A nationwide road show organized by the Venture Capital Trust Fund has revealed challenges and opportunities for the venture capital industry around the country. To build on its already veritable successes, these challenges will have to be met and the opportunities exploited, reports TOMA IMIRHE.
Last week, the Venture Capital Trust Fund, VCTF completed a three month nationwide road show campaign which has taken it around the country to educate potential business promoters and the general public about the alternative source of financing in the form of equity and quasi equity which the trust fund seeks to promote in the Ghanaian financial market. The road show started on August 16 in Ho, the capital of the Volta Region and was concluded last week in Accra.
To be sure, the road show was a pertinent one. The VTCF provides support to small and medium sized enterprises (SMEs) by providing low cost, long term equity and quasi equity capital through special entities called Venture Capital Finance Companies (VCFCs) and also offers direct debt financing to farmers through Special Purpose Vehicles (SPVs) to enhance the commodity value chain in the production of sorghum and soya bean. The trust fund also provides technical assistance and business support services for investee companies to ensure the successful implementation of business strategies and offers capacity building and training for investee companies and industry professionals.
This is crucial to Ghana’s economic fortunes. SMEs constitute about 90% of all registered businesses in Ghana, employs over 60% of the total workforce and contributes about 30% of the country’s Gross Domestic Product.
However, the VCFCs efforts to provide viable SMEs with equity capital have been hampered by several operational challenges, including their lack of understanding about equity financing and their traditional inclination towards debt financing which is often unavailable and even when it is, is short term and inordinately expensive, thus sometimes rendering an otherwise viable business unsustainable. There is also low access to information by SMEs about funding opportunities and sources and lack of understanding of eligibility requirements as prescribed by Act 680 which set up the VCTF in the first place. The road show set out to try to educate SME entrepreneurs and thus resolve these challenges.
Despite the problems facing the scheme however, it has chalked up veritable successes. So far the VCTF has partnered private financial institutions to set up five VCFCs, successfully leveraging its own initial seed money of US$22.6 million with its co-investors to create a much bigger funding pool of US$62.2 million for investment in SMEs.
From this funds have been invested in all sectors of the economy except in the import trade. Waste management has absorbed 2.9% of the funds invested so far; the savings and loans industry, 7.9%; real estate, 9.9%; pharmaceuticals manufacturing 13.5%; beverage manufacturing 2.2%; other manufacturing 7.9%; ICT 10.4%; healthcare 20.8%; agro-processing 18.6%; education 2.3%, aquaculture 2.6% and animal farming 1%.
There is still lots of money up for grabs though. So far a total amount of GH¢21,537,474 has been invested in 35 portfolio companies by the five VCFCs and this is less than half of the money in the kitty. Fund managers explain that this is not for lack of interest by SMEs but because they need to ensure that all the money invested goes into viable enterprises so they can sell off the equity stakes they have taken after seven to ten years for a profit, and reinvest the sales proceeds in taking up equity positions in other start-up and early stage enterprises, so the cycle can continue. Besides, they point out, they have to reserve part of the funds available to them to finance the future growth of enterprises they have already made initial investments in, as the opportunities evolve, and to share them up if they encounter problems they require financial solutions.
So far though the five VCFCs have already evolved useful investments portfolios. For instance, Bedrock Venture Capital Fund (VCF) with total fund size of US$10 million provided by VCTF, SIC Insurance and National Investment Bank, has a portfolio that includes a water production and supply company and the first DNA medical facility in Ghana, located in Tema, which now saves residents in Ghana from having to travel to South Africa or elsewhere even further afield.
Activity VFC, the oldest with a US$10 million fund size and provided by VCTF, Ghana Commercial Bank and Agricultural Development Bank has so far made 15 investments, covering the pharmaceuticals, water and poultry sectors among others.
The Fidelity Equity Fund, the largest VCF with US$23.2 million, provided by VCTF, SSNIT, the governments of Denmark, Switzerland and the United Kingdom (through their respective international development agencies) and Fidelity Bank, has invested in seven companies across manufacturing, food processing, real estate and a modern medical diagnostic facility.
Gold VCF, a partnership between the VCTF and Gold Coast Securities was registered in 2007 but only started investing from its US$4 million kitty in April this year. However it has already made three investments including a top-market hotel.
The latest VCF to be formed is the Ebankese Fund, with VCTF partnering HFC Bank, Ghana Union Assurance, WDBL Ltd and Oasis Capital, involving initial total funding of US$15 million; although a Dutch investor has added on another US$2 million since it was launched a year ago. This venture capital fund focuses exclusively on the real estate sector, particularly affordable housing.
As each of these funds looks for sure bet investments, the national road show is part of the VCTF’s efforts to throw the net further afield. After all, there are lots of SMEs outside Accra where the VCTF itself, and its various specialized venture capital companies maintain their offices.
