Innovative Instruments for SME Financing in Romania - a New Proposal with Interesting Implications on Markets and Institutions

Procedia Economics and Finance 32 ( 2015 ) 240 – 255

2212-5671 © 2015 Published by Elsevier B.V. This is an open access article under the CC BY-NC-ND license (http://creativecommons.org/licenses/by-nc-nd/4.0/).

Selection and peer-review under responsibility of Asociatia Grupul Roman de Cercetari in Finante Corporatiste doi: 10.1016/S2212-5671(15)01388-X

ScienceDirect

Emerging Markets Queries in Finance and Business

Innovative instruments for SME financing in Romania - a new

proposal with interesting implications on markets and institutions

Mircea Boscoianu

, Gabriela Prelipean

, Emilia Calefariu

, Mariana Lupan

*

b_{“Stefan cel Mare” University, Suceava, 720229, Romania}

Abstract

The problem of SME manufacturing financing is already chronic in Romania. The banking system, on the one hand, still fails to sufficiently understanding on these projects, on the innovative character and the work model with intangible assets. On the other hand, the stock market is inaccessible for this type of investments. Investment funds are too focused on liability and indicial management. The government makes efforts to solve the problem of financing SME manufacturing, but there are no tools and no markets or appropriate institutional architecture. In this paper we propose not only new tools based on innovative mix of private management and governmental support of a new type of financial public -private partnership (PPP), but a way that creates a strong support of the markets and changing public perception about investments in capital markets. It first examines the possibility of creating a tool as closed end fund for SME manufacturing, the initial participation of the government will be 50%. It could be attracted foreign Venture Capital Fund (VCF) or Private Equity Fund (PEF) that already exist on the market and are interested in portfolio diversification. This fund can turn into semi-open in the background periodically be admitted new entries private. This fund can turn into semi-open fund in which periodically will be admitted new private entries. The fund may provide loans or, in a further development, may provide venture capital or private equity funding and at least we can start creating a framework for these new tools. Based on this proposal it is also possible to analyze another type of fund focused on co-financing mechanisms dedicated for national and European projects. In this case the main interest is to support liquidity management, consulting, to support warranties or windows settlement for different project phases.

© 2015 Authors. Published by Elsevier B.V. This is an open access article under the CC BY-NC-ND license (http://creativecommons.org/licenses/by-nc-nd/3.0/).

Selection and peer-review under responsibility of the Emerging Markets Queries in Finance and Business local organization. Keywords: SME financing, PPP (Public Private Partnership),VCF (venture capital fund), PEF (private equity fund)

* Corresponding author. Tel.: +40740311292; fax:+400230520080.

E-mail address: gprelipcean@yahoo.com.

© 2015 Published by Elsevier B.V. This is an open access article under the CC BY-NC-ND license (http://creativecommons.org/licenses/by-nc-nd/4.0/).

1. Introduction

The aim of this paper is to examine some innovative financing instruments for emerging markets with details on the implications on markets and institutions in the case of Romania. For an emergent market it is essential to adapt toward the real conditions and the use of innovative instruments for SME financing in Romania could represent a good proposal with interesting implications on markets and institutions.

The conventional methods based on VCF and PEF are still difficult to apply in the context of Romanian capital market, a market far behind regional emergent markets because of the lack of interest and lack of understanding of the mechanisms, a difficult post-crisis recovery, and even a reluctance to maintain these markets. The interest is now directed toward effective solutions of triggering new innovative process in an efficient and robust manner, fructifying the existing infrastructure. The solutions must be simple and easy to apply, also having the support and sustain of the legislation. Specialized funds VCF/ PEF have shown recent interest for Romania, but the present legislative framework does not allow a solid development, and there are not enough incentives in this line of interest. The introduction of a hybrid solution based both on VCF/ PEF funds but also on the power of PPP (Public Private Partnership) could sustain not only Romanian SMEs but also the capital market in a synergic mechanism.

2. Introduction in innovative financing methods for Romanian SME

The spectrum of the access to finance of the SMEs is nowadays different from two decades ago. SME development stages in Romania have developed rapidly, against a background of uncertainty and turbulence, entrepreneurs’ main obstacle being the possibility of financing (financing conditions, effective access to financing). Indeed SME are characterized by deep uncertainty, lower fixed investment, lower fixed assets and a different and dynamic structure of additional finance. New firms and start-ups are usually characterized by negative cash flows, untried business models, and additional risks due to technology development gap, the strong competition, and also environmental aspects. In this case the business plans are difficult to be evaluated with additional limitations to their financing. The response could be the diversification of funding sources portfolios to innovative solutions.

