Philippine mezzanine investor ARQCapital Partners (ARQ) is pushing “smart capital” investments in the private and alternative lending space by raising P1.5 billion to fund as many as 50 high-growth medium enterprises (MEs) over the next two years.
“There are a few ‘smart capital’ investors in the Philippines today and this space has yet to be institutionalized,” said ARQ founding partner and CEO Edmund M. Solilapsi in a news briefing.
He said the country’s financing market is dominated by banks and non-bank financial institutions, which are primarily passive capital providers and predominantly asset-backed.
At the same time, he added, the private lending space is highly fragmented and is generally yield-driven with no clear thematic approach necessary in providing smart capital and creating an enabling environment for these enterprises.
Likewise, he said venture capital firms focus on early-stage startups and tech-driven companies while private equity investors and strategic investors focus on larger investments and more mature enterprises.
This environment leaves SMEs with more traditional but similarly growing businesses uniquely challenged to find the right capital partner to fuel their growth.
“The Philippines continues to be second to the lowest in Asean in terms of private sector credit as a percentage of gross domestic product, domestic credit to private sector by banks and domestic credit provided by financial sector,” said Solilapsi.
He further foresees a number of enterprises encountering capital funding hurdles due to more stringent bank requirements.
Touting itself as the country’s pioneering mezzanine investor for SMEs, ARQ has invested approximately P1 billion in 33 firms since 2016 through its ARQ SME Business Development Company (ARQ SME BDC) and through co-investment partners.
Solilapsi said the SME fund has accelerated the growth of these companies that proved to be “agile, innovative and have value-adding products and services” and sustained close to 3,000 jobs.
ARQ plans to fund 10 more MEs by year end to add to its current portfolio, which now stands at 22 MEs.
The investment company is also raising additional capital from development institutions to fund its investments.
In the same briefing, ARQ co-founder and managing partner Abigail D. Tan said the market base for smart capital investors could be worth over P25 billion ($480 million).
Tan said this is the equivalent of 20 percent of 4,800 medium enterprises in the Philippines identified by the end of 2020 that may have high-growth potential, which is one of ARQ’s fundamental requirements.
“We typically support entrepreneurs requiring more than P25 million during their companies’ high-growth phase, especially those with revenues hitting between P100 million to P500 million,” said Tan.
She said that as the country rises from the Covid-19 pandemic, ARQ will likely support companies engaged in the “building blocks of transformation” that drive economic growth.
These include those in the industries of technology, telecommunications, financial services, digitization and digital payments, renewable energy, food and agriculture, healthcare, and affordable housing.
She said ARQ as a “smart capital” partner bridges the funding gap for companies seeking growth capital, matching their cash cycle with customized financing products, and provides entrepreneurs with solutions beyond finance.
These solutions include assistance in areas such as strategy and risk management, technical financial advice and access to ARQ’s network for either business relationships or further capital-raising.
“As partners, we primarily assist companies in crafting a sound business plan and financial strategy that in the end should unlock further capital raising or a potential exit,” said Tan.
She said the companies are aware that as a “smart capital” partner, ARQ will add value or support to the investees beyond the capital it provides.
ARQ is an active investor that advises on the general strategic direction of these companies and provides relevant insights gathered from its industry experience and track record, added Tan.
Since ARQ’s core product is mezzanine “where we can sit anywhere above owner’s equity” she said its capital investment does not dilute equity ownership of these companies.
ARQ offers loan instruments with mezzanine or upside components that are unique to the local market.
Its biggest partners to date include companies involved in renewable energy, quick-service restaurants, affordable housing and salary or payday loans.
Solilapsi said SMEs will continue to be a strong backbone of the Philippine economy.
“We are hopeful that economic policies and regulatory framework will help sustain the growth of our SMEs, particularly in the capital markets, encouraging companies to go public or raise funds through issuing debt,” he said.
ARQ was founded in 2014 by Solilapsi and Tan to address the underserved financial needs of the country’s fast-growing small and medium enterprises.
They began their careers in ING Bank as corporate banking professionals and eventually held roles with international private equity funds. Together, they have almost three decades of experience in investment banking and private equity.
In 2019, Manuel Paolo A. Villar, president and CEO of Vista Land & Landscapes, joined ARQ SME BDC as partner and member of its Investment Committee.
In the same year, ARQ SME BDC received its first foreign institutional investment from Netherlands-based Dutch Good Growth Fund through its Seed Capital and Business Development facility.