Indeed, the VCTF is looking at using part of the GH¢10 million being given it by government out of the 2011 budget, to decentralize its operations; one complaint by SMEs during the road show was that they could ill-afford to travel to Accra – some cases all the way from the north of the country – to seek equity capital which might not eventually be approved. Indeed, this is most probably preventing the various venture capital companies from getting applications from some eminently viable and deserving enterprises.
Now that the national road show campaign has been completed, the VCTF can now plot its way forward.
“The VCTF as part of broadening its horizon is seeking to secure a permanent source of funding from government to support SME funding and growth of the private sector,” says Daniel Duku, the trust fund’s Chief Executive. “VCTF is seeking to establish additional SME funds, including sector focused funds, with other local investors, development finance institutions, sovereign wealth funds and other angel investors and expand investment sizes.”
Indeed venture capital fund managers protest against the portfolio strategy limitations imposed on them of a US$500,000 upper limit for investments as well as the US$25,000 floor. Already an angel investor fund is being put together to cater to the needs of Greenfield and very early stage businesses and is expected to be launched next year.
There are other challenges to overcome too. Promoters complain that the requirement for a business plan and other documentation such as tax clearance certificate is costly, that it takes too long to secure venture capital funding and that the requirement that they own at least 51% equity in the business can be an impediment to potential entrepreneurs who are strong on ideas but not in financial wherewithal. Venture capital managers say they are willing to recognize great ideas as intellectual capital and place a value on them which can count as equity but this approach can only be carried so far.
The VCTF is also looking to expand its Special Purpose Vehicle. So far, through this, the VCTF has successfully developed network of 8,000 small holder farmers that produce sorghum locally for Guinness Ghana Breweries as a substitute for imported barley. The trust fund has since taken up financing of soya bean cultivation too and has so far successfully cultivated in excess of 18,000 acres of sorghum and soya bean producing over 12,600 metric tonnes of these commodities with a total cumulative turnover of some Gh¢7.4 million of which Gh¢6.2 million has been paid to farmers.
Now the VCTF is looking to replicate these successes with other commodities. First to be identified is yellow maize, another industrial input in high demand by local industry.
Having completed its national road show, realized the sheer potential for the venture capital industry all around the country, and identified all the challenges that need to be overcome first, there is an air of enthusiasm blowing around the offices of the VCTF in Accra.
“There are exciting times ahead for SME development and venture capital financing,” says Daniel Duku. The Economist magazine has projected Ghana to be the fastest growing economy in 2011 and that the VCTF will play its role in the government’s vision of stimulating growth for development and job creation for a better Ghana.
Last week, the Venture Capital Trust Fund, VCTF completed a three month nationwide road show campaign which has taken it around the country to educate potential business promoters and the general public about the alternative source of financing in the form of equity and quasi equity which the trust fund seeks to promote in the Ghanaian financial market. The road show started on August 16 in Ho, the capital of the Volta Region and was concluded last week in Accra.
To be sure, the road show was a pertinent one. The VTCF provides support to small and medium sized enterprises (SMEs) by providing low cost, long term equity and quasi equity capital through special entities called Venture Capital Finance Companies (VCFCs) and also offers direct debt financing to farmers through Special Purpose Vehicles (SPVs) to enhance the commodity value chain in the production of sorghum and soya bean. The trust fund also provides technical assistance and business support services for investee companies to ensure the successful implementation of business strategies and offers capacity building and training for investee companies and industry professionals.
This is crucial to Ghana’s economic fortunes. SMEs constitute about 90% of all registered businesses in Ghana, employs over 60% of the total workforce and contributes about 30% of the country’s Gross Domestic Product.
However, the VCFCs efforts to provide viable SMEs with equity capital have been hampered by several operational challenges, including their lack of understanding about equity financing and their traditional inclination towards debt financing which is often unavailable and even when it is, is short term and inordinately expensive, thus sometimes rendering an otherwise viable business unsustainable. There is also low access to information by SMEs about funding opportunities and sources and lack of understanding of eligibility requirements as prescribed by Act 680 which set up the VCTF in the first place. The road show set out to try to educate SME entrepreneurs and thus resolve these challenges.
Despite the problems facing the scheme however, it has chalked up veritable successes. So far the VCTF has partnered private financial institutions to set up five VCFCs, successfully leveraging its own initial seed money of US$22.6 million with its co-investors to create a much bigger funding pool of US$62.2 million for investment in SMEs.
From this funds have been invested in all sectors of the economy except in the import trade. Waste management has absorbed 2.9% of the funds invested so far; the savings and loans industry, 7.9%; real estate, 9.9%; pharmaceuticals manufacturing 13.5%; beverage manufacturing 2.2%; other manufacturing 7.9%; ICT 10.4%; healthcare 20.8%; agro-processing 18.6%; education 2.3%, aquaculture 2.6% and animal farming 1%.
