Vertex Growth posted on 09 Oct 2020
Photo: Digital News Asia
A well-established major financial centre, Singapore is now a global nexus between the East and West, and is the preferred destination for many major corporations worldwide to set up their regional headquarters in Southeast Asia. But did you know that 99% of companies in Singapore are actually small and medium enterprises (SMEs)?
SMEs in Singapore collectively employ over 70% of the workforce. Their combined economic activity accounts for about half of the nation’s GDP, which was over USD 370 billion in 2019. This economic significance is reflected across Asia-Pacific – SMEs comprise over 95% of all enterprises, employ half of the workforce, and contribute around 20-50% to national GDPs across the region.
Many countries risk their economies and workforces stagnating if they do not facilitate the growth of SMEs and ensure their continued survival. Despite that, SME financing has always proven a challenge. The SME bank loan-to-GDP ratio varies between 4% to 20% across ASEAN countries, resulting in a multibillion-dollar funding gap for SMEs.
This perennial unmet need for SME financing presents a huge lending opportunity in the region, giving rise to alternative lenders such as Validus Capital (“Validus”). Our belief in Validus’ unique ability to address these gaps and support SME growth led to us investing in the company through two funds – Vertex Ventures Southeast Asia and India and Vertex Growth.
Validus is Singapore’s largest SME financing platform and provides loan solutions that are designed specifically to meet the needs of SMEs. As a mark of their impact on the industry, they recently became one of the first FinTech to be approved by Enterprise Singapore as a qualified Participating Financial Institution (PFI) to offer government-assisted loans to SMEs under the Monetary Authority of Singapore’s (MAS) new SGD facility.
Under this scheme, MAS is offering near-zero interest rate loans to PFIs such as Validus, which allows Validus to lower its interest rates on loans distributed with the facility and pass these cost savings back to the SMEs. Attaining PFI status is significant for Validus as it will help them extend their reach and better serve the SME community. Vertex supported Validus during their application process with MAS and is proud to have worked alongside the company to make this happen.
Let us take a look at why Validus’ founders started the business, as well as how they found a way to provide better financing solutions to underserved SMEs with the aim of promoting inclusive growth for small businesses across ASEAN.
The challenges with traditional lending
Aquila Nova (“Aquila”), an SME in Singapore, is a security solutions provider and equipment supplier to the marine and offshore as well as civil sectors. Aquila requires short-term financing to help bridge cash flow challenges for operational expenses and growth. However, tedious paperwork and strict collateral requirements as well as long approval timelines proved major obstacles in their previous attempts to obtain bank funding.
Aquila discovered Validus and found the loan application experience with Validus very different – Validus offered bank-like financing rates and could provide the funds they needed within just 48 hours. This allowed Aquila to easily scale up and take on more projects without cashflow worries.
Aquila’s financing woes are typical among SMEs in the country, if not the wider SEA region. Eight in ten SMEs in Singapore do not qualify for bank loans as traditional financial institutions consider SMEs to be risky and costly to serve. For SMEs, the requirement for collateral is a huge hurdle as they typically do not have sufficient assets and lack solid credit history or financial records of their business.
The Validus difference
By delivering innovative loan solutions that underwrite differently from traditional lenders, Validus bridges the financing gap faced by SMEs leveraging proprietary technology and data to assess SME creditworthiness and tapping alternative pools of capital.
Vikas Nahata, Co-founder and Executive Director of Validus said,
“We’re not a traditional lender. We are a fully regulated online financing platform licensed by the Monetary Authority of Singapore. We help both sides of the SME financing spectrum - small businesses who need money as well as investors looking to strategically park their funds in new and exciting asset classes.”
Validus offers loans without the need for collateral. Instead, it uses a combination of data analytics, risk engineering and proprietary algorithms to establish individual business profiles. It does so by using artificial intelligence and machine learning to leverage both primary and surrogate data such as procurement, repayment and contract award details.
For example, SMEs that count large conglomerates as long-term clients are allotted a lower risk rating and hence can obtain loans at lower costs. A combination of data points drive the underwriting model and determine the interest rate for each loan application.
