Mezzanine Finance
Definition
Hans Schuhmacher:
Concise definition: a form of company funding that provides participation rights in eventual profits for investors instead of interest on debt. Particularly suitable for SMEs and startup companies.
Characteristics
Hans Schuhmacher:
- Application for technology cooperation: Financing of companies or joint ventures in
threshold or developing countries, particularly of startups, not less than 80.000 EUR
- Achievement potential : Mezzanine Finance mitigates risks from weak proprietary capital
and effective interest load for young companies and, thus, for investors.
- Prerequisite for effectiveness : Bundling and spreading of investment capital by
Mezzanine funds for technology cooperation. Creation of the necessary infrastructure on site in order to facilitate reliable assessments and to minimize review costs. Online platforms for brokering, networking and information exchange
- Practical experiences: Mezzanin Finance stood the test in financing SMEs and startup
companies. Up to now there are no experiences regarding Mezzanine finance for companies in the global South by investors from the global North.
- Possible correlations : Mezzanine finance can be directly combined with P2P Finance (Mezzanine capital from retail investors). As the creation of appropriate
infrastructures on site is a necessity for other instruments too, there are indirect correlations. In one region, several financing instruments can be employed, for example Mezzanine finance for companies and microcredit for contractors and consumers.
Discussion
Hans Schuhmacher:
"This model provides participation rights in eventual profits for investors instead of interest on debt. Mezzanine finance is employed for company funding, particularly for SMEs, and is beneficial for startup companies. It can mitigate a typical weakness of young companies, the lack of proprietary capital, without bringing about restraints for the founders due to strong influence of shareholders. Mezzanine is not debt capital which demands payment of interest regardless of events and circumstances. Thus, Mezzanine capital minimizes the risk of failure due to insolvency for SMEs and startups. In industrialised countries, Mezzanine is attractive for investors because of a comparatively high rate of return. The flexibility of the model allows variations which are closer to outside capital or proprietary capital, according to the needs and interests of entrepreneurs and investors. Thus, it can be adapted to specific local circumstances. Special Mezzanine funds for technology cooperation can mitigate the risk of single investors by not allocating her investment to a single company or project in the global South. Bundling can also minimise transactions costs.
For companies or planned projects in developing countries, such special Mezzanine funds would reduce difficulties to find investment capital. Their counterpart would be a Mezzanine fund which, in order to facilitate coordination and information exchange, would cooperate closely with the companies that provides the technologies in question. These companies, in turn, could choose a Mezzanine fund as partner during the planning phase who could act on site together with representatives from the technology companies and who would be included in the planning of the project. This would ensure that the Mezzanine fund is well informed regarding the status of projects and can use this knowledge when dealing with investors.
A correct risk assessment and competent monitoring on site are decisive in order to avoid dead losses. To facilitate reduction of the significant review costs, an appropriate infrastructure has to be created in the destination area of the technology transfers, where applicable employing public or NGO assistance. Mid-term, experienced Mezzanine funds can use their knowledge regarding local conditions to pave the way for SMEs in the global North into the regions where the fund is active. Thus, these funds may become initiators of technology cooperation.
To date, regulations concerning investment companies allow the realisation of Mezzanine funds only as private placements. This restricts them to a small segment of investors willing to take risks. International efforts aim at softening these regulations. In part, these efforts stem from the proponents of socially responsible investment. The results of the current financial crisis may accelerate this process."
Example
MyC4: Bidding on Mesoloans
Sander Van Damme:
"While Kiva and the like are focused on refinancing small loans to poor entrepreneurs, MyC4's main target market are established companies in developing countries that do not have access to bank credit; they aim for the Third World SME market. This translates in typically larger loans for already established enterprises. Another difference between this Danish platform and other ones is that they chose to let the investor decide whether or not a project is worth to be financed. It is only after a loan has been fully funded online, through a Dutch auction system, that it will be disbursed to a local administrator (usually an MFI) who then on-lends it to the borrower as chosen by the Western lender. Another organization, the provider, which usually is a local NGO, will then make sure information is provided on the MyC4 platform to inform the investor about local conditions. MyC4 is a for-profit organization and its business model is based on a 6% fee on repayments and additional provider and administrator fees; given that it also gives a return to investors, its borrower interest rates are substantial. Meaning the interest paid by the lending business, through the sum of all these fees, is usually found in the 40 to 70% range." (https://www.zidisha.org/editables/news_docs/Louvain.pdf)
Source
- Climate Justice as Business Case: Innovative Business Models for the Transfers of Climate-Friendly Technologies. By Hans Schuhmacher, with support from Julio Lambing et al. European Business Council for Sustainable Energy. Preliminary English version. 06 December 2009 [1]
URL = http://www.e5.org