Private Equity is future of SMME financing
At the recently ended conference of the African Securities Exchange Association (ASEA), capital market players heard that the best way to develop SMME into ripe institutions ready to list on stock exchanges is through private equity (PE). KEABETSWE NEWEL reports.
In one of several panel discussions at the recent conference of the African Exchange Securities Association that was held at the resort town of Kasane, delegates heard that the paucity listings on African stock exchanges results mainly from a scarcity of private equity partnerships across the continent.
Discussing the topic of “SMME Financing through Capital Markets in Africa,” private equity expert, Bame Pule, who is the CEO of Africa LightHouse, said private equity was the future in terms of financing smaller companies.
The symposium was the 23rd ASEA Conference and the first of such a magnitude to be hosted by the Botswana Stock Exchange (BSE). It took place from 24 to 26 November 2019 and was themed “Building Resilient African Capital Markets.”
Pule said in developed markets like the United States (US), Japan and Europe, smaller companies which require capital, strategic growth and business know-how, seek financing from venture capitalists and private equity firms. He said in addition to providing capital and skills, these forms of financing also ‘panel beat’ the companies into corporate governance compliance and prepare them for listing on stock exchanges. When equity partners exit, he added, the shares are sold to the public through an Initial Public Offering (IPO), which will provide stock exchanges with a pipeline of companies that are ripe for listing.
Pule said in African exchanges where rates of listings are low, there is not enough private equity. According to him, private equity grooms and prepares companies for listing, which makes private equity firms valuable partners to stock exchanges.
In private equity, Pule noted, they not only finance SMMES but partner with them to provide strategic direction. Traditionally around Africa, and especially here in Botswana, concerns are that SMMEs have been reluctant to have equity partners. In private equity, he said, they help SMMES adhere to corporate governance and have functioning boards of directors and qualified management teams.
Pule explained that they also help companies grow and expand to new markets. Equity partnerships, he said, provide not only money but valuable and strategic partnerships. Pule was responding to a question from the panel moderator, Naledi Madala, who is an Economist at Barclays Bank Botswana. She noted that alternative financing, like private equity and venture capital, are on the rise, comparing them to public equity, and asked Pule if these funding methods would play a bigger role in future.
Pule answered that private equity is a growing means of funding, especially in Botswana.
“The challenge is about exposure and education,” he said. “A lot of SMMEs may not know the products available and how they work. There is a need to educate SMMEs about available funding methods. They do not know how to prepare themselves to be recipients of such funding. They need to be taught that preparing financial statements, auditing their books and enhancing their corporate governance readies them for private equity funding,” he said.
Pule’s company, Africa LightHouse, is one of the three private equity companies which benefitted from Botswana Public Officers Pension Fund’s (BPOPF) P1.5 billion private equity incubation programme. The fund, which is the single largest investor in Botswana’s capital markets, launched the programme in November 2016 to empower citizen owned asset management firms into private equity. Pule’s company, which has operations in South Africa as well, was awarded a P500 million mandate.
Madala had wanted to know if African capital markets had the capacity – legal, financial or regulatory – to finance SMMEs. She asked if SMMEs themselves were ready for capital market financing.
The Chief Operations Officer (COO) at CEDA, Andre Madeswi, responded by saying SMMEs struggle to access funding inspite of the existence of institutions like the CEDA coming to the fore.
In the SMME space, he said, development finance institutions (DFIs) are worried by SMMEs’ reluctance to seek funding from capital markets because they either do not want to relinquish any shareholding or are unwilling to conform to required corporate governance principles. Another challenge with SMMEs is that they believe their business ideas could be stolen, should it be shares with financiers, Madeswi said SMMEs keep to themselves and even limit information in their business plans, which makes it difficult to fully undreatnd their ideas and interact with investors.
A major handicap for SMMEs is that they lack collateral when seeking financing. He said if financiers do not look at other ways of managing risks other than using assets as collateral, SMMEs with no assets, would continue to struggling to access funding. African exchanges like the BSE have established SMME structures like the Tshipidi Board which have flexible listings rules so as to accommodate SMMEs. On whether the SMME boards would offer solutions in attracting SMMEs to the exchanges, Executive Director at Afinitas, Limited, Leutlwetse Tumelo, said SMMEs’ lack of corporate governance impacts on their abilities to raise capital. He added that SMMEs need to be handheld towards having proper corporate governance structures.
The CEO of the Local Enterprise Authority (LEA), Dr. Racious Moatshe, said policies should be made to create a conducive environment for SMMEs so as to be able to unlock the true potential value by SMMEs. He said they have a business incubation programme where aspiring businesses are housed, groomed and mentored into functional enterprises before they are released into the market.
The African Securities Exchanges Association (ASEA), is a premier association of 25 securities exchanges in Africa, five associate members and two observer members that have come together with the aim of developing member exchanges and providing opportunities for knowledge-sharing and collaboration.
The BSE is a member of ASEA which also also provides a platform for networking. Established in 1993, it works closely with member exchanges to unlock the potential of African markets and the African economies by enhancing visibility of its member exchanges to attract capital inflows.