Validus also distinguishes itself in how it reaches out to SMEs. Partnering with procurement platforms and local corporates allows Validus to offer its partners’ SME vendors financing when they need capital the most, for example, when they have landed a big contract or a major order.
This partnership-led approach not only gives Validus instant access to a large pool of customers; it also helps Validus obtain the surrogate data it needs to further evaluate risks and pre-approve supply chain financing for these SMEs.
The Validus difference has led to its success. Today, Validus is Singapore’s leading financing platform for SMEs and accredited investors. To date, it has disbursed over USD 450 million, with an average loan size of USD 100,000.
Validus-supported SMEs in Singapore saw their annual revenues increase by an average of 17% in 2018. This additional revenue generated contributed to Singapore’s economic growth and supported jobs in the country.
Significantly, due to its unique operating model, Validus has been able to maintain a low non-performing loan rate (NPL), which in 2019 was just 2.7%, with healthy recovery rates.
In the midst of the COVID-19 pandemic, the company continues to fulfill the short-term financing needs of SMEs. The qualification to disburse government-backed loans under the Enterprise Financing Scheme will further enhance Validus’ ability to support Singapore’s SME sector during this critical period.
On the investment front, it continues to attract steady capital commitments from accredited investors and institutional lenders. In the four weeks between April to May 2020, the number of investor sign-ups doubled as SME direct lending continues to offer opportunities for attractive risk-adjusted returns with low correlation to public markets.
Nikhilesh Goel, Co-founder and Chief Executive Officer of Validus said,
“Validus has provided a unique platform for SME lending and hence, the allocation to this asset class in our portfolio is likely to increase. Validus’ sourcing ability, quality checks and default guarantees make it a very attractive investment opportunity. Under the current COVID-19 situation when asset values across classes are eroding, an investment in SME lending makes good sense.”
From Singapore to the World
With its partnership-led strategy proving a solid foundation, Validus was able to enhance and replicate this model in new markets beyond Singapore. Today, Validus is also present in Indonesia and Vietnam.
In Indonesia, Validus operates as Batumbu and received its Financial Services Authority (Otoritas Jasa Keuangan - OJK) registration in April 2019. SME funding requirements in Indonesia are five times larger than what SMEs in Singapore need, and Validus is working with equity partners that are large corporates who understand Indonesia’s massive SME landscape.
Validus entered Vietnam in November 2019 and forged key partnerships with corporates to address financing in key sectors. These partners included pharmacy group Medicare Vietnam, Unicons (part of leading private construction enterprise Coteccons Group) and Nafoods, a fast-growing agri-food business and manufacturer.
Ajit Raikar, Co-founder & Executive Chairman of Validus explained,
“We strongly believe that local experiences and insights are essential as each market is differentiated - that is why we’ve adopted a ‘glocal’ approach in the new countries we enter. Alongside working with credible local corporate partners, we have built a strong local team, adopted best practices and implemented the strong governance framework already in place from our Singapore operations.”
Validus is not stopping there – it aims to help more SMEs across ASEAN, assisted by joint venture (JV) partners in each new market. In May 2020, Validus raised a new funding round led by Vertex Growth, which will serve to support its expansion into Thailand later this year.
James Lee, Managing Director of Vertex Growth, shared,
“We are very impressed with the way Validus has approached the problem of SME lending with its proven Corporate Vendor Financing programme. Validus’ unique lending program works for both SMEs and their investors. We are confident the company will be able to successfully scale across the region.”
SME financing is a current, pertinent problem to solve across the region and Validus is making significant inroads towards bridging the financing gap.
The company’s prudent risk management and unique acquisition strategy means that Validus has a much more stable portfolio performance and sustainable through challenging market environments like today, thereby establishing them as a leading player for the long term.
As evidenced by their success in Indonesia and Vietnam, their lending approach is also highly scalable and can be replicated across ASEAN. Back at home, their qualification for MAS’ loan facility also bodes well for its growth trajectory.
Vertex Growth is excited to support Validus on its journey towards driving financial inclusion and building better business communities in emerging markets. We are confident that Vikas, Nikhilesh and Ajit will lead Validus towards delivering even better outcomes.
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