The first step in SME financing is represented by loans granted by the banking system. If a decade ago a SME was almost impossible to get banking loan, nowadays there are specially created products that are dedicated to support the SME’s. There should be noted the evolution of interest rates in the last 1-2 years and an extension of the loan’s maturity, end encouraging aspect for the SME.

Next we will refer to specific external funding solutions that are not related to the banking system. The first step of innovative external SME financing is represented by business angels (BA)/ angel groups/ angel networks. In Romania there are several such initiatives that are oriented in the ICT field, but the value of the financing is low because of the entrepreneur’s expectations, on one hand, and because of the exaggerated expectations of the financiers, on the other hand. This type of financing can also be addressed to some geographical areas or regions, in order to obtain a total administration cost reduce (expertise and monitoring costs have a significant share in this case).

VCs follow the BAs with focus on growth opportunities and are based on a competitive selection of projects lower than 1 mil Euro. The interest is to sustain the path of growth by giving an active support based on effective cooperation with the management. The main stages of VCs are: fundraising, investment with focus on growth and exit (initial public offering - IPOs, mergers and acquisitions - M&As). This classic path of VCs is not easy to be understood in Romanian markets because of the poor liquidity and the lack of information. It is hard to believe that the situation will change in the coming period of time, so as this type of financing will represent rather little in the total financing. The innovative solutions based on private equity funds PEF (Fenn, 1997) and venture capital funds VCF (Moscovitz, Vissing-Jorgensen, 2002) have been developed in a spectacular way in the last two decades. There are only few references with specific data (Wong, 2002) and an

analysis of the propensity toward for these investments is difficult to proceed without additional analyses. Lerner (2007) demonstrated the increasing role of alternative sources of financing, highlighting the monitoring role of SMEs portfolio in the context of investments atomization. Cumming, Johan (2007) showed the importance of project selection by institutional investors and the role of investment by venture capital funds or private equity (VCF/ PEF). PEFs are collective investment vehicles dedicated to sustain the next step of SMEs development, situated between 1-5 M Euro, by optimizing the amounts of capital from the investors by using specialized intermediaries firms (usually this private equity manager work with many other investment funds). The profit is based on the difference between entrance and exit prices of the participants. By their high risk nature, PEFs could accept high leverage based on additional banking finance capable to create a faster development (LBO-leveraged buy outs).

Because the direct investment in SMEs is difficult and high risky, investors search indirect solutions like primary collateralized bond obligations (PCBO-SME). PCBO-SME is represented by an asset-backed security (ABS) with newly issued bonds, and offers a competitive supply of funds with active support on innovative start-ups. The use of PCBO-SME is also efficient in the case of firms with low credit ratings. The mechanisms of PCBO-SME are the following: in a first step, the firm issue bonds and sell them to a special purpose vehicle (SPV) capable to resale to investors interested on high returns, on different types of ratings/ tranches. Based on the property of diversification, PCBO-SME represents a relatively safe asset which offers higher yields, a good solution for solving the classic credit mismatch problem and the financing gap typical for innovative SMEs.

Even though this is a simple mechanism, there are required strong markets and investment culture, on one hand, and robust SME’s to respond to such challenges, on the other hand. In this case a government intervention is possible, based upon market functionality, creating markets and opportunities. This observation is extremely important for Romania, because in this case, the existent infrastructures are exploited. The small number of possible financing and the groping on risk classes that are associated with the SME rating, could make a difficult selection process, and also determining the risk premium that could satisfy the investors’ expectations and for the SME to have access to. This again is a problem generated by the small Romanian bond market. It can be seen that decreasing the interest rate would discourage the investors. The solution proposed in the article is based on the PPP concept, in this case, the government undertaking to buy these bonds by primary issue, afterwards reselling them on a secondary market, more specific to big clients, as bond funds, already existing on the market. There are of course other options like investment funds specialized on VCs (VCFs) and private equity funds (PEFs), based on flexible partnerships with institutional investors, financial companies and government entities, that also in this case use existent infrastructure and scalable market mechanisms with multiplicative effect. The innovative alternatives for flexible financing adaptable for small, illiquid markets can engage institutional investors in direct but also indirect investments with robust contributions on the creation of superior financial products, related to the dynamics of the markets and characterized by smaller risk, higher liquidity and transparency.

