Micro Connect: $450m to provide China MSEs working capital

Hong Kong-based fintech Micro Connect has raised US$458m in Series C funding, as it aims to improve access to capital for China’s small and micro businesses.

Like many economies, smaller firms make up the majority of China’s economic output; according to the OECD, micro and small enterprises (MSEs) account for 98.5% of all firms in the country. But they have traditionally lacked access to funding, prompting the Chinese government to previously call for better private financing for MSEs.

Micro Connect has already launched an exchange to help small businesses get access to capital in return for a portion of their sales. The fintech will use its own fundraising to enhance the “market structure” of that platform and build the world’s largest financial market for investing in Chinese MSEs.

Its Series C funding comes courtesy of “a diverse group” of investors from Europe, North America, the Middle East and China. They include private equity and venture funds, online platforms, consumer retail groups, and even university endowment funds.

Micro Connect Co-Founder and CEO Charles Li says: “We at Micro Connect are determined to achieve the fourth ‘Great Leap Forward’, this time by connecting global capital with China’s enormous ecosystem of micro and small businesses. This could be an unprecedentedly difficult task, as we strive to not only connect China with the global financial market yet again but also to overcome the barriers between traditional financial market structures and the radically dissimilar universe of financing small businesses.

“To achieve our ambitious goals, we thereby developed an open, neutral, and central market infrastructure as a financial connector and transformer. Setting up an international exchange was our natural strategic choice, birthing MCEX today.”

MCEX exchange will help Chinese firms raise capital

Micro Connect’s online exchange, called MCEX, will help China’s micro and small enterprises to raise capital from investors and plug their present funding gap. “This is much easier said than done,” explains Li, “given the staunch differences between China’s international and domestic financial markets and the barriers that have historically prevented small-scale enterprises from attaining capital through traditional financial systems”.

There are three credit propositions that will be available through MCEX. DRC, or daily revenue contract, will inject capital into small businesses in exchange for an agreed percentage of the firm’s daily revenue for a fixed period. DRO, or daily revenue obligation, is basically an offshore version of the DRC, allowing the rights and benefits of a DRC to be imbued on behalf of an international investor. And finally DRP, or daily revenue portfolio, is a portfolio of DROs whose unit interests can be invested in and traded under the laws of foreign jurisdictions.

The structure of the financial products, designed to increase the liquidity of small Chinese firms, is telling in that it’s designed – particularly through the DRC and DRP products – to appeal to non-Chinese investors. But do foreign companies still want to invest in China?

Despite still being the world’s second largest economy, there are some signs that Chinese productivity is slowing. GDP grew by just 0.8% last quarter; according to the Guardian newspaper, “export demand remained tepid and sinking property prices sapped consumer confidence”.

Western countries once saw China as a prime export market, but well-publicised controversy about the integrity of IT systems and the need for businesses to hand over IP in order to enter the Chinese market appear to have dimmed sentiment. American companies no longer perceive China as the primary investment destination it once used to be, according to a survey from the US Chamber of Commerce in China; and a majority of UK businesses are ‘uncertain’ about investing in the country, the equivalent British chamber says.

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