Financing opportunities: A new private equity fund is designed to facilitate the growth of SMEs

The perennial issue of lending to small and medium-sized enterprises (SMEs) in Jordan is being addressed by a new fund providing long-term financing and institutional support for up to 15 companies with high growth potential, particularly in the technology sector. The nascent private equity industry and conservative banking sector will be all eyes to see whether this initiative will set a new course in private sector lending in the kingdom.

INS & OUTS: The $50m Jordan Growth Capital Fund was launched in October 2011 by the Jordan Enterprise Development Corporation (JEDCO), the European Investment Bank (EIB) and Abraaj Capital. The fund is supported by the Riyada Enterprise Development (RED) platform, part of the Dubai-based Abraaj Capital Group’s $650m SME investment fund. In addition to capital injections, SMEs supported by the fund benefit from management expertise built up by RED’s 30-strong team, as well as by JEDCO’s experience in preparing companies for export-led growth and EIB’s technical understanding of importing to crucial EU markets.

In a statement made at the fund’s launch, which followed the World Economic Forum’s Special Meeting on Economic Growth and Job Creation in the Arab World, the CEO of JEDCO, Yarub Qudah, emphasised this was the first venture capital fund targeting SMEs in the region, and added that the initiative will play a major role in attracting investment in Jordanian SMEs from international venture capital funds and foreign direct investors, and will help encourage Jordanians to establish their own venture capital funds. “That will create a new sector specialised in fund management activities,” Qudah said. Even though the fund is supported by two non-market actors, JEDCO and EIB, the inclusion of Abraaj Capital as an anchor investor provides confidence that the fund has a serious profit motive. Indeed, Abraaj Capital is experienced in such funds, having undertaken similar initiatives, including the Lebanon Growth Capital Fund, which provides early stage capital to start-ups, and the Palestine Growth Capital Fund, a fund set up together with the Palestine Investment Fund, Bank of Palestine, EIB and Cisco.

All three of Abraaj Capital’s funds are supported by RED, which is dedicated to investing in SMEs across the region. Bringing the experience of these neighbouring funds will help the Jordan Growth Capital Fund during start-up and expansion phases.

LOWERING CAPITAL COSTS: Investors in Jordan will watch with keen interest to see how the establishment of such a private equity fund performs. While there is considerable private capital in Jordan, banks are lending at high interest rates – forced up by generous rates on government bonds and inflation – making loans expensive and difficult for companies to service. The intervention of two non-private sector institutions indicates an attempt to lower the cost of capital and provide affordable equity to businesses that have strong potential for growth. If the fund demonstrates that businesses can provide a competitive rate of return, investors unable to access the rich rewards of government bonds are likely to follow suit, which may result in more private equity funds being established.

FINDING SMES: The other big question is whether the fund will find the right SMEs to invest in. Jordan has an entrepreneurial foundation, but there are few technology companies that have succeeded in export-led growth. That said, Abraaj and RED are well placed to use their experience in the technology sector to identify and manage investments. In 2007 Abraaj sold its 75% stake in Maktoob.com, a leading Arabic internet portal, and in September 2011 RED invested in Jordan’s d1g.com, an Arabic social media platform. This move will help provide access to sector information on new start-ups in the technology field, allowing the fund to identify opportunities ahead of competition.

In light of the economic and market conditions, investors and venture capitalists will be eagerly monitoring the performance of this fund to see whether JEDCO, Abraaj and EIB can lead a new investment segment. If successful, others will likely be quick to follow.