Latin American Capital Markets

ACCESS TO FINANCING FOR SMALL AND MEDIUM ENTERPRISES 41is certain that both effective and dynamic capital markets and healthy and strongSMEs contribute to economic success and that one can certainly help to facilitate theother However, while there is no certain causality between these two factors, it is understoodthat dynamic capital markets can serve as catalysts to create and feed thepresence of active private equity and thus support enterprise developmentUnder these circumstances, policymakers should avoid designing and implementingcapital market solutions for an SME environment that is not ready yet for thatform of financing. It would be a misplaced effort and ill-directed resources. Indeed,policymakers must understand that SMEs need appropriate support, including financingin order to grow, compete, and contribute substantially to economic growth.Thefinancial support must be adequate to the stage of development of the SMEs.In the early stages of their development, particularly in emerging countries,SMEs are generally less prepared to access the capital market and risk capital. Howevenseed capital, private placements, commercial lending, leasing, and governmentprograms are applicable. For SMEs, and particularly medium-size enterprises, accessto capital markets and risk capital might be more pertinent for those in the growthstage. At that point, venture funding, limited debt offerings, and IPOs are likely possibilities.Moreover, the existence of a capital market constitutes an incentive to investorsto make the company grow so they can reap the benefits with a sale or IPOin the market. This leads to the additional consideration that, to be effective, capitalmarket access has to be tailor made, appeal to various risk profiles, but still not compromisethe basic need of transparency and disclosure. However prior to accessingthese instruments, the enhancement of institutional capacity for these enterprises hasto be addressed, as well as the need to prepare these companies to appropriately accessthis type of financing.The chapter has reviewed the specific barriers SMEs face to access risk capital,utilizing the case of SME stock exchanges in Europe as a reference. Although riskequity markets have not served as the primary source for SME finance in general, theexample of Europe demonstrates that the barriers SMEs face could impose a seriousproblem for the development of high-growth companies in capital-intensive sectors.In Europe, these markets are often too small, have strict and complex regulatoryrequirements, and lack liquidity. Some of the great success stories are high-tech, highgrowthfirms in the United States that are backed by active and strong venture capitaland junior public markets as well as NASDAQ. It is important to note that NASDAQserves an international clientele: from the approximately 5,000 listed companies, morethan 500 are foreign, over 140 of them are indeed European. At the same time, inspite of the wide proliferation of new markets in Europe, companies looking for fi-Copyright © by the Inter-American Development Bank. All rights reserved.For more information visit our website: www.iadb.org/pub