|By Joseph Doway, Caribbean News Now,
Grand Cayman, Cayman IslandsMcClatchy-Tribune Regional News
Dec. 20, 2012--When we get a massive hurricane and every mountain top has lost its lush greenery, every beachfront is cluttered with debris, weeks after, through the plan of creation, everything returns to its normal beauty. That is how any business should function.
Investing in the Caribbean is one with great potential, especially in the areas of tourism and manufacturing. When one looks around the majority of the Caribbean islands, and even The Bahamas, the majority of resorts and hotels are owned by expatriates. One may ask why. The answers are numerous.
Let's look at financing of any project. Most business owners will tell you that, when they got their loan to start their business 30 years ago, the requirements were proof that the business will pay for itself in a number of years. More so, the bank managers themselves were ex-pats. They saw no threat in providing financing to an entrepreneur or business owner. Today, the banks tell you that if you want a loan of a quarter million, then you have to provide the bank with the cash equivalent as collateral. So, you don't have it, you don't get it.
From my experience working in The Bahamas in 2011, the Bahamian entrepreneurs are now looking at outside funding, sourced through funding brokers, investors, venture capitalist and lenders. One of the reasons is that, like in the Caribbean, some banks do not have the liquidity or the amounts over, say two million US, maybe beyond and above their limit of lending. Consider a client in the Caribbean who has a building worth over $9 million, needs EC$250,000.00 to purchase stock to allow him to increase his inventory and sales, he is now waiting three years later on his bank.
Over the past 35 years, we have established that real estate investment plays a major part in the growth of the economy of most of the Caribbean islands. Not only does it generate revenue for the governments through payment of licenses, permits and stamp duty, it creates jobs in construction and everyone would feel the effect of having a disposable income. Craftsmen and manufacturers would be able to sell their creations and products.
With increased hotel rooms and other facilities, a door will open for more airlift into whichever country. That means more airlines will request permission to enter and leave those islands, bringing in an influx of visitors and potential investors to the shores. Countries with small or declining populations will feel the benefits of new immigrants and returnees adding to the working population, establishing homes and families and spending their earnings on the islands. That would allow economic growth.
The world is full of potential investors, but a country, a government and an individual has to be prepared to do research to find the right investors, venture capitalist or lender. The professional business climate between all parties must be right on target.
Regardless to the planned development, local or foreign development investment is required. In some case, the developer may be able to start the project with his/her own funds, create an equity base which could include the actual land and a percentage of completed construction. That injection of capital and construction gets a value which is then used as an asset base or equity. When it becomes imperative to bring in an investor, joint venture partner or investor, the entrepreneur or developer must be prepared to have all the required paperwork in place.
Whoever the funder is, they are going to request the following documents (not necessarily in the same order): (a) An Executive Summary. I normally encourage any entrepreneur to prepare an executive summary to protect their project. It has been known that persons would copycat on submitted business plans. No document is submitted without a signed non-disclosure agreement between developer and funding source. That again is to secure the property rights of the person submitting the plan. (b) A concise, professionally prepared business plan will be the next request of the lender or investor. That will provide information on how the business will be operated. Attached should be all the financial details, including balance sheet and profit and loss statements. Depending on the project size, a feasibility study will be required. Once those documents have been reviewed and the lender decides to issue a letter of intent, the borrower or developer needs to produce all drawings, permits and government approvals. One of the major problems that delay or cancel financing is the borrowers' neglect to provide professional documents or the refusal to pay professionals to prepare the required documents. Then there is going to be the fee for due diligence on the project. No one is going to lend or invest money unless they are certain that the project is legitimate. There is a cost involved, which would include visits from the investor or his/her agent. Due diligence and upfront fees can run from US$8,000 to US$20,000 depending on the magnitude of the project.
I always suggest to my clients to verify with local banks and the Central Bank governing their territory as to how best the funds can be transferred. In The Bahamas for instance, once the project is presented to the Investment Authority, due diligence is conducted on the investor, joint venture partner(s) or lenders. That avoids any embarrassment by money laundering enforcement officers, who in some cases may have no clue about investment transactions.
Once due diligence has been carried out on both sides, then the process begins. Secured financing transactions can take 45 to 90 days for closing, especially if the funder and the lender are in two different jurisdictions.
