by Simone Hudson
The role that alternative investment vehicles play in economic growth and development in the region is becoming of greater significance.
As the government walks the tightrope of balancing the books while supporting the most vulnerable economic groups in society, there is very little fiscal space for investment in infrastructure, affordable housing, and to support entrepreneurial efforts in high-growth, high-technology sectors.
The irony is, a lack of investment in these critical areas comes at a cost which will be borne by all sooner or later.
It is within this context that the capital markets will have to play their part by providing the patient, flexible funding and advice that are needed to move the regional economies forward.
This will be facilitated largely through the growth of alternative investment vehicles including infrastructure, venture capital, private equity, and real estate funds.
Let us count the cost
A study by the Inter-American Development Bank (IDB, 2019) found that growth in Latin America and the Caribbean (LAC) is sharply impacted by failure to invest in infrastructure.
It examined various themes in the infrastructure space which includes transportation, telecommunication, energy,
water and sanitation in six countries that the IDB think are indicative of the reality of the entire region.
One of the key points that the study makes is that on average, failure to add new capital to the existing infrastructure stocks is estimated to cost LAC approximately one percentage point of forgone GDP growth.
The cost rises to 15 percentage points in forgone growth if the gaps persist over ten years.
Recent heavy rains in Jamaica, Guyana, Trinidad and Barbados have highlighted the inadequacy of the existing road infrastructures and drainage systems. And let us just leave the discussion about issues with telecoms and electricity in a remote-work dispensation for another day.
Therefore, the ask for additional capital expenditure to add to existing infrastructure that firstly needs to be replaced and properly maintained, may give Prime Ministers Holness, Mark Phillips, Keith Rowley and Mia Mottley several (more) grey hairs. Infrastructure Funds are necessary to bridge the funding gaps that exist in the region’s structural development.
While challenges with physical infrastructure may be more visible to most, failure to direct adequate resources to Micro, Small and Medium Enterprises (MSMEs) particularly in times of a crisis, will also help to keep LAC well behind developed markets on the global competitiveness scale.
In the region, MSMEs represent the lion’s share of businesses and employment, as they represent 99 per cent of businesses and 67 per cent of employment.
Therefore, they are among the strongest drivers of economic development, according to the IDB. Research shows that investing and enabling MSMEs to fulfill their development potential can have significant contributions
to 60 per cent of the sustainable development goals targets.
The primary constraint faced by MSMEs is the inability to access flexible financing that prevents them from growing, increasing productivity, and from investing in innovation — including their capacity to embrace digital solutions. Venture Capital and Private Equity Funds will therefore be critical enablers in this ecosystem.
The alternative solution
Governments and state agencies usually lead the way in financing infrastructure development and investments in MSMEs.
However, we face a great dilemma – our governments’ ability to provide the support in these critical growth areas is constrained by even greater fiscal limitations, then, more recently, the coronavirus and the efforts to minimize the impact on the economy.
With mandates to limit contingent liabilities, many projects will require financing solutions that are not dependent on government guarantees.
Moreover, the business models of traditional commercial banks cannot facilitate the long term, flexible, junior financing that is required in these situations; however pension funds, other institutional and some retail investors can. Alternative investment funds can therefore act as intermediaries that facilitate greater investor participation in these areas that are catalytic to regional development.
In addition to the financial support, alternative investments facilitate development by providing advice and support to the governance necessary for turnaround.
This increases the probability that value the vision, and potential returns to investors are realised. By taking stakes in companies, and holding those positions often for years at a time, activist alternative investment funds support improvements in the performance of thousands of firms around the world – struggling businesses are turned around, well-run businesses improved, capital more efficiently allocated and the interests of managers, business owners, investors and other stakeholders are better aligned.
Alternative investments have evolved to become an integral part of the financial system and regional economy. These vehicles act both as crucial suppliers of capital and satisfy the investment demands of varying investor groups. Both are important.
However, the innovation in the supply of capital fulfills a bigger need for the greater good and lays the groundwork for the turnaround story in regional development that we all want to be a part of.
Simone Hudson is the AVP of Alternative Investments & Fund Management. NCB Capital Markets Limited.