A factor of equal importance to determining access to financing is the relative strengths and weaknesses of those capital markets and market segments that the expanding SME may require on its progress. As several Canadian and international research studies have demonstrated in recent years, there are serious and substantial gaps in the financing continuums of national economies. Despite their increasing importance to fostering economic change and restructuring, several of the capital markets plotted in Figure 6, or segments of these markets, remain small, undeveloped or not-fully-developed relative to business financial demand needs. This is even more true in sub-markets in certain community and regional economies. Key to improving circumstances in many of these is consistent supply of sufficient magnitude and infrastructure that addresses identifiable market weaknesses.
This is most necessary in the case of private capital markets - SME loan markets, institutional venture capital, mezzanine financing and other markets for private debt and equity placements - which are clearly structurally inefficient. The basis of private capital market inefficiency is its information intensity, meaning that the suppliers of capital must obtain their own data about SME demand through direct or indirect collection, due diligence and on-going investment management and monitoring. This is in contrast to public markets where government regulation ensures data disclosure that, in turn, establishes a reliable pricing mechanism and raises transactional efficiency. Because they are information-intensive, transacting in private capital markets is very often complex, costly and risky and depends more heavily on the value-added that experienced investment specialists bring to them. In other words, information problems dictate creative, management-intensive solutions.
Investors and financial institutions in private capital markets, as well as advisors, agents and intermediaries that act on behalf of suppliers or SMEs, can be described as "market shapers" in that their long-term operations end up constituting market infrastructure. Insofar as they are sound and effective, such marketplace operations compensate for structural inefficiency. This means that inherent structural barriers are organizationally overcome to put investors in touch with potential earnings and to permit the economic potential of private capital markets - such as job-creating, high-growth SMEs - to be completely realized.
This is the burden of Canadian lending institutions, venture capital institutions, investment and merchant banks and other investors and financial intermediaries motivated by the optimal, high-yield returns that private debt and equity investing frequently promise, net of risk and deal-making costs. Very often, government-directed or government-sponsored financial institutions also enter local sub-markets or segments of private capital markets that are, for one reason or another, neglected or difficult to navigate and organize, at least initially.
Venture investing and middle market investing, as defined in this document, fit into the above-described private capital market matrix. So does real estate investing, for the most part. Naturally, public equity investing stands apart, but as Pension Funds and Public Equity Investing discusses, the relative smallness of Canadian public securities exchanges, and underdevelopment in certain exchange corners, suggests some relative, market-specific inefficiency. These are very relevant to low-capitalization stocks (or small- caps).