Private Equity
PRIVATE EQUITY – A VIABLE ALTERNATIVE SOURCE OF FUNDING FOR GHANAIAN SMEs
By Joseph Ciici Arthur
Ghana’s workforce is predominantly employed by the informal sector. This sector of our economy is largely made up of Small and Medium scale Enterprises (SMEs) and sole proprietorships (“one man business”). This is confirmed by available data from the Registrar General which indicates that 90% of companies registered in Ghana are SMEs. Over time, this target group has been identified as the catalyst for economic growth, serving as the major source of income and employment for many Ghanaians.
SMEs often face a daunting task accessing capital from financial institutions. Banks shy away and would want to do a lot of due diligence before a decision is taken to partner their business financially. This stance taken by the banks is as a result of the high credit risk associated with these SMEs. This risk may emanate from some of the following: ▪ Lack of proper accounting records ▪ Absence of corporate governance practices ie one man show business ▪ Unrealistic business plans ▪ Poor or lack of credit history ▪ Inappropriate financial structure
These possible reasons albeit not exhaustive are the major causes why funding remains a challenge for SMEs. This article will want to delve more into the last point of the reasons above being the issue of inappropriate financial structure and Private Equity as an emerging funding alternative. Typically, many large organizations we have today evolved from small businesses. Businesses which are able to survive the market at initial stages all other things being equal will increase their scale of operations into SMEs and over time become large successful companies. The right financing package for each stage of the company’s development is critical for its survival or otherwise. Studies have shown that debt capital for start-ups most often leads to the collapse of potentially viable business from onset due to the early
By Joseph Ciici Arthur
Ghana’s workforce is predominantly employed by the informal sector. This sector of our economy is largely made up of Small and Medium scale Enterprises (SMEs) and sole proprietorships (“one man business”). This is confirmed by available data from the Registrar General which indicates that 90% of companies registered in Ghana are SMEs. Over time, this target group has been identified as the catalyst for economic growth, serving as the major source of income and employment for many Ghanaians.
SMEs often face a daunting task accessing capital from financial institutions. Banks shy away and would want to do a lot of due diligence before a decision is taken to partner their business financially. This stance taken by the banks is as a result of the high credit risk associated with these SMEs. This risk may emanate from some of the following: ▪ Lack of proper accounting records ▪ Absence of corporate governance practices ie one man show business ▪ Unrealistic business plans ▪ Poor or lack of credit history ▪ Inappropriate financial structure
These possible reasons albeit not exhaustive are the major causes why funding remains a challenge for SMEs. This article will want to delve more into the last point of the reasons above being the issue of inappropriate financial structure and Private Equity as an emerging funding alternative. Typically, many large organizations we have today evolved from small businesses. Businesses which are able to survive the market at initial stages all other things being equal will increase their scale of operations into SMEs and over time become large successful companies. The right financing package for each stage of the company’s development is critical for its survival or otherwise. Studies have shown that debt capital for start-ups most often leads to the collapse of potentially viable business from onset due to the early