Exchange listed SME Investment Vehicles as a new financial ...



Terms of reference

Financial Product Design Study:

Exchange listed SME investment vehicles as a new financial instrument in EBRD’s countries of operation

1. Background

The technical cooperation project is taking place within the EBRD Initiative on Local Currency and Capital Markets Development (LC2). This Bank-wide strategic Initiative aims to identify and support sequenced reforms and policies in EBRD’s countries of operations (COOs) that contribute to local currency and local capital market development. One of the ways that the Bank supports this role is in producing focused studies and providing assistance to developing the local capital markets based on international standards and best practices. Increasing the access to capital market financing for small and medium sized companies (SMEs)[1] is thereby one of the focus areas of LC2.

According to the OECD, SMEs represent the dominant form of business organizations, accounting for over 95% and up to 98% of enterprises, depending on the country. In the European Union countries, nearly 99% of all enterprises are SMEs.[2] Especially in emerging economies, SMEs are the driving force behind economic growth, employment, poverty alleviation and wealth creation. But, SMEs face more severe credit conditions than larger companies, which include higher interest rates, shorter maturities and increased collateral.[3] Access to capital market financing is limited, as exchanges are still focusing their business development efforts on mid- to large-cap companies and examining the options for increasing the number of transactions in order to secure revenues.

In some countries listed investment entities like listed SME investment funds, venture capital trusts[4] (UK), capital pool companies[5] (Canada), listed purpose acquisition vehicles and infrastructure project corporations (Malaysia) and other forms of listed financing schemes are quite popular.

Listed investment vehicles (LIVs) i.e. similar to special purpose acquisition companies (SPACs), Venture Capital Trusts (VCTs) or a Capital Pool Company (CPC), which are collective investment structures incorporated with the sole purpose of raising money through initial public offerings (IPOs). The stock exchange listed investment vehicles will then use the IPO proceeds to invest into target businesses within a given timeframe.

Currently, the Bank is analysing if locally listed investment vehicles are feasible in EBRD’s region to increase the access to capital market financing for companies. Therefore, EBRD decided to commission the technical cooperation (TC) project “Financial Product Design Study: Listed SME investment vehicles as a new financial instrument in EBRD’s countries of operation”. The proposed project is also in line with the Action Plan on “Building a Capital Markets Union,” published by the European Commission, which explicitly mentions “improving access to finance, including risk capital, notably for SMEs”[6] as one of the five priority areas for development.

2. Objectives

Overall objective

The overall objective of the project is to recommend the most suitable design for a listed SME investment vehicle that can increase the access to capital markets based financing for companies, especially for small and medium sized enterprises in EBRD’s countries of operation.

Specific objectives

The specific objectives of the assignment are to (a) identify pre-requisites for successfully listing investment vehicles and recommend focus countries in EBRD’s region, (b) design the optimal structure of the recommended listed investment instrument, prepare a detailed implementation plan for the launch in at least two identified pilot countries and build the local capacity to ensure support for the launch of the product, and (c) assess the business potential for EBRD and estimate the transition impact of EBRD’s involvement.

3. Scope of Work

In order to fulfil the objectives mentioned above, a highly specialised consulting company or a consortium of companies will be required to carry out following activities:

▪ Activity 1: Identify successful types of listed investment vehicles and EBRD focus countries

▪ Activity 2: Design the optimal structure of the recommended listed financial instrument and

prepare a detailed implementation plan for at least two pilot countries

▪ Activity 3: Assess the investment potential for EBRD and the transition impact

It is expected that the Consultant bases his recommendations on best practices as well as lessons learned from other listed investment vehicles/schemes, and takes into consideration the legal and regulatory environment set by international standards (i.e. AIFM/UCITS/MiFID2/MiFIR) and local laws/regulations in the Bank’s countries of cooperation and especially the EU action plan on building a Capital Markets Union (CMU)[7] as far as it applies.

Activity 1: Identify successful types of listed investment vehicles and potential pilot countries

The aim of the Activity 1 is to identify types of successfully listed investment vehicles and to rank EBRD’s countries of operation (CoO)[8] according to the feasibility of a successful launch of such an instrument based on international experiences, the local legal and regulatory framework, tax implications, availability of product sponsors, investor base, country specifics and other criteria as deemed important by the Consultant.

The activity will consist of the following tasks:

a) identify and describe categories/types of listed investment vehicles including innovative approaches which have been proved to be successful based on international experiences;

b) prepare a set of case studies of listed investment vehicles and their impact on SME equity and/or debt financing and local capital market development;

c) identify pre-requisites for the successful listing of various types of investment vehicles in emerging markets (i.e. legal/regulatory/tax environment, product sponsors, investor base, market segment, etc.) based on international experiences;

d) develop a methodology for ranking EBRD’s countries of operation according to the feasibility of successfully launching a listed investment vehicle segment/scheme;

e) rank all EBRD’s countries of operation according to the developed methodology and based on the ranking recommend at least two pilot countries in EBRD’s region which would have the highest chance for successfully launching listed investment vehicles; and

f) prepare an Assessment Report.

