The players in the Barbadian capital markets comprise of bank, insurance companies, credit unions, finance companies and securities exchange. Funding is provided by individuals, companies and central government. Based on the values of assets available in the sector, there is a significant amount of economic activity in this area. The challenge for Barbadians is to change the current direction on how capital is utilized. The focus has to be shifted from consumption to wealth formation.
The securities market in Barbados is illiquid due to limited trading activity. The principal reasons behind this are, they are very few listed companies and most investors in the Barbadian market buy and hold their investments. Secondly, with exchange controls in place, we are restricted to the purchase of cross listed securities on the other regional exchanges. Barbadians generally cannot purchase securities traded in international exchanges directly, but they are afforded access through professionally managed mutual funds.
If we expand our view of capital markets we would recognize that the biggest opportunities exists in the debt financing segment. The Barbados government is an active issuer of debt securities, which Barbadian institutions and individuals regularly purchase. Most of these issues are held to maturity and we have not moved to the second stage where they are treated as tradable securities which can be used to create further liquidity in the market place. Over the last 15 years we have become comfortable with mutual funds, but we will now see if that comfort was more driven by the tax concessions rather than accessing a vehicle for wealth creation.
So what are the next steps in the process?
They are not technical, or legislative but more cultural and mental. Increasing capital market activity will not happen until we recognize the products for what they are. These products may be used to create wealth, provide liquidity or provide capital directly to others rather than through the banking system.
The cultural and mental challenges mentioned above relate to the belief that using the capital markets to raise capital will lead to a loss of control of the enterprise and secondly that the competition will have access to competitive data and intellectual capital of the venture. These issues are overcome by understanding that there are very few ideas that are not already in the market place, secondly, you have to be willing to trade off some control to access the capital that would allow the business to grow exponentially.
As much as business people complain in Barbados, banks are relatively easy to deal when compared with going to the exchange to list debt or equity securities to raise capital. Essentially you need a business plan and collateral to access funds from the banking system. Guess what, you need similar tools to access funds in the capital market. The fastest way to build liquidity in this market is to provide a framework where debt can be raised using more relaxed listing requirements than currently exist.
The general focus on junior markets has been raising equity, but with interest rates as low as there are on savings or fixed deposits, and banks lending at up to prime plus 3%, there is an opportunity for private companies to enter the market to raise debt financing in the first instance and equity in the second. These companies must be willing to be transparent with their financial reporting and demonstrate that they have strong management teams in place. We need to either revisit the securities act or provide a separate framework to facilitate the development of a secondary market for these issuers.
Perhaps the biggest challenge to be overcome in Barbados is the issues of fiscal and operational transparency. Most companies in Barbados are closely held and hence the performance of a company or group of companies can be readily linked to an individual’s personal wealth. Many entrepreneurs resist the oversight that will come with using other people’s money, as they consider it a nuisance and that they alone know best how to run their venture. The number of business failures that occur annually would demonstrate that while most people understand their business concept, they do not execute effectively. How can we change this?
Companies grow rapidly for two reasons, either it has a product or service in high demand with good profit margins and cash flow or they are properly capitalized so that they can withstand the cash deficits that occur in the early stages of its life cycle. An equity capital injection is the most effective way to do this. This capital may come from friends and family, angel investors, venture capitalist and off course the one that we seldom think about vulture investors.
Investors consider the following when evaluating proposals:
- The project idea is unique or changes the competitive landscape in the industry. Entrepreneurs should recognize that while they may be impressed by their own ideas, active venture capitalist may have already seen something similar.
- The management team has the experience to deliver the expected results. This means that each member of the team should show a history of setting and attaining meaningful goals. If the team has no experience working together, the project may still be rejected. Hence, the team should work closely together as the business plan is formulated so that there is clear vision of the objectives to be obtained as well as to create a working relationship past friendship or professional affiliation.
- Time weighted return to the investor exceeds other investment opportunities that they are considering. Venture capitalists receive up to 50 proposals a week to consider.
- There must be a clear exit plan which defines how the investor will get back their investment plus expected returns. However great the idea is, if the investor cannot see how they will get out, they will not get in. Without an active capital market, this can be a difficult hurdle to overcome.
- The founders must have money and not just time in the project, even if it is borrowed money or other tangible property. If you are not committed enough to put your own resources at risks then why should the investor.
- The founders must be prepared to cede a meaningful level of control to the other parties with funds at risks. This does not mean that they will lose control of the process, but that they should use the opportunity as a learning exercise to work with people who have significant experience in building successful enterprises.
The last challenge is best overcome but having the clearly thought out exit strategy. The formula to buy back shares from the investor during the investment period or to earn shares through an executive compensation arrangement should be properly structured. If the project is successful, issuing a combination of debt and equity in the market to finance the buyout of the venture investor should always be on the table.
Enhancing the Barbadian capital market has to do more with the human dynamics involved rather than creating the technical and legislative framework. It requires action from both potential entrepreneurs and investor. The key elements from each side require the following mindset:
- The willingness to take risks, which means measured and properly evaluated risks.
- Focus on making decisions rather than talking about we have been discussing and we have been looking at an issue for a period of time. It is doing the risk analysis as mentioned, and making a decision about the course of action to be taken.
- Finally the implementation of decisions, this is where we are the weakest. All too often decisions are made, but people find excuses for not implementing them.
If we do not create the emotional maturity to address these three elements, interest in investing in our using our capital markets to generate wealth will continue to linger.