US$30m investment for SMEs; PEs, VCs lead the way

Private equity (PE) and venture capital (VC) funds are set to invest at least US$30million in small and medium-scale enterprises (SMEs) during 2023, according to Board Chair of the Ghana Venture Capital and Private Equity Association, Matthew Boadu Adjei.

Private equity and venture capital funds are investment vehicles that offer financing to companies at various stages of growth. These funds provide access to much-needed capital for companies which may struggle to secure financing from traditional sources such as banks. By investing in SMEs, private equity and venture capital funds help to stimulate economic growth and job creation.

Mr. Adjei, who is also Chief Executive Officer of Oasis Capital, said that despite the traditionally safe investments in government bonds and Treasury-bills, these funds are seen as the solution to boosting the investment potential of SMEs in the country.

While SMEs account for 70 percent of GDP and 83 percent of employment in Ghana, the funding and technical support required to unlock their potential remain largely unavailable – with private equity funds viewed as a potentially lucrative source of funding.

“We still expect that about US$30million equivalent or more will be invested in Ghana this year; and more importantly, next year we will be able to ramp up more investments than there have ever been,” Mr. Adjei said.

“Private equity and venture capital can provide the much-needed funding to unlock the potential of Ghana’s SMEs and turn them into significant contributors to economic growth,” he said, adding that: “We are committed to enhancing the investment ecosystem and providing more capital to Ghanaian entrepreneurs, who are the backbone of our economy.

“In the context of Ghana, there are five domicile entities and about 10 private equity firms operating in Ghana but are not based in Ghana. Specifically, four of the 5 now have liquidity, so we would expect that all of them will be making investments. The remaining one is at the point of closing a fund by mid-2023, and it will also start making investments,” he highlighted.

This year, Venture Capital Trust Fund (VCTF) has committed to deploying approximately GH¢200million, aimed at supporting managers that can rapidly deploy it to the real sector and strengthen the economy’s resilience, according to General Manager at the VCTF, Hamdiya Ismaila.

Legal regime

The country is said to be missing out on the multi-billion-dollar private equity investments sector, as a result of stifling domestic investment conditions – such as the prevailing legal regime, which will need to change in order to capitalise on the projected 60 percent global compound growth between 2017 and 2023 to US$14-trillion.

Currently, Ghana’s home-grown funds are worth about US$150million – but this could more than quadruple with the necessary updates, such as the legal regime, which the country needs to learn from the successes of other nations rather than ‘reinventing the wheel’.

Currently, seven key indicators suggest the country has an ideal fund domicile, including investment categories, investor agreements and corporate governance structures. While previously viewed as high risk, private equity funds now offer an alternative to government bonds and Treasury-bills and can be used to bolster the SME sector while allowing for the setting-up of proper management structures and governance for such businesses.

For the country to become an attractive centre for domiciliation and to spur growth, the country must make regulatory changes which improve structures promoting private equity/venture capital’s capacity to fund SMEs. These include limited partnerships which allow a general partner to have unlimited liability for the funds’ losses or debts, while the limited partner has limited liability protection.

Such a change could result in more attractive and functional private equity markets in Ghana, removing investors’ need to register their funds in other countries.