INDIRECT APPROACHES TO
LEVERAGING PRIVATE CAPITAL
The approach described in Chapter 3 is for government to fill gaps in the debt capital markets by making loans directly to businesses, typically through some other institution such as an authority or non-governmental organization. Another approach is to use governmental powers and resources to leverage more private capital (particularly from banks) into midrisk small business lending. This approach might be preferable because: (1) it expands the resources flowing to small businesses; (2) it removes government from the management and oversight of business operations; (3) by requiring private lender or investor participation, private capital is not crowded out of a market that might be served without government involvement; and (4) if done properly, such an approach might build intermediary institutions, strengthen market mechanisms, and greatly expand midrisk capital investment over time. To accomplish these goals government must lower the risk for private capitalists to participate in the midrisk market so that risks are commensurate with perceived rewards. This typically involves some government risk sharing. Four public/ private partnership approaches discussed in this chapter are loan guarantees, loan insurance, loan kicker mechanisms, and subordinated lending. Governmental programs using these approaches are described and critiqued. Once each of these vehicles is examined individually, an analysis of the collective shortcomings of current governmental interventions is presented at the end of the chapter.