There is a problem with getting local business people with large sums of money to invest in their own island. The issues include a lack of faith in the government and the economy, the lack of guidance from investment consultants and the feeling that once the money is in the bank, which is all good. Banks use other people's money (OPM) to stay in business. Now, when we make banks the custodian of our money, the real beneficiary is the bank. The banks pay you just about 4% interest on your money. They make loans to other customers and place an interest rate of 8 up to 10.5%. Do the math. Brokers would place a collection of investors together to invest in a project, or one developer would use the money of various investors / lenders to make a project become a reality. That is using other people's money.
An entrepreneur who is serious will pay an investor up to 18% interest on an investment and within a payment period from 5 to 20 years, depending on the project. So we basically advise our entrepreneurs to source outside funding. It takes a longer period, it may be more expensive to buy, but you can get any amount of funding required, once the project is viable. Every lender / investor / investor representative (broker) / joint venture partner has their own requirements and closing timeframe. One should shop around for the best deal, the most reputable lender and the best interest rates. Likewise, the investors and lenders would have their own philosophy on the return on investment (ROI) that they are seeking.
Entrepreneurs or persons considering a new business investment must also be creative. Don't follow what Jack and Jill is doing. Create your own niche, your own mix and then with the help of a consultant doing the research, develop a product or service that is really needed. Investing is real estate has its pros and cons, depending on location, marketing and management. Think wisely.
One example of proper planning is a mother-daughter full service resort being developed on Staniel Cay, Exuma Cays, Bahamas. The owners of EMBRACE Resort did all the necessary planning for this high end resort and then contracted The MoonBay Group to provide technical and financial advice.
Governments and large corporations should consider foreign direct investments. Where do you source your investors? Let's look at the countries that have emerged to the top of the ladder.
Over recent years, direct foreign investment in certain Caribbean islands has been coming from more diverse arrays of sources, as global wealth shifts and rapidly developing countries expand their international interests. Seeing the potential in countries like The Bahamas, based on its location and natural environment, such emerging economies are looking to invest in the jurisdiction in areas as varied as resort development, product transshipment, road structure and public amenities.
One of the world's fastest growing economies, China, is quickly becoming one of the largest direct foreign investors in the Caribbean and the region as a whole.
Another developing nation with massive resources is India. As yet, trade and commerce between the Asian nation and some of the islands is relatively blossoming to include bilateral trade. Strengthening relations with China, India and Brazil would create a momentum for growth with high ranking exchanges leading the way.
But like governments, entrepreneurs have to be serious. Presentation of documents must be extremely professional, preferably prepared by a business consultant or broker. There has to be a clear understanding on want is needed and the benefits of doing business with either larger or much more powerful countries or individuals. That is being smart. As small developing economies, we still have to chart the way forward. As young countries, whatever we do now will have long term implications for future generations. This notion of I am leaving my land for my children or future generation must change. There has to be a development plan in place.
Government must consider incentive programs that should be developed to encourage the creation of innovative products or services that will improve economic development. New entrepreneurs must create innovative products or services that will have easy access to financial funding, even on an international level. The rich folks on the islands must consider investing in local projects, placing their faith in their own children's future.
Commercial banks, credit unions and government financial funding programs must be available to those who qualify for funding. There must be a collaborative effort by all financial lending institutions to develop various funding packages that address all financial requirements.
The Caribbean will soon be able to source alternative financing (i.e. private equity), through the Eastern Caribbean Enterprise Fund. ECEF is a holding company and venture capital firm, as well as a fund sponsor and manager for a family of funds ECEF aims to be the market leader in the provision of venture capital/private equity to SMEs and growing enterprises in the Eastern Caribbean market. It will realise this strategy with dedicated people and a strong local presence, continuously developing a culture of professionalism and excellence.
ECEF also aims to deliver attractive financial returns and to add value for clients and investors by operating proactively and with integrity to the highest ethical standards.
Finally, business persons and entrepreneurs must appreciate the fact that to make money, one has to spend money. When you are approaching an investor / joint venture partner and lender, it is a different platform as to approaching a bank. These independent lenders want to know that the groundwork had been started, that your financials shows you have invested money in the project. No investor of financial partner is going to invest 100% in any project. Certainly, they will consider if you use real estate as your form of equity, but your project has to be shovel ready. The planning must be in place, the designs approved the licenses in order and your team is qualified and ready. That leaves us the idea to consult with the professionals who provide technical advice and mentoring.
So when a government or individual has a project that needs funding to be developed, start with the right people. Consult with a consultant or firm who has the experience in the research and development of your project.
(c)2012 the Caribbean News Now (Grand Cayman, Cayman Islands)
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