ARQCapital Partners (ARQ) is pushing “smart capital” investments by raising P1.5 billion to fund 50 high-growth medium enterprises (MEs) over the next two years.

Many businesses have started out from humble beginnings—whether this includes hole-in-the-wall establishments, mom-and-pop stores, or even home-based online businesses. When the right cards are played, these concepts grow into big names that are known and loved by many.

Thing is, all businesses, regardless of size, need a sizeable capital—investment money for materials, equipment, manpower, and the like. But with all the risks involved and not having enough to start with, many budding business owners funding through partners, or in some cases, smart capital investors.

What exactly is a smart capital investor? Fundsup defines it as an “entrepreneurial, self-made, high-net-worth individual with a DIY [do-it-yourself] mentality towards managing their own wealth [and] directly providing smart capital to the next generation of entrepreneurs.” And Philippine mezzanine investor ARQCapital Partners (ARQ) does that.

Smart Capital, Explained

“There are a few ‘smart capital’ investors’ in the Philippines today and this space has yet to be institutionalized,” shared ARQ founding partner and CEO Edmund M. Solilapsi in a news briefing.

A privately-owned, institutionally-focused investment holdings firm based in the Philippines, ARQ specializes in offering private alternative opportunities. By developing investment strategies and stressing the importance of seeking special opportunities that impact society, they invest in companies and produce consistently attractive risk-adjusted returns.

Solilapsi also adds that to date, the country’s financing market is dominated by banks and non-bank financial institutions, which are primarily passive capital providers and predominantly asset-backed, which small businesses lack. Moreover, the private lending space is highly fragmented⁠ and yield-driven, too, which means that no focus is given to providing smart capital and creating an enabling environment for these enterprises to grow.

Adding to that, 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.

The result? Small-Medium Enterprises (SMEs) are challenged, as they do not have the same opportunities as other businesses, and likewise lack the right capital partner to fuel their growth.

“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 [the] private sector by banks, and domestic credit provided by [the] financial sector,” explained Solilapsi.

ARQCapital Partners: Funding and Guiding SMEs

Aside from the lack of opportunities and no room for growth and guidance, a lot of SMEs face challenges in securing capital, especially due to more stringent bank requirements. However, ARQ seeks to remedy this. In fact, the company is raising PHP 1.5 billion to fund as many as 50 high-growth medium enterprises (MEs) over the next two years—pushing “smart capital” investments in the private and alternative lending space.

As the country’s pioneering mezzanine investor for SMEs, ARQ has already invested approximately PHP 1 billion in 33 firms since 2016 through its ARQ SME Business Development Company (ARQ SME BDC) and co-investment partners. This SME fund has accelerated the growth of these companies, which proved to be “agile, innovative, and have value-adding products and services.” Moreover, it gave job opportunities to people too, as it sustained close to 3,000 jobs.

By the end of the year, ARQ plans to fund 10 more Medium Enterprises (MEs), thereby adding to its current portfolio, which now stands at 22 MEs. Plus, the company is also raising additional capital from development institutions in order to fund its investments.

A Market Base for Smart Capital

While seemingly risky to invest in a small business, there are actually numbers backing them up. In the same briefing, ARQ co-founder and managing partner Abigail D. Tan explained that the market base for smart capital investors could be worth over PHP 25 billion. She even added that this accounts for 20% of 4,800 medium enterprises in the Philippines (as of the end of 2020), which may have high-growth potential⁠—one of ARQ’s fundamental requirements as an investment firm.

“We typically support entrepreneurs requiring more than P25 million during their companies’ high-growth phase, especially those with revenues hitting between P100 million to P500 million,” said Tan.

And with the country’s economy slowly recovering from the COVID-19 pandemic, ARQ will likely support companies that are engaged in the “building blocks of transformation” that drive economic growth. These include companies that specialize in technology, telecommunications, financial services, digitization and digital payments, renewable energy, food and agriculture, healthcare, and affordable housing, among others.

Helping and Guiding SMEs

Money isn’t the only investment going into these companies. As a smart capital partner, ARQ serves as the funding bridge between companies that seek growth capital. By matching their cash cycle with customized financing products, ARQ provides entrepreneurs with solutions that go beyond financing.

These include assisting in areas like strategy and risk management, as well as technical financial advice. In fact, ARQ even gives these owners access to their network for either business relationships or further capital-raising. “As partners, we primarily assist companies in crafting a sound business plan and financial strategy that in the end should unlock further capital raising or a potential exit,” said Tan.

Simply put, ARQ is an active investor that advises on the general strategic direction of these companies. It also provides relevant insights gathered from its industry experience and track record, thereby minimizing risks and bad business decisions. And since ARQ’s core product is mezzanine, which means that “it can sit anywhere above owner’s equity,” Tan added that its capital investment does not dilute equity ownership of these companies.

A Strong Backbone of the Philippine Economy

Based on trends, Solilapsi said SMEs will continue to be a strong backbone of the Philippine economy. “We are hopeful that economic policies and regulatory framework will help sustain the growth of our SMEs, particularly in the capital markets⁠—[thereby] encouraging companies to go public or raise funds through issuing debt,” he said.

ARQCapital Partners—or ARQ—was founded in 2014 by Solilapsi and Tan as an answer to the underserved financial needs of the country’s fast-growing small and medium enterprises. Both founders started their careers at ING Bank as corporate banking professionals, where they eventually held roles with international private equity funds. Together, they have almost three decades of experience in investment banking and private equity.

In 2019, Manuel Paolo A. Villar—the president, and CEO of Vista Land & Landscapes—joined ARQ SME BDC as the company’s partner and member of its Investment Committee. That same year, ARQ SME BDC received its first foreign institutional investment from the Netherlands-based Dutch Good Growth Fund, through its Seed Capital and Business Development facility.