There is still lots of money up for grabs though. So far a total amount of GH¢21,537,474 has been invested in 35 portfolio companies by the five VCFCs and this is less than half of the money in the kitty. Fund managers explain that this is not for lack of interest by SMEs but because they need to ensure that all the money invested goes into viable enterprises so they can sell off the equity stakes they have taken after seven to ten years for a profit, and reinvest the sales proceeds in taking up equity positions in other start-up and early stage enterprises, so the cycle can continue. Besides, they point out, they have to reserve part of the funds available to them to finance the future growth of enterprises they have already made initial investments in, as the opportunities evolve, and to share them up if they encounter problems they require financial solutions.
So far though the five VCFCs have already evolved useful investments portfolios. For instance, Bedrock Venture Capital Fund (VCF) with total fund size of US$10 million provided by VCTF, SIC Insurance and National Investment Bank, has a portfolio that includes a water production and supply company and the first DNA medical facility in Ghana, located in Tema, which now saves residents in Ghana from having to travel to South Africa or elsewhere even further afield.
Activity VFC, the oldest with a US$10 million fund size and provided by VCTF, Ghana Commercial Bank and Agricultural Development Bank has so far made 15 investments, covering the pharmaceuticals, water and poultry sectors among others.
The Fidelity Equity Fund, the largest VCF with US$23.2 million, provided by VCTF, SSNIT, the governments of Denmark, Switzerland and the United Kingdom (through their respective international development agencies) and Fidelity Bank, has invested in seven companies across manufacturing, food processing, real estate and a modern medical diagnostic facility.
Gold VCF, a partnership between the VCTF and Gold Coast Securities was registered in 2007 but only started investing from its US$4 million kitty in April this year. However it has already made three investments including a top-market hotel.
The latest VCF to be formed is the Ebankese Fund, with VCTF partnering HFC Bank, Ghana Union Assurance, WDBL Ltd and Oasis Capital, involving initial total funding of US$15 million; although a Dutch investor has added on another US$2 million since it was launched a year ago. This venture capital fund focuses exclusively on the real estate sector, particularly affordable housing.
As each of these funds looks for sure bet investments, the national road show is part of the VCTF’s efforts to throw the net further afield. After all, there are lots of SMEs outside Accra where the VCTF itself, and its various specialized venture capital companies maintain their offices.
Indeed, the VCTF is looking at using part of the GH¢10 million being given it by government out of the 2011 budget, to decentralize its operations; one complaint by SMEs during the road show was that they could ill-afford to travel to Accra – some cases all the way from the north of the country – to seek equity capital which might not eventually be approved. Indeed, this is most probably preventing the various venture capital companies from getting applications from some eminently viable and deserving enterprises.
Now that the national road show campaign has been completed, the VCTF can now plot its way forward.
“The VCTF as part of broadening its horizon is seeking to secure a permanent source of funding from government to support SME funding and growth of the private sector,” says Daniel Duku, the trust fund’s Chief Executive. “VCTF is seeking to establish additional SME funds, including sector focused funds, with other local investors, development finance institutions, sovereign wealth funds and other angel investors and expand investment sizes.”
Indeed venture capital fund managers protest against the portfolio strategy limitations imposed on them of a US$500,000 upper limit for investments as well as the US$25,000 floor. Already an angel investor fund is being put together to cater to the needs of Greenfield and very early stage businesses and is expected to be launched next year.
There are other challenges to overcome too. Promoters complain that the requirement for a business plan and other documentation such as tax clearance certificate is costly, that it takes too long to secure venture capital funding and that the requirement that they own at least 51% equity in the business can be an impediment to potential entrepreneurs who are strong on ideas but not in financial wherewithal. Venture capital managers say they are willing to recognize great ideas as intellectual capital and place a value on them which can count as equity but this approach can only be carried so far.
The VCTF is also looking to expand its Special Purpose Vehicle. So far, through this, the VCTF has successfully developed network of 8,000 small holder farmers that produce sorghum locally for Guinness Ghana Breweries as a substitute for imported barley. The trust fund has since taken up financing of soya bean cultivation too and has so far successfully cultivated in excess of 18,000 acres of sorghum and soya bean producing over 12,600 metric tonnes of these commodities with a total cumulative turnover of some Gh¢7.4 million of which Gh¢6.2 million has been paid to farmers.
Now the VCTF is looking to replicate these successes with other commodities. First to be identified is yellow maize, another industrial input in high demand by local industry.
Having completed its national road show, realized the sheer potential for the venture capital industry all around the country, and identified all the challenges that need to be overcome first, there is an air of enthusiasm blowing around the offices of the VCTF in Accra.
“There are exciting times ahead for SME development and venture capital financing,” says Daniel Duku. The Economist magazine has projected Ghana to be the fastest growing economy in 2011 and that the VCTF will play its role in the government’s vision of stimulating growth for development and job creation for a better Ghana.
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