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SMEs, Drivers of Growth

  Sep 17, 2019

Small and Medium Enterprises (SMEs) are among the leading drivers of growth, innovation, and employment in most parts of Africa. They represent more than 80% of businesses in Kenya and employ up to 75% of the active working population.

The shortage of capital is among the biggest constraints to development in the private sector in most developing countries. Due to a lack of fixed assets and low cash reserves, SMEs in Kenya and other emerging markets are unable to access financing from banks and SACCOs. Data from the International Finance Corporation shows that up to 68% of formal SMEs in developing countries are financially underserved.

Private equity funds offer an alternative to this financing problem since it can offer capital to SMEs without high-interest rates by participating in a share of the profits and capital gains instead. Thus, making private equity funding a very effective model to provide capital and grow businesses sustainably.

Tony Wainaina, Managing Partner at Fanisi Capital extensively spoke on private equity funding during the Private Equity and Venture Capital Programme held at the Strathmore Business School from 17th-20th September 2019.

On partnering with private equity firms, he emphasized on the need to carry out extensive due diligence both as the SME seeking funding and as the Private Equity Firm. This he said was because rapport between the parties would, therefore, play a huge role in the success of the partnership.

He further outlined various benefits that an SME is set to get by partnering with a private equity fund. “The overall value of a company/ business is set to appreciate, a strong and loyal management team is created, good governance is achieved, and the entrepreneur will acquire stronger business skills and networks.”

Private equity firms work in different ways: some are passively involved in the investment and leave the management to improve returns and increase earnings. However, the majority of private equity firms play a more active role in managing and running the company by either restructuring or merging.

A private equity fund looks to create value that will allow them to exit within the shortest time possible and at the highest possible value. They come with a fixed fund life typically ranging from 5 to 7 years, at which point the private Equity firm hopes to profitably exit the investment.

Private equity funding has become popular in Kenya and has over the years seen major growth not only in Kenya but in the East Africa region. According to a report by KPMG and the East Africa Private Equity and Venture Capital Association, Kenya accounted for 87% of the total investments made in the region in 2017 and 2018. “The highest deal values were recorded in Kenya at $1.2 billion, in part due to the high number of deals as well as the size of the businesses.”

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