Equity and Quasi Equity

2016 was the year when the Chinese FinTech dragons roared and some previously feted Western FinTech leaders wilted. In our first Digital Disruption GPS report, we argued that China was very important to the FinTech story (March 2016, link here). In this follow-on report, we follow the venture capital (VC) and corporate investments money trail to revisit the theme of the Chinese FinTech dragons as they roar at home and expand overseas.

Regulatory changes at the beginning of 2016 opened equity crowdfunding up to more Canadian companies and retail investors. In the months since, a number of startups and growing ventures have sold small stakes to the public via online portals, though restrictions on interprovincial dealings mean they’ve largely used existing exemptions rather than the new rules.

The funding environment of small- and medium-sized enterprises (SMEs) is becoming critical, as the supply-demand gap in SME finance continues to widen in Asia and the rest of the world. Global economic uncertainty and financial regulatory tightening, denoted by Basel III, are accelerating this trend.

Startups and scaleups create the vast majority of jobs in the formal economy, providing, on average, 66% of the jobs worldwide, and the greatest share of jobs in low income countries. Moreover, the small and medium enterprise (SME) sector is important not just for job creation, but also for economic growth, thanks to its outstanding capacity to increase productivity through innovation.

This article on public equity financing for small and medium-sized enterprises (SMEs) complements earlier OECD work on market-based finance for SMEs. The development of this market segment could promote investment in SMEs and, together with securitisation and other non-bank debt financing instruments, encourage an enhanced allocation of risk and risk taking, and thus support growth. Despite the benefits of public SME equity, its share is small and an equity gap exists for risk financing more generally.

International private equity has been the fast growing capital flow to the sub-Saharan Africa with a five-fold growth and a total of more than $50 billion of inflows since 2008. It now comprises approximately $12 billion annually and 20% of cross-border capital flows.
It offers an unprecedented opportunity to accelerate economic development.
However, new policy is needed from development finance institutions, national governments and bi-lateral agencies to capture their benefits. Policy priorities include;