3. Innovative SMEs financing for emerging markets. Lesson learned from the actual PEF industry

VCF and PEF are innovative financing solution, based on the concept of portfolio diversification, characterized by adaptive capacity of project’s selection, flexibility of financing an appropriate project, high leverage, and equipped with securitization capabilities (of the assets and future cash flows of the portfolio companies).

For a better understanding of VCF/PEF functioning as specialized funds in SME financing, we present the evolution dynamics of these instruments in US. The first successful wave of the PEF industry (the 1980s) was focused on the restructuring mechanisms and productivity growth (Cumming, 2007). The high financial leverage in the portfolio companies and the orientation to increase the efficiency by reducing the agency costs associated to the principal- agent conflict, have represented the basic factors of interest for PEF. Managers should be directly interested to increase the performance of the portfolio companies and to provide elements of

performance to shareholders, but in the case of emerging markets this is very difficult and there are higher costs associated with the monitoring. In addition, scalability does not necessarily works, the companies in emerging markets being characterized by uncertainty and high volatility of the performance indicators. On the other hand, the high leverage aspect involves high risks related to the impossibility of paying the interests and loans rates, with the possibility of even closing a feasible business. This VCF/ PEF orientation on short term financing and high interest rates, harm in fact, the long-term development capacity of portfolio companies, the only advantage being the discipline of payments and collection of flows towards VCF/PEF shareholders. In the first wave of PEF transactions there were highlighted also financings through high interest bonds mezzanine type, which encounters additional risks during the life cycle of firms. There were also situations where companies were forced to suspend their work, proving actually problems in the PEF’s portfolios with impact on the capacity of restructuring a high leveraged situation. The PEF investment chase after the acquisition of the interest incomes actually contributed to the crisis of junk bonds, an explosive situation that affected downstream all the American firms. This lesson must be well understood by the emergent countries where there exists a volatile interest rate and bond markets are illiquid. In the early 1990s, after returning from the junk bonds crisis, the PEF industry was characterized by a modest increase in transactions, basically a stabilization period with focus on quality. This period however allowed the future quantitative accumulations on PEF segment. The revitalization of interest in SMEs integration in PEF after 2000 was influenced by the aim of SME to reduce their excessive management costs, and the pressure of short-term investors toward higher interests in the money market.

Thus, the second wave of PEF industry began in the late 1990s, with a peak in 2007, during which the PEF contracts represented over 25% of the total volume of mergers and acquisitions. The novelty of this new wave of PEF transactions was characterized by a better efficiency of listing SME in public companies and a good focus on consulting and knowledge. If in the first wave there was a tendency to capitalize the financial engineering mechanisms and to create value through cost savings, in the second wave the instruments were focused on operational engineering, providing professional managerial knowledge, necessary for increasing value and profitability. Most of PEF resorted to professional consulting teams (for example KKR, Bain Capital) and built partnerships to support strategic plans. It is interesting to analyze the impact of management on the PEF effectiveness for both portfolio companies and for PEF companies in the context of their dialectical relationship in a scalable way. In the recent years we are witnessing a settlement of transactions that could adversely affect this type of innovative financing instrument. Next there are studied the managerial implications on PEF. Regarding the recovery after the global crisis, it is interesting to note that the PEF portfolio companies capacity of recovering in the new context of low volatility (Willkinson, 2012). This performance was better than the listed firms (Hotchkison, 2011) but despite this aspect, the investors interested in participating in PEF was strongly influenced by the change of the attitude towards risk and especially towards the incorporation of the liquidity risk and exit risk in assessing risk premium. Investors have fundamentally reset these perceptions and there was no theory that clearly quantitatively expressed the characteristics of this change of behavior. Therefore, it is necessary to create new performance evaluation models, establishing a mechanism for evaluating the risk return liquidity. This aspect is very important in our study in order to understand the mechanisms capable to stimulate VCF/ PEF development in emerging markets.

4. The analysis of performances of PEFs The role of management in reconfiguring flexible architectures

Understanding how to obtain the performance of firms accessing VCF / PEF is essential for firm managers and for the managers of these portfolios. New architectures that enable the achievement of performance in terms of risk control and reducing the volatility of results would contribute to increase of the investor interest. Last but not least, the government support it is correlated with the possibilities for achieving the proposed performances. The state can intervene with measures based on markets and the resulting impact will be sustainable. In the literature, the analysis of the performance of portfolio firms selected by VCF/PEF showed a

remarkable interest for the quality of the management, the sustainability of operational performance, liquidity, productivity, the relationship with markets, innovation). The portfolio firms showed a robust dynamics with a profitability of 22.2% with a PEF average efficiency 70.5% based on leverage (Cumming, 2007; Davis, 2009; Harris, 2005).

