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Business News of Thursday, 28 February 2013

Source: Graphic Online

Venture Capital Fund rescues SMEs

The Venture Capital Trust Fund (VCTF) has leveraged its seed capital by about three-fold and is now prepared to deliver significant second round of funding for small and medium scale enterprises (SMEs) to spur economic growth.

However, since the repeal of the National Reconstruction Levy in 2006, the only reliable source of capital inflow for the Trust Fund has been curtailed with no replacement to warrant the sustainability of one of Ghana’s most creative and innovative approach to solving the perennial dearth of long-term and long-cost financing for SMEs.

The Trust Fund is now expecting new inflows from the government so that it can make new commitments to viable businesses which require their support.

While it awaits a more stable source of inflow to be determined by the government, VCTF has concluded a US$150-million funding deal with the China Exim Bank, a testament to the Trust Fund’s commitment to leveraging limited Government Funding to attract foreign investments for the promotion of economic prosperity.

The Trust Fund is currently awaiting approval from the Minister of Finance and Economic Planning to complete the necessary documentation to complete the funding agreement and trigger a disbursement, which will also be supervised by the Ministry of Finance and Economic Planning.

The Trust Fund expects to use this facility as matching funds to attract partnership from Development Finance Institutions, many of which have already partnered the Venture Capital Trust Fund to create a pool of venture capital funds for SMEs.

The Chief Executive Officer of VCTF, Mr Daniel Duku, told the GRAPHIC BUSINESS in Accra that since no funding had come in since its initial GH¢22.4 million, we adopted the ‘leveraging’ model which enables us to reach out to more clients while also getting the private sector actively involved in determining how the funds are invested.”

“We have proven that when given more funds, we can leverage them to reach out to more SMEs, by creating more fund pools or committing second round of funds to existing fund managers. Presently, we are unable to do that because of inadequate funding” he said.

He stressed, “all we need is a permanent source of funding. Once we have that, we can amplify what we have been able to achieve over the last few years and really position the Trust Fund as the government’s engine for job creation and SME development.”

The Venture Capital Trust Fund was set up to provide financing to small and medium scale enterprises, working through Fund Managers and partner financial institutions (Venture Capital Financing Companies (VCFCs)) to deliver long-term capital and technical support to enable SMEs grow.

The Venture Capital Fund Managers are essentially investment bankers and advisory service providers, who work in collaboration with other partners, mainly financial institutions, to provide managerial and technical services support to the SMEs in which they invest equity.

The VCTF has committed US$17 million since 2003, but the fund’s portfolio of investments now stands at US$57 million as of date.

Currently, operating as a Fund of Funds, VCTF has five Fund Managers and several partners that together channel financial commitment to SMEs by investing both equity and quasi-equity capital in businesses. Not only that, but the Fund Managers are also required to nurture the businesses they invest in to growth, thereby protecting investors capital and moving SMEs to greater heights.

By this model, the beneficiary SMEs are able to gain access to cheaper long-term capital to support business growth, while at the same time benefitting from the top-level strategic managerial input and business support expertise delivered by the Fund Manager.

To increase the pool of funds available for investments in SMEs, VCTF encourages its Fund Managers to look for the investment opportunities and matching funds from other investors, particularly from development financial institutions as well as both local and foreign commercial investors.

Already, the Trust Fund has attracted matching funds from the Dutch entrepreneurial development bank, FMO; the French development bank, PROPARCO, the Swiss Investment Fund for Emerging Markets (SIFEM), Social Venture Capital (SOVEC), the Finnfund of Finland, and Oasis Capital.

Partners drawn from among local financial institutions include the HFC Bank, the National Investment Bank, the Agricultural Development Bank, the Ghana Commercial Bank; trusts and insurance companies such as the Social Security and National Insurance Trust (SSNIT), Gold Coast Securities; Ghana Union assurance; SIC Insurance Company Ltd and Fidelity Capital Partners.

With the dearth of long-term capital for SMEs in a country such as Ghana, Venture Capital has become the surest way of delivering patient capital to businesses to enable them grow. It is a well-known fact that venture capital investing has spurred the development of major economies in Europe and North America.

Recently, the operations of private equity and venture capital funds in emerging markets such as Brazil, Russia, India and China are also credited with the fast pace of development in these economies. Venture Capital has also proven to be a highly effective tool utilised by governments in these economies to increase access to long-term and cheap funds for small and medium businesses, including start-ups and early-stage businesses.

However, as stated earlier, the lack of a steady flow of capital for the Trust Fund threatens the very sustainability of the whole venture capital program, which was started in 2004 by the passage of the Venture Capital Trust Fund Act 2004 (Act 680).

By its very nature, the venture capital model is a relatively long-term, robust, and effective approach to easing access to long-term capital and spurring business growth. It requires significant long-term commitment from the government and consistent flow of investable funds to warrant sustainability.

As a government intervention therefore; the Trust Fund cannot be deprived of funds and at the same time be expected to carry on delivering on its important mandate. It is expected that with continuous work from the VCTF, the Venture Capital Industry will grow and effectively be dominated by private sector players.

However, to reach that destination, the Trust Fund needs to continue setting the pace for other investors to follow, defining industry standards, setting new and larger funds, developing fund management talent, attract foreign direct investments, and more importantly satisfy an almost insatiable appetite for long-term low-cost funding by SMEs in Ghana. This is what additional funding is expected to do on an ongoing basis.

Recent government efforts to support the Trust Fund by providing an additional injection of GH¢10 million in the 2011 budget is highly encouraging and commendable. However, a steady permanent source of funding to replace the repealed National Reconstruction Levy is required to warrant the long-term sustainability and survival of the Trust Fund and the nascent Venture Capital Industry it has created.

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