In many sectors of industry and services, technology and other changes to legacy business models have brought substantial bene�ts in creating new forms of business and distribution and in lowering the cost and barriers to establishment. Ten years ago, an internet business was wildly successful if ithad 20 million users – but now that number is more likely to be in the hundreds of millions and start-ups and medium size businesses can build from the outset for these expanded markets.

This phenomena is not exclusive to technology businesses but has impactedother sectors including everything from technology, through publishing, education, pharmaceutical and medical devices and even �nancial services and banking. In addition, many large industry players, from �nance to pharma-ceuticals, regard themselves less as risk-taker in areas of innovation but asbrands and distributors that absorb innovation from smaller risk-taking businesses. In other sectors technology and new forms of distribution are disrupting industry models.

“Small and mid-sized companies are where entrepreneurial ideas and intellectual capital emerge; yet these businesses continue to �nd it hardest to access growth capital. “

Jamie Spence, Asian Link

Some �nancial services examples:

Asset management – the growth of hedge funds in boutique-style models. In 2014 year-to-date, 150+ hedge fund launched globally (Hedgeweek).

Wealth management – as assets in Asia have grown, multi-family o�ces and smaller focused managers and advisers across asset-classes have emerged. Accoring to the Boston Consulting group by 2017, China will be home to 60% of the worlds private wealth assets (of US$48trn).

Capital raising – the shrinking of direct bank funding has seen an explosion of smaller VCs, cap’ intro. professionals and new platforms like those for crowd-funding and peer-to-peer lending. Crowdfunding raised US$89 million from members of the public in 2010, US$1.47 billion in 2011 and US$2.66 billion in 2012 and in 2013 is expected to have exceeded US$5bn.

Trading – the expansion of alternative trading venues and dark-pools, in most cases technology driven initiatives, with 30% of US market liquidity now in “dark pools” and growth from 0% to 5% in Europe and growth in Australia (with Chi-X) and Japan expected to widen in Asia.

SME FUNDING - HOW TO APPROACH AN INCREASINGLY COMPLEX MARKET

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Opportunities for small and medium-sized businesses have arguably neverbeen so great, with technology and business change in many industries and service sectors lowering the costs and other barriers to entry. Well that’s the theory. But for an individual business these opportunities bring challengesin raising �nance, selecting the right strategic direction for their businessand in competing in open and often crowded markets. With Jamie Spencefrom Asian Link we explore some of the opportunities and the challenges.

Jamie Spence: “Asia-based companies and investors are targeting scalableopportunities that in many instances look to the region’s bourgeoning middle class and resource needs. Signi�cant amounts of capital are available for the right enterprises, however, competition for capital is high. It is vital that businesses seeking to raise growth, or replacement capital, position themselves e�ectively for potential strategic partners and providers of such capital.”

Investors are particularly interested in businesses generating positive cash �ow and with a good history of attracting clients and those with genuine growth prospects and synergies with enterprises and markets in the Asia region. Spencehighlights �nancial services, food manufacturing, agriculture, resources, infrastructure, logistics, real estate, industrial and consumer product companies, as all current key targets for investors.

However, whether a company is an established SME or a start-up (or anything inbetween) the change in the landscape for raising capital is daunting. And with many relatively cash-rich companies in the region and globally there are strategic investorsavailable too. The task for a company is to �nd them and engage them e�ectively.

Jamie Spence “If you have ever tried to raise capital in Asia, or attract a strategic partner for your business, you will understand the signi�cant amount of prepara-tion required to position yourself e�ectively and then to identify targets and initi-ate discussions with interested parties.” At a recent Fintech conference in London a VC panel estimated that start-ups could expect to meet up to 100 venture capital funds and angel investors before securing funding. And for medium sized business-es the work is no less arduous.

Fund managers agree that more non-bank loans will develop as banks retrenchfurther and that there will be more �nancing along the US model. “In Europe, banksfund 70% to 30% against capital markets. In the US, it is more like 80% capitalmarkets and 20% banks,” says M&G’s Hutchinson. “There needs to be a shift in terms of education for banks in marketing alternative forms of funding to mid-sized and the larger SMEs.” Ernst & Young Report, 2013.

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Raise Capital

Business/ Asset Sale

StrategicPartnership

Organic:Self-Funding

Distribution/Market Expansion

Business Cost/Synergy Strategies

Acquire for Top-Line Growth

Product Investment/Development

Small/ MediumSized

Enterprises

• Do you need the funds – are there other strategic options?• How will you use the funds – clear/ precise, worth the risk?• What is the ROI – the return on the cash?