It results the implication for the need to develop the capital market as a basic element in the equation of development of this type of financing. For Romania, a recent proposal is the possibility of admission since 2015 at the Bucharest Stock Exchange (BSE) of SMEs with market capitalization of more than 250kEuros and a free- float of more than 10%, with a focus for start-ups. The New Connect platform that will serve this market segment has already been successfully tested in Poland since 2007 and pushed up the number of "gazzelle" companies, with increases of over 20% per year. We should also remark that the portfolio firms benefited from higher levels of development of new products, based also on an interesting increase of the number of patents (Lerner, 2008; Ughetto 2010), this effect being more important for Romania as an emerging country whose development of knowledge is essential. Regarding the effects of creating new jobs, the interpretation of results is difficult because of the heterogeneity of the portfolio firms and the huge number of transactions (Amess 2007; Gurung, Lerner 2009), but for emerging markets this aspect remains an important aspect and deserves a separate treatment. The dramatically reducing the number of SME in 2010-2011 has not been followed by a recovery in number as expected, the fragility of markets and lack of government support are among the causes of failure of this objective. Of course, it should be considered the role of SMEs global development, able to create new jobs in Romania.

VCF and PEF management is a very complex process that involves not only portfolio management but also strategic capabilities like outstanding qualities of a market maker, investment marketing for attracting both foreign but also domestic investors, high professionalism in the selection of portfolio companies and a remarkable ability to anticipate market movements. VCF and of PEF management should also include the following tasks: the capacity to mobilize partners in order to attract stable flows of investments; an agile capacity to identify target firms for adjusting the VCF/ PEF portfolios; the ability to develop collaborative relationships with banks and other non-bank financers in order to achieve a robust leverage; the contribution to secure specific VCF/PEF instruments. Regarding the size and the implications of scalability in the management of VCF / PEF should be noted that the confidence in emerging markets is essential and that is why we believe that the first step would be better to be based on government involvement for the opening of the PPP approach as a natural continuation to private investment and retail.

Klein (2013) showed the importance of achieving a balanced perspective in the management of VCF/PEF. The principal-agent problem between funds and their portfolio firms is related to the fact that managers act in their own interests and not in the interests of the fund’s shareholders (Jensen, 1999). Kaplan (1991) and Wright (1995) show the importance of the characteristics of the portfolio firms, the financing contracts and the management of funds. It is important to understand the possibilities of evolution of VCF / PEF and diversification strategies for exploiting growth opportunities as strategic options. The passive investors in emerging markets could not understand this picture because of their interest in short-term instruments. Funds managers should take care of this fact in their portfolio management but also on the initial prospect it should be mentioned the objectives of the funds in a more detailed manner.

Fig. 1 Conceptual framework for the analysis of the possible strategies of VCF/ PEF in emerging markets Source: Adapted from Bacon and Wright (2013)

In order to understand the framework with possible paths of evolution we consider the four quadrants framework proposed by Bacon, Wright (2013). In the first quadrant there is a short-term speculative strategy focused on increasing the organizational efficiency and extraction of value and could be viewed as a hostile takeover. This is a natural beginning, based on the simple fact that investors are on one hand stressed by the performance and on the other hand by the fact that other possible alternatives for financing are poor. This quadrant could be also considered as a first move in a VCF/ PEF from emerging markets. The problem is which could be further evolution and that would be the government's role in sustaining a favorable development in macroeconomic terms, in the sense of orientation to a preference for long-term investments. In quadrant II, the shareholding aims to construct effective business, and create the mechanisms for launch the quadrant IV. But in real life, VCF/PEF can hold both long-term assets, and short-term assets and aims to increase the value by taking advantage of opportunities for efficiency and growth. The art is to realize a flexible adjustment to the size and frequency of the possible investment flows and to relate these flows to the business strategies and operational practices. Hoskisson (2013) proposed an intuitive visualization of the possible financial structures expressed by four quadrants associated to the leverage position and the degree of diversification. If we consider the strategy, the diversification and the financial structure in a unified framework it results a 3D strategic vision in which is possible to recognize the global picture of positioning the funds and their evolution, offering the image of possibilities to reconfigure the possible long term strategies in a flexible context of tactical and strategic actions. The aspect of diversification is a natural task in the case of Romania because VCF/ PEF are expected to be small, at least in the first phase. To further specify the possibilities of effective and robust growth is necessary to add a new ingredient, named PPP and to analyze the typical performances of this type of funds. This framework is very important in emerging markets and it should be applied from the beginning to the end of the fund lifecycle in these markets. It is also important to note the importance of a better

SHORT TERM (ST) LONG TERM (LT)

E FFI CI E N C Y ( EF ) I II IV GR O W TH (GR )

a zone that should not be totally neglected because it gives investors specific ingredients a zone with specific in the case of turbulent periods

a zone with special interest in the case

of emerging markets, including

understanding of the possible strategies and their future paths even in the phase of design of VCF/ PEF funds.

