OECD SME and Entrepreneurship Papers No. 10 Alternative Financing Instruments for SMEs John Thompson, and Entrepreneurs: The Kris Boschmans, case of capital market Lora Pissareva finance https://dx.doi.org/10.1787/dbdda9b6-en OECD Papers on SMEs and Entrepreneurship Alternative Financing Instruments for SMEs and Entrepreneurs: The case of Capital Market Finance By John Thompson, Kris Boschmans and Lora Pissareva Abstract The present report analyses the extent to which capital markets have provided capital to SMEs since the GFC, focusing on three kinds of financial instruments that have proven especially important in providing finance to SMEs undergoing major transitions during the past few years: · Private Equity; · Private Debt; and · Collective Investment Vehicles It is part of the 2017-18 Programme of Work and Budget of the Working Party on SMEs and Entrepreneurship (WPSMEE). JEL codes: L26, G32 Keywords: SME finance, capital markets, growth finance, financial crisis OECD SME AND ENTREPRENEURSHIP PAPERS This paper is published under the responsibility of the Secretary-General of the OECD. The opinions expressed and the arguments employed herein do not necessarily reflect the official views of OECD member countries. The publication of this document has been authorised by Lamia Kamal-Chaoui, Director of the Centre for Entrepreneurship, SMEs, Regions and Cities. 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All requests for commercial use and translation rights should be submitted to [email protected]. 3 │ Table of contents Abstract ............................................................................................................................................ 1 1. Introduction and Summary .............................................................................................................. 5 1.1. Rationale ....................................................................................................................................... 5 1.2. Background ................................................................................................................................... 5 1.3. Organisation of this report ............................................................................................................ 6 1.4. Main findings ................................................................................................................................ 7 2. Bank and Capital Market Financing for SMEs ............................................................................ 10 2.1. Bank and capital markets: the distribution of risk and return ..................................................... 10 2.2. Private capital markets ................................................................................................................ 11 2.2.1. Investors in private capital markets ...................................................................................... 11 2.2.2. Private investment partnerships............................................................................................ 14 3. Private Equity and Private Debt .................................................................................................... 16 3.1. Private equity .............................................................................................................................. 16 3.1.1. Structural characteristics of private equity ........................................................................... 16 3.1.2. Patterns of revenue: the “J-curve” ........................................................................................ 18 3.1.3. Categories of private equity ................................................................................................. 19 3.1.4. Distinctive characteristics of private equity in individual OECD countries ........................ 23 3.1.5. Trends in private equity in OECD countries and regions..................................................... 27 3.2. Private debt/ Alternate lenders .................................................................................................... 31 3.2.1. Structural characteristics of the private debt market ............................................................ 31 3.2.2. Trends the private debt market and sources of data ............................................................. 34 4. Public Capital Markets ................................................................................................................... 37 4.1. Limited use of public markets by SMEs ..................................................................................... 37 4.2. Collective investments in the SME segment: closed-end funds ................................................. 37 4.3. Country experiences.................................................................................................................... 41 4.3.1. United States ........................................................................................................................ 42 4.3.2. United Kingdom ................................................................................................................... 49 4.3.3. France ................................................................................................................................... 51 4.3.4. Canada .................................................................................................................................. 54 4.3.5. Portugal ................................................................................................................................ 58 5. Conclusions and Recommendations .............................................................................................. 60 6. Bibliography ..................................................................................................................................... 64 Tables Table 1.1. Alternative External Financing Techniques for SMEs and Entrepreneurs ............................. 6 Table 3.1. Sources of Funding for Private Equity by Region, 2016 ...................................................... 25 Table 3.2. Sources of Funding for Private Equity in Europe, 2015....................................................... 26 Table 3.3. Global Private Equity: Fund raising and un-invested Capital, 2010-16 ............................... 28 Table 3.4. Trends in Middle Market Private Equity in the United States, 2007-16 .............................. 28 4 │ Table 3.5. Trends in Private Equity in Australia, 2006-16 .................................................................... 29 Table 3.6. Trends in Private Equity in Australia, 2006-16 .................................................................... 30 Table 3.7. Trends in Private Equity in Canada, 2013-16 ...................................................................... 31 Table 3.8. Global Private Debt Market: Fund Raising by Region, 2011-15 ......................................... 34 Table 4.1. Collective investment vehicles for retail investors in SMEs in OECD countries ................ 42 Table 4.2. Issuance of new shares of BDCs, 2007-16 ........................................................................... 48 Table 4.3. Fund raising by FCPI and FIP in France, 2008-16 ............................................................... 52 Table 4.4. Tax-Advantaged Funds in Quebec ....................................................................................... 55 Figures Figure 3.1. Private Equity investment in selected OECD countries, 2016 ............................................ 24 Figure 3.2. Outstandings and “Dry Powder” in the Global Private Debt Market, 2006-16 .................. 35 Figure 4.1. Activity in the BDC Sector, 2008-16 .................................................................................. 47 Figure 4.2. Venture capital trusts in the United Kingdom, 1995-2017 ................................................. 51 Boxes Box 3.1. The social dimension of private equity ................................................................................... 18 Box 3.2. Risk and leverage in private equity ......................................................................................... 21 Box 3.3. Major categories of leveraged private equity operations ........................................................ 22 Box 4.1. SMEs and open-end funds ...................................................................................................... 39 5 │ 1. Introduction and Summary 1.1. Rationale Small and medium enterprises (SMEs) traditionally rely on banks and similar deposit- taking institutions for external financing. Immediately after the post