) * Default rate F/E 29.4% 13.6% 19.6% 15.3% 19.0% 24.79% *The first contest was not financed by IDB

9 Numbers at a Glance (2) Balance: US$ 216,821 Certificates executed Certificates encumbered Certificates unencumbered (returned) Amortized: US$ 1,110,467

10 Numbers at a Glance (3) As of July 2012 Expected final results # of firms that received loan 121 Average size of loans US$11,340 % of the firms that extended repayment period 15% # of firm that used the guarantee fund twice 5 # of firms that used the guarantee fund 119 # of firms that repaid the loans 83 89* 23 30* Default rate# of firms defaulted 19-24% Survival rate (more than 3 years) 75%

11 Numbers at a Glance (4) Default details (23 firms) Loan amount Repaid amount US$293,206 US$41,622 Default amount US$251, % Guaranteed amount US$196,448 Guarantees executed US$154, % Banks loss US$ 96,758

12 Management Challenge (1) Director Selection Market Analyst Financial Expert University Coordinator Business plans development Constitution Entrepreneurs Constitution Process with Guarantee fund Banks Trustee Negotiation with Banks Guarantee fund Implementation MIF/IDB Private firms Monitoring

13 Management Challenge (2): Evolution 2005 and 2006 were the years of restructuring. Loan Disbursement and Repayment Since 2006, the modality was changed to rolling admission.

14 Management Challenge (3): Geographic Distribution Tumbes 1 3 Loreto Piura Lambayeque Cajamarca La Libertad 6 Ancash 3 1 Huánuco 2 Ucayali Lima 64% Provinces 36% Lima Ica Ayacucho Arequipa 17 Junín Cuzco Abancay 2 10 Puno Tacna

15 Distribution by Sector 121 firms financed 14% 4% 3% 7% 5% 67% 23 firms defaluted 0% 5% 0% 12% Service/Retail Fishery Agro Tourism Manufacturing ICT 83%

16 Fund Sustainability Analysis 22%

17 How to make the fund sustainable? Revenue sources: Investment in long-term safe assets (to generate income to cover annual admin costs) Fee charged to entrepreneurs Sustainability depends on factors such as: Fund size Default rate Allowable absolute idle space Fee and # of firms Transaction costs (# of firms)

18 Sustainability Simulation Annual Income Default (annualized) Fund size Allowable Contingency Firms Fee 3.5% Fee 3.5% Fee 3.5% Fee 3.5% Investment 1% Investment 1% Investment 1% Investment 2% Default 20% Default 15% Default 10% Default 10% $2 million 70% 190-5, ,933 9,933 60% 163-1,811 2,208 6,228 14,228 50% 136 1,823 5,173 8,523 18,523 $3 million 70% 285-8,169-1,134 5,900 14,900 60% 244-2,717 3,312 9,342 21,342 50% 204 2,735 7,760 12,785 27,785 $5 million 70% ,616-1,891 9,833 24,833 60% 407-4,528 5,521 15,571 35,571 50% 339 4,559 12,934 21,309 46,309

19 Comparable Seed Capital Fund in Uruguay US$1.1 million Started year convertible loan Loan size: US$20,000 US$50,000 3 year grace period on principal 10% p.a. (fixed) Quarterly repayment based on gross sales (3, 5, 7, 10%) Can defer repayment No prepayment penalty Managed by a venture capital fund company

20 Comparable Seed Capital Fund in Uruguay Proposals analyzed 548 Loans approved 24 Firms financed 20 Firms created within the last 4 years 12 Loans converted into equity 2 Average loan size Effective rate 3.6% Startup ratio 2.1% US$40,000 Less than 1 in 100 start-ups obtain angel financing. Less than 1 in 1,000 start-ups are venture capital funded. Less than 1 in 10,000 new-companies go public. (Source :Susan L. Preston Angel Financing for Entrepreneurs)

21 Direct vs. Guarantee Fund (Basic structure) Direct Loan (2007-) Guarantee Fund (2003-) US$1.1 million US$800,000 used for loans Managed by a venture capital fund management company No involvement of banks Strong support by ANII (Science and Technology Government Agency) US$1.04 million US$750,000 returned Managed by NGO and University No involvement of VC/Angels No support from the government agencies

22 Direct vs. Guarantee Fund (Results) Direct Loan (2007-) Guarantee Fund (2003-) 20 firms financed 12 firms created 7 failed (expected) 170 jobs created US$ 3 million sales 7 received second round financing US$3 million Valuation of the three successful firms: US$15 million 121 firms financed 121 firms created failed 500 jobs created US$11.2 millions sales 20% of firms have second secured bank financing

23 Logic of Venture Capital Loan balance Disbursement US$800,282 Repaid US$473,190 Outstanding US$562,530 Likely default US$345,048 (43%) Likely repaid US$217,482 Repaid+ Likely repaid US$690,670 X 2! Successful exits (expected) 2.5% of the 3 home-run US$900,000 Total Total expected earning US$1,590,670

24 Direct vs. Guarantee Fund: (Entrepreneur Profile) Direct Loan (2007-) Guarantee Fund (2003-) University graduates Software, technologyoriented Secondary, vocational training completed Service-oriented Some work experience Pursuing bachelors degrees

25 Direct vs. Guarantee Fund (Sustainability) Direct Loan (2007-) Guarantee Fund (2003-) 3 high-growth firms (15%) obtained second round finance by VC and business angels. Tend to look for a few super winners Easy to align incentives 20% of the operating firms obtain bank finance for second and third round (interest rate is still high) Some banks launched SME finance lines Difficult to align incentives (why guarantee rather than invest, when there is no upside?)

26 Direct Loan Fund vs. vs. Guarantee Fund (Cost) Direct Loan (2007-) Guarantee Fund (2003-) Deal flow generation/improvement Fund management (Minimum) Monitoring (costly, but vested interest for VC) US$4.3 million + annual US$240,000 Deal flow generation/improvement Fund management (minimum) Monitoring (costly) US$1.3 million + annual US$120,000 Caveat: sector diversity, geographic coverage, alliance, learning curve, etc.

27 Logic of Loan Guarantee Fund Revisited Bank s perception Risk Real risk/return This space is not large enough for the fund to be sustainable Return This rather makes the bank s perception closer to the reality. And makes it harder for the fund to sustain.

28 Conclusion Collateral required because of information asymmetry (lenders are not informed about borrowers) Any mechanism to inform financiers of borrowers information is good Risk Uncertainty Guarantee fund may be effective in engaging banks in the unknown world (Learning Externaltiy) Seed direct fund may stimulate angel financing and venture capital

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