Fig. 2 Conceptual framework with eight elements: a 3D strategic vision for VCF/ PEFin emerging markets Table 1 The possible eight strategies for evolution in emerging markets

Based on niche Based on diversification I Speculation I’ Speculation and Diversification II Long term stability II’ Long term stability and Diversification III Short term rebound III’ Short term rebound and Diversification

IV

HPWS

(High Performance Work Systems) IV’ HPWS and Diversification

5. The use of PPP in innovative SME financing- an approach for emerging markets

There are a lot of definitions of Public Private Partnership (PPP). For example, PPP are defined in a general manner as cooperative agreements on long term, which involve at least a public entity and at least a private entity, having in view the achievement of mutual benefits (Carrol, Steane, 2000). Norment (2000) defines PPP starting from the accurate sharing of resources, benefits and risks, within a synergy based upon the use of private sector abilities, for a more efficient management of projects, and for the ability of public partner ability on owning the emergent infrastructures, respectively.

S

TRATEGY

LONG TERM (for any type of markets this approach is recommended) DIVERSIFICATION (for emerging markets is still not

There are more mechanisms of forming PPP described in the specialty literature, as for example, stimulating the private financing initiative by agreements where an accurate sharing of benefits and risks exist, or applying the franchise over a governmental service or partnerships, where the expertise and financing of the private sector have had a benefic effect of rejuvenating and re-launching the trade potential of the governmental assets. Some authors have limited the PPP power towards the local economic development programs, where the municipality offers the field and infrastructures, and the private partners participates with materials, capital and managerial experience.

In the developed countries, PPP are in generally used within the services insurances and the infrastructure development. Great Britain owns the leader position as regards the acquisitions based on the private financing initiative. In the USA, there is a large diversity of PPP, focusing on the energy and transport fields. Regarding the emergent countries, a large number of contracts in the Latin America can be seen, followed by South-East Asia. As concerns the Central and Eastern Europe, one can see the programs of encouraging the habitations building, with the help of private developers and by using the municipality terrains (Bulgarian Municipal Development Programme, BMDP). Analyzing Slovenia, Kozjansko centre has become the initiator of the touristic development projects [STR 00], where the success took place due to the simultaneous implementation of the public interest, and the private interest, as well. In Czech Republic, Spisska Regional Environmental and Energy Company (SREC) had a participation of 40% in municipality and 60% in the private companies and implemented energetic and forestry management projects. There are no referrals in the literature, as regards the PPP, for the support of SME financing, and for this reason we will forwards try, in this section, to build innovative models and synergies based on the mix between PPP and VCF/PEF, especially dedicated to the proposed application.

The main characteristics of PPP are analyzed by Peters (1998); the existence of a sustainable partnership, where the participants contribute with material and intangible resources (Middleton, 2000); the possibility of including the non-profit organizations, as well (Tarantello, Seymour, 1998); the fact that there is explained very clearly that each participant owns the ability of co-owner (Grimsey, Graham, 1997); dividing and correlation upon basis of a contract of the responsibilities and risks, in the view of achieving mutual benefit of the participants. By this construction, PPP presents a series of benefits, such as: the growth of governmental ability on developing integrated solutions; the support of creative and innovative approaches, even in difficult fields; reducing the costs of projects implementation (by synergies, scale economies, reducing the costs on the entire life cycle of products) and the duration necessary for the implementation (by making flexible the project in a competitive, and not sequential manner, the possibility of awarding the private partner, the discouragement of temptation on carrying out modifications that produce delays and increase the costs); the transfer of certain risks towards the private partner; attracting some powerful partners by supporting the excellence and the competition; the possibility of refining the expertise, by means of the experience and accepting the fast implementation of the technology progress.