Deliverable of Activity 1 will be a Report providing an in-depth analysis of listed SME investment vehicles/schemes, a set of case studies and a ranking of EBRD’s CoOs based on the feasibility of successfully launching a listed investment vehicle [covering tasks (a) to (e) above].

Activity 2: Design the optimal structure of the recommended listed investment vehicle

Based on the assessment conducted in Activity 1, the Consultant will design the recommended structure of locally listed SME investment vehicles which can be launched in (selected) EBRD countries to increase SMEs access to financing. The Consultant will also recommend the legal and regulatory base and any other requirements which have to be in place to successfully launch the recommended investment vehicles in the identified pilot countries.

The activity will consist of the following tasks:

a) recommend the design and optimal structure of the recommended listed investment vehicles;

b) recommend the corporate governance structure;

c) recommend the legal, tax and regulatory base and any other requirements which have to be in place to successfully launch the recommended investment vehicles (it is assumed that the pilot countries will have most of the pre-requisites for a successful launch already in place);

d) recommend the listing place and the market segment in the proposed pilot countries;

e) estimate formation, management, issuance and listing costs (i.e. including legal, overhead, accountancy, underwriting, etc.);

f) identify and recommend potential product sponsors;

g) recommend investment strategy/strategies;

h) recommend investment type (i.e. equity, debt);

i) identify the retail and institutional investor base;

j) define investor protection measures;

k) prepare an implementation plan for the pilot countries with clear tasks and responsibilities;

l) prepare a set of presentation slides;

m) build the local capacity to ensure support for the launch of the recommended product through workshops and/or roundtables;

n) prepare a set of presentation slides; and

o) prepare a detailed Concept Report.

The Consultant will be tasked to liaise with all concerned key stakeholders, especially in the selected two pilot countries, to ensure the proper design of the investment vehicle scheme, market readiness and a broad level of acceptance of the proposed set-up. It is also expected that the Consultant will identify product sponsors who may intend to launch the recommended form of investment vehicle and to raise capital on the local stock exchange via an IPO. Proper support from potential product sponsors, the local regulator(s) and the stock exchange has to be secured.

Furthermore, the Consultant will have to organise roundtables/workshops for local key market participants and potential product sponsors in each of the identified pilot countries to (a) collect their view on challenges and opportunities that could be seized through a listing of a SME equity/debt investment vehicle, and (b) to present the optimal structure. The workshops should also highlight the potential impact of such an instrument on increasing the access to financing for SMEs.

The Deliverables of Activity 2 will be

▪ a detailed Concept Report presenting the optimal structure of the recommended type of listed investment vehicle, identified product sponsors and an implementation timetable for the two selected pilot countries with clear tasks and responsibilities as agreed/discussed with the potential product sponsor(s). The Concept Report should also propose measures which will support the successful launch of the recommended listed product.

▪ A set of presentation slides.

▪ A number of roundtables/workshops to build the local capacity.

Activity 3: Assess the investment potential for EBRD and the estimated transition impact

The countries where the EBRD invests have experienced varying degrees of economic controls in the past and are at different stages of completing the process to close the "transition gap". It is commonly recognised that improvements in the living standards of  people in the EBRD region depend on market economies that function well -  where businesses are competitive, innovation is encouraged, household incomes reflect  rising employment and productivity, and where environmental and social  conditions reflect peoples’ needs. To help countries achieve these goals, EBRD works within its mandate to support not only the growth of physical and financial capacity, but also improve the way in which resources are managed. Through these initiatives, and with direction provided by both public and private sectors, countries make the transition and "move forward". Hence, EBRD investments and projects enable transition to be supported along several routes. Increasing SME’s access to capital market financing is thereby an important part in creating sustainable economies.

The activity will consist of the following tasks:

a) assess the investment potential for EBRD and the estimated transition impact;

b) organise a roundtable to present/discuss the structure of the recommended investment vehicle(s) and the outcome of the assessment with selected EBRD teams in EBRD’s HQ; and

c) prepare an Assessment Report.

It is expected that the Consultant will liaise with the respective EBRD teams to discuss/assess the investment potential and the estimated transition impact of the recommended instrument(s).

The Deliverables of Activity 3 will be an Assessment Report and a Roundtable.

4. Project counterpart and implementation arrangements

1. Project counterpart: The Consultant will be selected and contracted by the EBRD. The Consultant will report directly to EBRD and will work closely with the Bank’s nominated Operations Leader (OL).

2. Management structure and project oversight: EBRD’s OL will closely monitor the implementation of the assignment by the Consultant on a day-to-day basis. The Consultant through its Project Team Leader (TL) will have overall responsibility for delivering the assignment according to the agreed work plan and will as such manage the project implementation and actively monitor the progress achieved. The TL will also be responsible for communication between the EBRD and the Consultant. Project oversight will be provided by the OL. The Consultant will provide a brief monthly report on the progress of the assignment, including: description of work undertaken and deliverables produced; main findings; performance of the assignment against the agreed project timetable; descriptions of challenges encountered in delivering the assignment and proposals for overcoming them; and description of the work programme for the forthcoming month.

