BAS Bulletin – Sept 19, 2014
(Extracted from the Observer dated September 19, 2014)
TODAY should mark a major step forward for venture capital in Jamaica, as a number of leading conglomerates are expected to respond to the Development Bank of Jamaica's call for proposals to manage venture capital funds, perhaps even including some foreign firms.
Last week, the Development Bank of Jamaica held its second venture capital conference entitled "Towards a dynamic ecosystem, linking capital, innovation, entrepreneurship for growth." In our article last Friday, we highlighted keynote speaker Professor Josh Lerner's presentation "Why bother with venture capital", but there were many other speakers at the conference, and a number of other activities surrounding it that bear mention, including critically, the official opening speech by our Minister of Finance, Peter Phillips, and those of the representatives of all three multilateral development banks involved in Jamaica — the IDB, World Bank and CDB — in the form of Therese Turner Jones, Fabio Pittaluga, and Nigel Romano respectively, all signalling their full support.
In his presentation, the Minister of Finance rightly noted that "Specific legislation will be required for the venture capital industry", adding that "many of our people don't identify high net worth people with angelic behaviour", a clear reference to business angel investors. He argued this initiative "proved them wrong."
Chairman of the Development Bank of Jamaica, Joe Matalon, described the IDB's collaboration as "invaluable", as their multilateral investment fund (MIF) arm has provided a large part of the funding required for the Jamaica venture capital project, as well as substantial technical support, with the MIF being an investor in 54 seed and venture capital funds across the region. A key panellist was the chief investment officer of the MIF, Susana Garcia Robles, who, feeling the energy in the room, encouraged the audience with her comment.
"We are making history here". A key area of MIF's current focus is to build venture capital ecosystems, as even small venture capital funds, such as the minimum US$20 million fund contemplated in Jamaica, may need smaller "seed" funds to prepare the companies for investment. In Uruguay, the MIF helped set up a seed fund to invest as little as US$50,000 to US$100,000 in projects by way of convertible equity, with the best performing companies going regional. She recommended that Jamaica seek to build a regional venture capital industry.
One company that is working on just that is the Michael Lee Chin-controlled AIC Caribbean fund, which, after having raised and invested US$225 million, is just closing a second US$100 million round of a planned much larger fund. The fund seeks to make seven to eight investments of between US$15 to 40 million in late stage cash flow generating businesses utilising the typical ten-year limited partnership that US institutional investors eg pension funds, are comfortable with. In short, it has a private equity focus, with a target rate of return of 20 per cent.
Managing partner Douglas Hewson outlined key elements of his pitch to US institutional investors, namely the difference between their perception and the actual reality of risk in the region, citing the outstanding performance of Cable Bahamas as an investment, or the over one hundred-year-old performance of Bank of Nova Scotia Jamaica. As he put it, "would you rather invest in a perfectly efficient market" or a less efficient one, where the task is to make an inefficient company more efficient, and where "the dearth of equity capital means each dollar of capital will be treated better".
Another panellist, Nelson Grey, represented the World Bank's Infodev programme designed to help create an angel investment community here in Jamaica. Grey, a Scot, has helped develop over twenty angel investing networks in Scotland, and has since worked in a wide variety of emerging countries. Grey notes that the traditional ten-year limited partnership model doesn't fit angel investing, as it requires high engagement. As he put it: "He doesn't want to work with someone who just wants money".
For Grey, the key metric in looking at state involvement in helping small business is not money raised, but jobs created or private sector funding mobilised, without which the state's role is just not sustainable in the longer term. Angel investing has different models, including personal guarantees for bank lending (for a fee) and revenue sharing, rather than simply equity. The key is getting to know the entrepreneur "as the business plan is relevant for the first fifteen minutes". Most important is the team (an A team and B business is better than vice versa) , the extent of the market opportunity, and how developed is the supporting ecosystem.
Finally, Yousef Hamidaddin of Jordan's Oasis500, a very successful business accelerator based in Jordan and a key partner in the 'Start Up Jamaica' initiative, noted that over a ten-year period Jordan had succeeded in increasing information and communication technology from three per cent of GDP to 14 per cent. They saw huge opportunities in the creative industries, for example, music, film, and animation, as did a number of other local panellists.