There are various forms, types and approached of the PPP, from which mentioned: the selling of participants and assets belonging to the public sector; extended markets for the support of using as much as efficient the assets that belong to the public sector; accepting the private companies in public interest business; contracting quality services on long term; capital venture partnerships (including the implementation or development of politics). For the proposed application, this paper takes into account the venture capital, concession and privatizing. Models of private financing of Great Britain seem to be quite interesting, and they might be sees as success examples in applications of SME financing. In the situation of venture capital, the partners participate with resources and create a common entity, where the responsibilities and the profit are shared in accordance to the participation quota. The government acts as a compensator and active shareholder, and the private partner is responsible of the current management. The partners work together starting with the initial stages, many times forming the institutional vehicle or an entity of project development, based upon a collaborative dialogue between the public and private partners (Bennett, 1998). The concession signifies and agreements, where it is expected that the private sector should contribute to the level of public services quality (Tiong, 1992; Sindane, 2000). The services provider finances, designs and builds a new facility of services, or

at least improves substantially the one already existing. There is also a certain inspiration, necessary to develop innovative models of financing, but the limited access of SME and the high level of specialization will conduct towards some restrictions, which are not recommended in emergent markets, as Romania, by the proposed application and the SME financing, respectively.

The privatizing has involved the process of selling assets by the state, and therefore, the existence of a full transfer of ownership. Even if the waves of privatizing passed, the failures and disappointments have created a frame of rejection, so that correlated to the market movements; it is hard to believe that SME might participate to the future privatizing processes. Instead, if one takes into consideration the VCF/PEF frame, the solution cannot be rejected, thus offering opportunities at least on the level of return.

The initiative of private financing signifies a very popular PPP concept in Great Britain, by which fast financing processes were carried out, based on the optimal allotments of the risks. The main advantages refer to the abilities and agility of financing, as well. Favorable conditions of financing and acceptable contracting costs are taken in view, as well. The partners have offered warranties, by which they are able to prove the viability of a project. As regards SPV, the interest of investors is represented by the capital growth, in conditions of a moderate exposing towards the risk. On the other hand, by the effect of lever, SPV tries to limit the exposal, by preserving the liquidities. The architecture of the private financing initiative relies on creating the SPV (Special Purpose Vehicle).

The private financing involves a better understanding of risks associated to the projects, and of the potential consequences (Oldfield, 1997), thus distinguishing four risk categories: the risk of lending (potential bankruptcy of the debtor), the risk of trade-off (not respecting the contractual commitments), the organizational risk (during the processing, confirmation and reconciliation of transactions, as result of the human errors, the inaccurate control, the system failure), and the legislative risk. Starting from the full list of specific risks, related to the architectures, and as regards the private financing initiative (Jones, 1998; Tiffin, Hall, 1999; Birnie, 1999), one might see the importance of the project concept, of the operational risks, of the technology (placing on a certain area of relative progress), the economic and legislative risks, the competition. Prioritization of risks, at the level of SME, and respectively at the level of financers (Akintoye, Taylor, Fitzgerald, 1998) would probably led towards the following ranking: risk of conception risk of not-fulfilling the performances; the risk associated to the delays; the risk of exceeding the costs; the market risk; the legislative risk and the financial risk. As regards all these studies, one might notice that the economic and financial risks are placed at the bottom of the classification, fact which involves the possibility of coupling the PPP vehicles with VCF/PEF funds type.

Horne, Wachowich (1998) presented the principles that determine the relationship between profitableness, liquidity and risk. The modern capital markets have launched liabilities and other products able to ensure long term financing, in competitive conditions (Morrison, 1998). One should also notice the interest dedicated to fructifying the advantages of using the liabilities markets, and respectively the solutions of mezzanine type, offered by other investors outside SPV (Ellis, 1999; Sapte, 1997). The answer of banks relied in the growth of reimbursement towards twenty years, and in the reduction of margins within the context of interest rates adaptive feature (Ellis, 1999). There are financial packages adapted in accordance to the project requirements on different levels (credit facilities), which have gained popularity due to their simplicity and flexibility character (Finnerty, 1996).

6. A hybrid financing solution for emerging markets. The way toward VCF/ PEF- PPP

VCF/PEF- PPP is a hybrid solution that integrates both the advantages of VCF/ PEF funds, but also the efficiency of a flexible PPP architecture. In addition this is a possible solution better adapted for emerging markets, where the trust and the governmental support could contribute to the dynamic process of effective designing the architecture of the new concept, but also the rapid implementation of it. The advantage of PPP is based on the flexibility brought by liquidity of the financing vehicle through injections, characterized by

efficient doses in critical moments in the process of implementation. The role of government is not only the liquidity provider and guarantor. Through these interventions that are punctual and do not require spectacular funds, it develops markets and institutions in a synergistic manner based on market mechanisms.

