Venture capital and private equity provide financing options for smaller firms

As in many emerging markets, small companies, start-ups and entrepreneurs have a difficult time raising funds in Ghana, particularly given the high interest rates for commercial loans. The stock market – where listing can be challenging for a smaller firm and where trading is minimal – is also not currently a practical avenue for early-stage funding. The main board is dominated by larger firms, including secondary listings from foreign firms such as Tullow, which limits space for smaller players. The second board is just now up and running, and it is not yet clear whether it will be of practical value for smaller firms.

While tales of Silicon Valley dot com founders living off of frozen meals highlights the plight of finding funds for start-ups in OECD countries, these conditions make start-up financing in Ghana even more of a challenge, leaving options limited to licensed money lenders, microfinance companies or informal channels, where rates tend to exceed even the averages of 20-25% high-street lending rates. The lack of options for smaller players is a significant obstacle for Ghana, as 90% of its companies are either micro, small or medium-sized, according to data published in the local press.

Policies & Plans

The Business Assistance Fund was started in 1994 to help distressed companies that have the potential to be saved and contribute to the country’s GDP and its exports. The returns, however, were low. In 2012 the government created the Ghana Investment Fund – with some of the capital used coming from the Business Assistance Fund – to support a number of targeted industries. But for the most part it was designed for more mature companies.

The Venture Capital Trust Fund (VCTF) was formed in 2004 and is designed to more directly help small companies and start-ups. The VCTF provides both debt and equity via tax-exempt, Securities and Exchange Commission-licensed venture capital finance companies (VCFCs). Priority sectors are targeted, including agriculture, pharmaceuticals, telecommunications, tourism and energy. In order to access funds, a company needs a three-year business plan; three years of audited financials; tax certificates; and incorporation documents (if incorporated). The founder must provide at least 51% of the equity. Significantly, collateral is not required.

The original capital of the fund was GHS22.4m ($8.5m). The fund has no permanent backing from government but must raise capital where it can from the government, from partners and from Development Finance Institutions. The VCTF is widely seen as a success. Its total funding is now GHS83m ($31.6m), and as of October 2013 it had invested in 39 companies and created more than 1000 jobs. Similar initiatives are not commonplace in West Africa, and perhaps unsurprisingly, there have been associated challenges with project execution. According to local press, there are regularly misunderstandings by applicants of what role the fund plays and exactly how it differs from a bank loan. The fund also is heavily focused on the Accra area.

Additional Funding

The VCTF received a boost when the Export-Import Bank of China agreed in 2013 to provide the fund with $150m. It was estimated that this investment could be leveraged into $1bn of venture capital financing. The deal ran into trouble, though, when the Ministry of Finance refused to approve the loan. It would have had to have guaranteed the financing, and given the current limited resources of the government it was impossible to do so. According to news reports, the government will instead be providing GHS10m ($3.8m) in financing to the VCTF itself.

With the country’s strong headline performance of recent years, there has also been an influx of private funds into the country, increasing scope for more mature small and medium-sized enterprises to tap into financing. International private equity has been increasingly active in the country, especially in the financial sector. In late 2013 the Abraaj Group, an international firm providing financing to the developing world, bought a majority of Ghana Home Loans, a mortgage firm. Also, in early 2014 Leapfrog took a stake in Petra Trust, one of the country’s largest pension trust companies.

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The Report: Ghana 2014

Capital Markets chapter from The Report: Ghana 2014