Equity finance In development

David Renwick on the growing importance of equity finance in Caribbean development

  • Illustration by Christopher Cozier

Equity finance is assuming growing importance in the economic development of Caribbean countries. Though it is unlikely ever to displace, or even to match, loan capital as a source of funds for investment and business activity, it plays a key supporting role in keeping economies ticking over and expanding.

The better-known term for equity is shares or stocks, and tens of thousands of citizens and residents of Trinidad and Tobago, Jamaica and Barbados are today owners of shares in companies quoted on the local stock exchanges.

Most of these holdings are small – worth a few thousand dollars or so – on which dividends are paid every year or, in the case of shares in commercial banks, every quarter. It is the bigger operators – pension funds, insurance companies, money market funds, the Unit Trust Corporation of Trinidad and Tobago and other corporate entities – who hold the bulk of publicly-quoted stock. A few wealthy individuals also have large holdings.

Widespread equity ownership in Trinidad and Tobago was originally conceived of as a “social” objective of the People’s National Movement (PNM) governments which ran the country in the1970s and the early part of the 1980s. The man and woman in the street, it was said, should have a piece of the economic pie. Hitherto, all he or she had was wage income, the result of selling his or her labour. With a few hundred shares under his or her control, the argument ran, the worker would now enjoy dividend income as well.

Almost all the early equity that came into the hands of the public was from foreign companies operating locally, which were gently pressured by the government to release a portion of their corporate assets onto the domestic market.

But local companies eventually cottoned on to the advantages of obtaining funds this way too, and since most “offers for sale” were made at a premium, it was also a neat way to make a tax-free capital gain. Of the 29 different shares quoted on the Trinidad and Tobago Stock Exchange today, 14 are those of companies that have always been locally owned and chose to raise new funds via a public placement.

Political administrations in the late 1980s and 1990s no longer tried to force foreign owned companies in Trinidad and Tobago, or, indeed, anywhere else in the Caribbean for that matter, to “go local”. Foreign investment is now a “good thing” in its own right, not to be pressured by “social” policy considerations.

Indeed, government-owned companies, especially those in the energy sector, were happily sold off to foreign owners, with no thought apparently being given as to whether even a portion of the shareholding should be reserved for citizens and residents.

To some extent, local private companies have taken on the role of “wealth spreaders” through public share issues, but their motivation is more financial and economic than social – profit for the individuals or firms that previously owned all the shares and an alternative, and cheaper, source of investment capital to bank loans.

In the case of this group, equity capital is performing the purpose for which it was originally intended – raising money from those who don’t mind taking a risk in order to support and expand business activities. The foreign firms who launched the wider share ownership movement could easily have obtained investment funds from their own resources or from their parent companies overseas. The local firms don’t have these options, and equity funding is now seen as an increasingly attractive way of accessing investment money.

The most recent development in equity funding is the venture capital movement: well established in Jamaica, it came to Trinidad and Tobago only a few years ago.

Like all share capital, venture funding is cheap because there is no requirement on the part of the companies in which such capital is invested to pay interest every month or to return the capital at any given point in time.

It is essentially risk money, and this is well recognised by the government, which in Trinidad and Tobago allows taxpayers write-offs if they invest in venture capital companies that, in turn, support nascent entrepreneurship.

Venture capital is, perhaps, the purest form of equity finance that is now available in the Caribbean. The early share divestments by foreign companies carried little risk, because the share buyer was investing in companies already solidly-based.

Buying shares in any of today’s existing publicly quoted companies is probably equally safe, since those that remain are well run and profitable.

Though the Venture Capital Incentive Programme (VCIP), supported by the government, does have responsibility for vetting companies seeking venture capital in Trinidad and Tobago, it can not remove all the risk; but the programme’s great virtue is that a budding businessman does not need a profit history to access venture funding.

As one of the system’s staunch proponents told Caribbean Beat recently: “If venture capital had been available in Trinidad and Tobago and other Caribbean countries much earlier, the entrepreneurial culture now emerging could have happened long ago.”

Funding provided by the 11th EDF Regional Private Sector Development Programme Direct Support Grants Programme.
The views expressed on this website are those of the the authors and do not reflect those of the Direct Support Grants Programme.