Jamie Spence remarks that �rms need to be realistic about whether they have boththe expertise and the time to track-down these sources of funding and strategic partnerships, engage with them and convert them into deals. Using the rightexternal resources is an attractive option if the �rm is inexperienced in the fund-raising and capital markets space or simply “lacks the management bandwidth”.

Even for medium sized enterprises the funding options have grown substantially through expanded VC and PE activity; lending platforms; public and private fundstargeting company �nancing; increasing direct participation by family o�ces andthe private wealth sector and, in Asia, an expanding market for debt issuance. Probably the only �eld that has not expanded so far has been equity o�erings through public markets – with interest rates still low and little market appetite atpresent - but expectations that 2014 will see an incrfease in IPO activity.

And the need to grow SME’s is �rmly on the public agenda too. Ernst & Youngrecently identi�ed the imperatives for governments in addressing employment growth in developed and emerging markets:-

“[T]here are many common challenges for entrepreneurs and governments across the G20. For most countries the agenda remains closely focused on job creation and …. there are things the public and private sector can do simply by learning from eachother. Easier access to funding, simpli�ed regulation and taxes, and bolstered education and training, have already helped to improve the entrepreneurial ecosystem in many countries.”

Jamie Spence comments that in most countries and particularly in Asia, the onusremains on �rms themselves to address their own funding needs through capitalmarkets, “and raising capital requires an in-depth understanding of how your �rm’s business model aligns with the objectives and focus of investors. Therewill rarely be more than a handful of ‘ideal’ investors. So a �rm must organise its approach and must, above all else, understand the drivers for investors and those providing capital in whatever form”.

Validate Strategy (need for funds/ bene�ts of funds.)

Identify available types and structures of funding & their costs and risks

Identify the venues and funders to be approached

Prepare team to pitch or raise & action targets

• What is available to your pro�le of business/ funding needs?• What structures meet your funding needs, how many funders and what are the comparative costs?• What are the risks to your business and your ownership interests of the types of funding?

• Create a target list for funding platforms and providers• Remember that funding is relationship-based as much as transactional - so build relationships before pitching

• Know the criteria for assessment and objectives of the funders• Approach will depend on funding type• Prepare all the necessary “evidence” for your business case

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So we asked Jamie Spence what makes a good adviser in supporting capital raising activities.

Spence commented that “a good intermediary will understand the industry in which you operate and should have direct experience – a �nancial analysis background is probably not a substitute for experience in operating or managing in that industry. It is about their understanding of the market for capital too – they do need to be connect-ed, as securing capital is about relationships and is not a just a ‘pitch-book’ game.”

And on other tips Spence commented: “just remember that funding may be just one option for a �rm. Strategic partnerships, distribution deals; asset swaps and outright mergers may o�er bene�ts and even less risk than a pure funding option.”

Venture Capital Activity 2013, sourced from Ernst & Young.

Global VC investment activity was marginally up in 2013 and reached US$48.5 billion,a 2% increase compared to 2012. However, it remains below 2011 and pre-2009 levels. The last quarter of 2013 was signi�cant, marking a quarterly increase over 3Q13 both interms of deals and dollars. Amounts invested increased by 10% to reach US$13.5 billionwith an 8% increase in the number of rounds (1,533). The quarter saw the largest number of rounds since 3Q11 and the highest proceeds in the last eight quarters. The outlook for VC investments will continue to grow at a modest rate in 2014, withventure-backed companies looking to bene�t from the improving exit conditions. A strong IPO market and improved global economy will continue the momentum in 2014. 68% of the total global dollars invested were in the US, with 26% of the total global dollarsinvested in the Bay Area.

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ASIA FIRSTTHE FINANCIAL INTELLIGENCE PLATFORM

Jamie Spence is an accomplished marketer, business leader and high-level corporate and investment transaction originator and facilitator with extensive experience in Asia markets.Prior to founding Asian Link in 2009, he worked for 23 years in investment banking, holding senior executive product and sales positions with RBC, HSBC, CBA, Bankers Trust and Macquarie bank.Based in Hong Kong, Australia, Singapore and Tokyo, he held management and P&L responsibility forvarious bank divisions including �nancial and commodity futures, �xed income, currency, credit and structured product business across Asia-Paci�c, servicing institutional, corporate and private clients.Jamie Spence can be contacted at: jamie.spence@asian-link.com.hk

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