A first version of VCF/ PEF- PPP refers to the construction of a diversified VCF/ PEF fund (equity and loans) with governmental funding that could offer support to a portfolio of firms that where selected based on an extern consultant. After 1-2 years, this closed end governmental fund could transform throw the link of the private investors acceptance, either in a semi closed fund (being open to private investors), or the governmental institution could withdraw by selling investments to the private sector. Of course, the first option is desirable because it allows the natural development of the fund and would bring flexibility to finance new entry firms. The main problem is achieving critical mass or volume of financing possible because, on the one hand, the number of companies that qualify in terms of the requirements of the financing institution (VCF / PEF - PPP) is reduced, and on the other hand, the conditions imposed by this are restrictive. The flexibility ingredient appears on the supply funds branch, and it is based on the government support, in order to ensure long-term liquidity at low interest rates. In addition, the government intervention precision occurs and these ensure punctually and timely strong initial funding. Another element of flexibility shall be provided by the opening fund to the private investors interested in getting higher returns than some banks offer. Romania is the emerging European country in which the reduction of interest rates was the most difficult (only after 2013-2014 we can speak of the acceptable interest rates) noting that risk premiums have remained high, and the stock market lagged behind other Eastern and Central European countries (ECE). Another problem is related to the selection process of acceptable SME for funding. Romanian entrepreneurs are innovative and even if the external environment is still hostile they want to obtain long-term financing through these mechanisms. It is possible to assist at a gradually development process, by supporting market mechanisms.

After creating the closed-end fund, the question is that would be the optimal time of entry of private investors and that would be the fund opening mechanisms to ensure flexibility and to reduce the volatility of these processes. Again there is a scalability issue related to the initial size of the fund. It would be desirable for the new development based on private inputs to be correlated with the absorption of funds from industry demand. Based on this aspect, our proposal refers to the efficient use of existing open-end investment funds, especially bond funds in search of higher returns. Basically, the government intervention has in view an initial funding of a portfolio of qualified SME and the securitization of these bonds based on well-defined contracts. The mechanism is very simple and existing investment funds would be interested in investing in these bonds. During the development of this system one can imagine several tranches of risk-return, but must take into account the costs of these operations.

7. Aspects regarding the evaluation of the global performances of the VCF/PEF-PPP

The VCF/PEF performances refers to the classic set specific to any fund, return- risk- liquidity, where liquidity is a very sensible aspect because is linked to the exit strategies. IPO (Initial Public Offering) efficiency is a critical aspect and for emerging countries there are additional constrains related to markets (liquidity and robustness of markets, problems related to the securitization). The hybrid VCF/PEF-PPP could have some advantages like: because the government launches SME financing portfolio actually following the market intervention, the mechanism itself is moving faster; there is no initial pressure on leverage and performance associated, which leaves some time to adapt the SMEs to the new conditions; by its typical operation, PPP allows rapid entry of private actors in the financing equation of the VCF / PEF.

In order to understand the performance and the factors that influence them in VCF/ PEF-PP let consider a closed investment fund architecture in two settings: the fund does not change the structure of the portfolio; there are admitted asset sales in order to obtain additional income to shareholders, similar to dividends but. In the case of a fund in the initial growth stage the distribution of dividends can be viewed in different ways: portfolio companies could reinvest dividends, in which case they contribute to NAV; active dividend distributions (collected from portfolio firms); asset sales assimilated to dividends (while reducing portfolio

holdings and NAV); a mix between the last two strategies.

Let consider a typical structure of closed investment fund consisting of n types of portfolio firms shares, denoted asA₁,A₂,...,A_n, each of these holdings having a constant value N₁.N₂,...,N_n. For

t

μ

σ

μ

σ

The performance of the portfolio firms could be expressed:

° ° ¯ ° ° ® ­ + = + = + = t dB n A n dt n A n ) t ( n dA ... ... ... ... ... t dB 2 A 2 dt 2 A 2 ) t ( 2 dA t dB 1 A 1 dt 1 A 1 ) t ( 1 dA σ μ σ μ σ μ

or expressed in the form of finite differences,

° ° ° ° ¯ ° ° ° ° ® ­ + = + = + = t n t n n A n A ... ... ... ... ... t 2 t 2 2 A 2 A t 1 t 1 1 A 1 A Δ ε σ Δ μ Δ Δ ε σ Δ μ Δ Δ ε σ Δ μ Δ .

