India: Netherlands' FMO to set up SME fund

Nov 2007
Mumbai, India, November, 01 2007 - The Netherlands-based development finance agency, FMO, is looking at setting up an exclusive fund in India to finance family-promoted small and medium businesses.

The $125 million fund, which will mainly invest in mezannine products, will have a contribution of $25 million from the Dutch development bank. The bank is in talks with both Indian investors and other international development finance institutions to fund the balance amount.

FMO plans to utilise these funds to finance at least 10-15 small and medium-sized companies, but will decide on a price which is competitive compared with what is offered by private equity firms.

Mezannine products are hybrid instruments used for raising capital and have features of both debt and equity. The proposed fund ‘Banyan Tree Fund’ will invest in different sectors which have pre-dominance of family-owned presence. These sectors, according to FMO officials, include metals, mining, engineering goods, automotive and auto ancillaries. FMO has almost finalised a deal with a medium-sized steel company.

According to FMO chief executive officer Arthur Arnold, FMO is interested in funding only small and medium enterprises. It has chosen the mezannine route because it helps the business retain its ownership and voting rights, and also at the same time, get access to overseas funding.

This is a more desirable route over private equity which entails dilution of equity. This, in turn, dilutes the voting rights of a business that may be owned for several generations by a family. Mr Arnold indicated that FMO is comfortable with the risks associated with lending to small businesses, as it has a vast experience in recoveries.

He cited the Argentine experience, where during the crisis period a few years ago, the Dutch development bank did not lose a penny. FMO intends to exit once businesses achieve scalability and sees itself primarily as a facilitator of development for small and medium-sized businesses.

Another area, which FMO is quite keen on, is microfinance. The institution has made investments in microfinance funds such as Bellwether, Avishkaar and Lok Capital, which in turn, lend to microfinance institutions. FMO has also invested in South-based Union Bank.

Mr Arnold informed that the institution would look at making investments in banks which have a more regional focus and are based in tier-II and tier-III towns. FMO has invested up to $200 million in India and the institution has a global portfolio of e3 billion. The Dutch agency has made investments so far in Africa, Eastern Europe, Latin America and other Asian countries.


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