3. Project team: The Consultant’s project team should consist of the TL, who should have extensive project management and capital markets experience, and a team of exchange listed investment vehicle specialists and la lawyer who have experience in developed as well as developing countries to the extent needed to successfully implement the assignment. The Consultant should be able to draw on additional expertise where necessary as identified during the project inception phase. The Consultant must ensure that its project team is provided with computers and the technical equipment needed for the implementation of the assignment. The consultant should not expect that EBRD will provide logistical support and, therefore, the consultant should provide his or her own communications, interpretation/translation, and other assignment-related logistical support.

4. Logistical support: The Consultant should not expect that EBRD will provide any logistical support and, therefore, the consultant should provide his/her own office, communications, interpretation/translation, and other assignment-related logistical support.

5. Project start and duration: Indicative start date of the assignment is beginning of September 2016 and the estimated project duration is 4 months.

6. Project language: Project language is English. All deliverables are to be delivered in English.

7. Place of performance: It is expected that a part of the work will be carried out on-site in the selected pilot countries, but the final split between on- and off-site work days has to be provided in the “Methodology and approach” section of the Expression of Interest and agreed with EBRD during contract negotiations.

EBRD reserves its right to require the consultant to suspend work, either temporarily or for longer period or to cancel the assignment at any time during project implementation.

Indicative number of working days: The effort of the consultant/s for the assignment is expected to be around 180 working days undertaken by the Consultant’s team on an intermittent basis over a maximum period of 4 months. The Consultant has to ensure that his expert team spends sufficient time in the identified pilot countries as required to meet the project’s objectives and secure commitment from the local key market institutions, potential product sponsors and participants. The number of on-site days has to be coordinated with EBRD.

5. Reports and deliverables

The Consultant will provide the following reports and deliverables:

|# |Deliverable(s) |Indicative Timing |

|Reporting |

|1 |Inception Report |The Inception Report should be submitted to EBRD within 1 week of project |

| | |start, specifying the implementation approach, timing and sequencing of |

| | |activities and exact submission dates for the deliverables. |

|2 |Monthly Progress reports |To be submitted to the OL on a monthly basis. |

|3 |Draft Final Report |To be submitted two weeks before project end |

|4 |Final Report |To be submitted at project end. The Final Report should present all |

| | |deliverables/reports in a consolidated form. |

|Activity 1: Assess the feasibility of locally listed investment vehicles in EBRD’s region |

|5 |Report “Listed SME investment vehicles – types, success |To be submitted within 1 month of project commencement |

| |factors and potential pilot countries in EBRD’s region” | |

|Activity 2: Design the optimal structure of the recommended listed financial instrument |

|6 |Concept Report “Recommended listed investment vehicle |To be submitted within 3months of project commencement. |

| |for implementation in EBRD’s region” | |

|7 |Roundtables/workshops with key capital market |Number of workshops/roundtable as well as dates to be agreed with EBRD. |

| |participants and potential product sponsors in the | |

| |proposed pilot countries | |

|Activity 3: Assess the investment potential for EBRD and the estimated transition impact |

|9 |Assessment Report |To be submitted within 3½ months of project commencement. |

|10 |Roundtable “Presentation of the investment potential for|Content and date to be agreed with EBRD. |

| |EBRD and the potential transition impact of the | |

| |recommended investment vehicle” | |

The exact timing of the deliverables will be set in the Inception report as agreed with EBRD, but should generally follow the timing given in the ToR. Other deliverables may become relevant as the project progresses. Those will be included as agreed with the relevant Consultant on a case-by-case basis. All deliverables will be produced in English and submitted to EBRD’s Operations Leader (OL) in hard copies and electronic format. All deliverables should be in form and substance satisfactory to EBRD.

To ensure that critical milestones are being met, disbursement of funds will be phased and contingent upon certain implementation criteria being satisfied. The payment schedule will be based on the approval of deliverables and will be agreed during contract negotiations.

Donor visibility

The donor for this project is the EBRD’s Special Shareholder Fund (SSF) who requires adequate visibility for its contribution. The consultant shall collect evidence of donor's visibility, such as media coverage, official notices and press releases, reports and publications referring to the project. No public statements should be made on the content of the project without prior written consent of EBRD. Any presentation and reports should acknowledge the donor contribution of the SSF. The final report should detail the ways in which the donor's visibility requirements were adhered to.

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[1] EU SME definition:

[2] SME Performance Review,

[3] Source: Financing SMEs and Entrepreneurs 2012: An OECD Scoreboard

[4]

[5]

[6] Source: , p.9

[7] See also:

[8] List of EBRD’s countries of operation:

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