MICROCAPITAL STORY: Microfinance Investor Netherlands Development Finance Company (FMO) to Establish $125m Fund to Support Small and Medium-sized Enterprises (SMEs) in India

The Netherlands Development Finance Company (FMO), a development bank founded by the Dutch government and business community in 1970, plans to establish a USD 125 million fund in India which will finance family-owned small and medium-sized enterprises (SMEs). The proposed Banyan Tree Fund will receive a USD 25 million contribution from FMO. The bank is in talks with Indian investors and other international development finance institutions to fund the balance amount.

FMO plans to use the fund to finance at least 10 to 15 small and medium-sized enterprises (SMEs). It will decide on a competitive price based on what is offered by private equity firms and intends to exit once businesses achieve scalability. The fund will invest in various sectors which have a high incidence of family-owned companies. According to FMO, these sectors include metals, mining, engineering goods, automotive and auto ancillaries. Currently, FMO is close to finalizing a deal with a medium-sized steel company.

Chief executive officer of FMO Arthur Arnold has stated that the firm is exclusively interested in funding SMEs. The European Union has defined a “small enterprise” as an enterprise which employs fewer than 50 people and whose annual turnover and/or annual balance-sheet total does not exceed EUR 10 million (USD 14.6 million). A “medium-sized enterprise” is defined as an enterprise which employs fewer than 250 people and whose annual turnover does not exceed EUR 50 million (USD 73.2 million) or whose annual balance-sheet total does not exceed EUR 43 million (USD 62.9 million). (While this definition is legally binding only in certain circumstances, such as for State aid, the European Commission urges member states, including the Netherlands, to use it as a reference.) Mr. Arnold explained that FMO has a wealth of experience in recoveries and therefore is comfortable with the inherent risks involved in lending to small and medium-sized businesses.

The fund will primarily invest in mezzanine products (i.e. those products which have features of both debt and equity and are also used to raise capital). These products are an attractive option for a family-owned business because they help retain ownership and voting rights—which is especially important if the business is to remain in a family for several generations—and allow the business to access overseas funding. Investment in the mezzanine products avoids the dilution of ownership that would accompany a private equity transaction.

FMO has been a major investor in microfinance programs. Recently, the firm reinvested in African microfinance private equity fund AfriCap. The firm has also made investments in Indian microfinance funds such as Bellwether, a fund based in Hyderabad which has USD 10 million in total assets, Aavishkaar Goodwell, which has USD 11.2 million in total assets, and Lok Capital, which has USD 12 million in total assets. FMO has invested up to USD 200 million in India to date. According to Mr. Arnold, the bank is also looking to invest in regional Indian banks located in Tier-II and Tier-III towns. Analysts broadly define metro cities as Tier-I, state capitals and bustling towns as Tier-II, and other semi-urban and rural centers as Tier-III.

FMO has a global portfolio of EUR 3 billion (USD 4.4 billion) and, as of 2006, had EUR 2.3 billion (USD 3.4 billion) in total assets. Since 2000, FMO has maintained the highest triple-A rating each year from independent credit rating agency Standard & Poor’s.

Additional Resources:

Economic Times: “Netherlands’ FMO to set up SME fund.”

Netherlands Development Finance Company (FMO)

FMO: About FMO: History: The 70s

FMO: News Item: “FMO reinvests in AfriCap.”

FMO: About FMO: ‘Triple A’ rating

Europa: Summaries of legislation: Definition of micro, small and medium-sized enterprises

MicroCapital.org, October 30, 2007: “AfriCap Microfinance Fund Attracts Notable Investors Including Nordic MicroCap, BlueOrchard and Gray Ghost, Raises Capital to $50m.”