The dividends obtained for the n shares, D₁,D₂,...,D_n can be modeled by equations like:

° ° ° ° ¯ ° ° ° ° ® ­ + = + = + = t n ' t n ' n D n D ... ... ... ... ... t 2 ' t 2 ' 2 D 2 D t 1 ' t 1 ' 1 D 1 D Δ ε σ Δ μ Δ Δ ε σ Δ μ Δ Δ ε σ Δ μ Δ

, where μ´i < 0.03…0.05 (the growth rate of dividends)

The net asset value (NAV) in the case of dividends reinvestments is expressed by

¦ = = n 1 i i N i A 0 VAN ; n N_i 1 i t i D t i A t VAN ¦ = ¸¹ · ¨ © § ₊ = .

Thus it is obtained the total net asset value of PEF at a given time. Again in the case of VCF, the dividends volume can be neglected, being a particular case of this version.

¦ = ¦= + = T 1 k n 1 i i N ) k i D k i A ( T VAN .

It is possible that the flow of dividends

Vdiv

Sdiv

¦ = ¦= = ¦ = = T 1 k n 1 i i N k i D T 1 k k Vdiv Sdiv .

Finally, the global return for the shareholders for the entire lifecycle of the fund is:

0 VAN Sdiv 0 VAN T VAN T R = − + .

An interesting case is the situation in which the managers intend sales of portfolio assets in order to be distributed to shareholders. The reduction of portfolio value should be compensated by the liquidity cash flow distributed as additional income to shareholders, in an advantageous tax- free behavior. If for the n shares notedA₁,A₂,...,A_n, there are considered the salesv₁t,vt₂,...,v_nt , registered at the moment t. The number of portfolio positions is reduced toward

¦ = − T 1 k k n v n N

and the cumulative sales are

¦ = ¦= = T 1 j n 1 i j i v Scum

In this case, the net asset value will be:

¦ = ¦= ¸ ¸ ¹ · ¨ ¨ © § ¦ = − ⋅ + = T 1 k n 1 i T 1 j j i v i N ) k i D k i A ( T VAN .

and the return for the entire lifecycle of the fund is:

0 VAN Scum Sdiv 0 VAN T VAN T R = − + + . 8. Conclusions

This article analyzes possible strategic financing opportunities for SMEs in Romania. VCF/ PEF funds are innovative instruments with a very small contribution to SME financing in emerging countries. The particularities of the SME financing and associated restrictions are obvious and we must start from a better

understanding of the needs of expression of firms in order to adapt to the current context of the global but also regional markets. Even if in the literature were analyzed and proposed various possible strategies for this type of funding in developed markets but in addition, the government should make more efforts for the development of entrepreneurship, based on the main problem of SME, the financing task.

There are also firm financial models and portfolio management mixed with project management and strategic management ingredients but the most important focus should be on the creation of new models anchored into the current reality capable to incorporate new specific hypotheses of the current international/ regional movements and the inter-correlations between the market conditions, regulations, evolution of institutions and even the evolution of organizational management. The new innovative mechanisms of financing for SME may not be magic, but just to support these mechanisms, subject to strict implementation and management of such specific and particular portfolios, a robust development based on markets and the government sustainment in the framework of the new innovative architectures proposed.

The introduction of a new solution special created for the particularities and adapted to the financial markets but also SME should consider the governmental support in a way based on markets. A hybrid solution named VCF/ PEF- PPP could provide a solid foundation for the entrepreneurship re-launch in Romania on solid basis of competition and innovation.

In order to understand the efficiency of this innovative financing strategy it is essential to deeply understand the mechanisms in the context of the complex relationships with portfolio companies. A vertical management of VCF/ PEF with high leverage would put pressure on portfolio companies and could be associated with a hostile takeover using burdensome contracts. The state's role is precisely to prevent speculative aggression specific in the case of emerging markets. In our proposal the analysis of the VCF/PEF-PPP evolution is based on the strategic positioning in a way that minimizes the agent - principal conflict just through the advantages offered by PPP.

Future work could be oriented on the following aspects: adaptation of the performance model in various settings / reset by introducing the possibility to quickly change the participations in portfolio companies, to consider possible mergers and acquisitions; the introducing of more realistic simulations on performance, in case the Wiener generalized process in changed with Ito processes, with time-varying growth rates; a special study for the impact of VCF/PEF-PPP during crises and turbulences; new studies related to the introduction of special flexible architectures capable to respond in a more agile way to the problems of scalability and diversification.

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