Conclusions

Broadening the range of financing instruments available to SMEs and entrepreneurs is  crucial  to  reducing  the  vulnerability  of  the  sector  to  changes  in  the  credit  market  and  to  address  the  “growth  capital  gap”  that  constrains  the  most  dynamic  enterprises.  OECD work is under way to map the range of financing instruments available to SMEs  and entrepreneurs and to assess the potential and challenges of these instruments in  addressing different financing needs of SMEs. 

This  section  has  focused  on  the  functioning  of  the  market  in  mezzanine  finance  and  on policy programs in this area. On balance, this form of finance has not received as much public attention as venture capital or specialized exchanges for SMEs, but it holds potential to respond to two critical problems in SME finance.

First, mezzanine finance can play an important role in widening the range of financing  vehicles  available  to  SMEs.  The  expansion  phase  of  the  firm  financing  cycle,  where  mezzanine is most commonly used, has been identified as one where market failure is  common. This is not to say that mezzanine is the best solution to the scarcity of growth  capital at all times, but that it is highly relevant when used by certain firms in specific  situations. While mezzanine finance is less suited than venture capital to financing high- tech  start-ups  and  guiding them  through  successive  phases  of  the  growth  cycle,  it  is  more effective in meeting the needs of established companies seeking to grow and those  seeking to effect major transformations.

Second, mezzanine finance may be especially relevant at the present juncture in global  finance, since it enables companies to improve their capital structure and lessen their  vulnerability  in  times  of  stress.  This  can  be  particularly  useful  when  SMEs  have  been highly leveraged and dependent upon close relationships with banks. Given the present  need in many countries to deleverage, mezzanine may have the potential to help SMEs  to improve the quality of their balance sheets and help them to move into the next phase  of expansion. 

Furthermore,  in  cases  where  the  withdrawal  of  private  funding  has  eased  but  private  investors  still  hesitate  to  take  new  risks,  mezzanine  can  be  a  highly  relevant  tool  for 

exiting the crisis. Because it has characteristics that help investors recognize new growth opportunities, partly through innovative risk-sharing techniques, mezzanine has the

potential to encourage new private funding and to direct investment to those firms with 

At  the  same  time,  mezzanine  finance  does  not  represent  a  definitive  solution  to  the  financing of SMEs. Many SMEs are not well-suited to this form of finance, and most firms using mezzanine finance will continue to need traditional debt and equity finance. Also,  the use of mezzanine finance instruments requires a certain level of financial skills on the part of entrepreneurs and SME managers, who often lack awareness and capabilities to  understand and access a wider range of financial options than traditional debt. Rather,  the  early  evidence  suggests  that  mezzanine  finance  can  be  an  important  part  of  the 

continuum of financing options that together constitute an efficient financial system.

One salient fact about the market in mezzanine finance is its uneven development across  OECD  countries.  It  seems  difficult  to  ascribe  differences  in  the  use  of  mezzanine  to  obvious  factors  such  as  the  state  of  development  of  the  economy  or  the  institutional structure of the financial system. Even countries at similar levels of development and with  similar financial structures appear to have vastly different levels of usage of mezzanine. In  some  countries,  a  well-developed  commercial  market  in  mezzanine  finance  has  functioned  for  more  than  two  decades  with  minimal  public  involvement.  However,  the  traditional market for commercial mezzanine finance has been upper-tier SMEs, with high  credit ratings and demand for funds above €2 million. Increasingly, governments in OECD  countries have developed measures to offer mezzanine products to SMEs with lesser  credit ratings and smaller funding needs. Public intervention has been taking two main  forms: (i) participation in the commercial mezzanine market by public entities (national  or subnational development funds, international organizations), which create investment funds targeted to certain categories of SMEs and award mandates to private investment specialists, who in turn invest in targeted companies; and (ii) direct public financing to  SMEs under programs managed by public financial institutions or development banks.  The ability to assess the full potential of mezzanine finance for SMEs and entrepreneurs,  and the effectiveness of public institutions in providing these facilities, is hampered by the  lack of data on commercial mezzanine finance in terms of financing volume, number and  type of firms, as well as data on public investment funds in countries and international  organizations. In this regard, progress is needed in terms of collection of statistical data  on the amount of public funding provided through both commercial vehicles and public  financial institutions, and on the performance of SMEs using this type of finance. To help  fill these gaps, more extensive analysis and policy dialogue involving key players, such  as official agencies that actively provide mezzanine finance, industry associations, private  financial institutions, and international financial institutions, should be encouraged. References Credit Suisse. 2006. Mezzanine Finance. A Hybrid Instrument with a Future. Economic Briefing no. 42.

European  Commission.  2007.  Mezzanine  Finance.  Final  Report,  Fifth  Round  Table  between Bankers and SMEs, DG Enterprise and Industry, European Commission.  http://ec.europa.eu/enterprise/newsroom/cf/_getdocument.cfm?doc_id=1065

Griggs,  R.  2012.  Annual  Report  2011/12,  Banking  Taskforce,  Appeals  Process,  Independent  External  Reviewer.  United  Kingdom.  Available  at:  http://www. betterbusinessfinance.co.uk/images/uploads/Annual_Report_Master_2012.pdf Kraemer-Eis¸ H., M. Schaber, and A. Tappi. 2010. SME Loan Securitisation: An Important 

Tool  to  Support  European  SME  Lending. EIB Working Paper 2010/7. European

Investment Bank.

OECD. 2010a. Assessment of government support programmes for SMEs and

entrepreneurs’ access to finance in the global crisis. Paris.

______. 2010b. High Growth Enterprises. What Governments can do to make a difference. Paris.

______. 2012. Financing SMEs and Entrepreneurs 2012. An OECD Scoreboard. Paris. ______. 2013. Alternative Financing Instruments for SMEs and Entrepreneurs: The Case

of Mezzanine Finance. Paris.

______. Forthcoming. Financing SMEs and Entrepreneurs 2014. An OECD Scoreboard.

Paris.

3.2.2. The Potential of SME Capital Markets in Emerging Asia

Shigehiro Shinozaki67

Asia’s  bank-centered  financial  systems  require  reduction  of  the  supply–demand  gap in lending as a core policy pillar to improve SME access to finance. Meanwhile,  the  diversification  of  financing  models  beyond  conventional  bank  lending  is  another  key  policy  pillar  to  better  serve  various  financing  needs  of  SMEs  and  expand  their  financial  accessibility.  The  rapid  growth  of  emerging  Asia  is  generating  SME  long- term funding needs and requires robust capital markets as an alternative channel to provide growth capital for SMEs. The G-20 leaders also addressed the importance of  promoting long-term financing for SMEs in the context of investment. The development  of capital markets that SMEs can tap is one of the policy challenges under the pillar  of  diversified  financing  models  which  requires  more  sophisticated  and  innovative institutional  arrangements  in  order  to  respond  effectively  to  the  real  needs  of  SMEs.  This  section  explores  the  potential  of  capital  market  financing  for  SMEs  in  emerging  Asia, reviewing the challenges of existing SME capital markets and assessing demands  on SMEs, regulators, policy makers, market organizers, securities firms, and investors  for developing an SME market, based on the findings from intensive surveys. Given the  responses to the national growth strategies and the crosscutting issues of global policy  agendas such as climate change, energy efficiency, and green finance, the potential for 

developing the “exercise” equity market68 _{and the social capital market in Asia is also}

explored in this section.

A. Introduction