Local mezzanine investor ARQCapital Partners (ARQ) is pushing “smart capital” investments in the private and alternative lending space to support medium enterprises (MEs).

Edmund M. Solilapsi, ARQ founding partner and chief executive officer said Wednesday, June 8, that the company plans to raise P1.5 billion to fund up to 50 high-growth MEs in the next two-years.

“There are a few ‘smart capital’ investors in the Philippines today and this space has yet to be institutionalized,” Solilapsi said during a virtual 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.

He added that 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, Solilapsi said.

“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,” Solilapsi said.

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.

An online definition of mezzanine investment states that it generally refers to an investment in a company structured in the company's capital structure between senior debt and common equity. Mezzanine loans assist in generating more capital for a business in addition to allowing it to increase its returns on equity and show a higher bottom-line profit. Mezzanine loans typically do not require payment during the term of debt, only at the end of the term. This enables a company to improve its cash flow.