ADB invests to spur SME growth in ASEAN, PRC

The Asian Development Bank (ADB) is investing up to $25 million in a new fund designed to support the growth of small- and medium-sized enterprises (SMEs) in ASEAN countries and the People's Republic of China (PRC).

The ASEAN China Investment Fund II, which is seeking to raise $250 million in total capital, plans to invest in companies that will benefit from increasing trade between the ASEAN bloc and the PRC.

In January 2010, the ASEAN-PRC Free Trade Area - the largest in the world by population, covering 1.9 billion people - came into effect.

SMEs are the lifeblood of many Asian economies, providing the bulk of employment in some countries, and livelihoods for the poor, women, and other vulnerable groups.

ADB's investment, which will be capped at 25% of the fund's share capital, will help leverage interest from other investors to raise money in the capital markets in the wake of the global economic crisis.

It follows ADB funding of $15 million in 2004 for the similarly targeted ASEAN China Investment Fund.

"ADB's investment in the fund is intended, in the long term, to help increase regional trade, economic growth and private sector development in Asia," said Robert van Zwieten, Director in ADB's Private Sector Operations Department. ADB aims to boost access to finance for SMEs, contributing to increased trade and investment among ASEAN countries, and between ASEAN and the PRC. Investing in SMEs will help generate jobs for the vulnerable, including women, and help close the gap between the poor and the rich.

In addition, ADB's new environmental and social safeguard policies will be incorporated in screening potential target SMEs, supporting environmentally sustainable and socially responsible investments.

The fund will make minority equity and equity-related investments of $5 million to $20 million. The investments will be aimed at companies which need capital to finance expansions, acquisitions, joint ventures, and restructuring, and will benefit from regional trade.

The investment allocations target is 50% in the ASEAN region and 50% in the PRC.

The fund will have an eight-year life from final closing, and will aim to exit investments over an average period of three to five years. It will be managed by UOB Capital Partners LLC and advised by UOB Venture Management Pte. Ltd., both subsidiaries of United Overseas Bank Ltd. (UOB). UOB is the sponsor and lead investor, with a capital commitment of $30 million. Other substantial commitments or interests in the fund have been received from development finance institutions such as French Development Finance Institution, Proparco.

Given the tougher post-crisis financial environment, the fund faces potential risks such as its overall investment strategy, increased competition for investments, exit and currency risks and other barriers.

Various measures to mitigate the risks will be taken, including expanding the number of ASEAN countries targeted for investment, and broadening coverage in the PRC.