Entrepreneurship is a key driver of economic growth and has a wide array of benefits to both the entrepreneurs and the society. The ability of entrepreneurs to grow, expand and scale up their operations is to a large extent dependent on the availability of capital. This includes both financial and non-financial capital.
Access to capital is normally a daunting task, particularly in the early stages of growth of enterprises. Difficulties in access to capital in many instances discourage entrepreneurs, forcing them to abandon their entrepreneurial endeavours. This has an overall negative impact to the economy and dampens the spirit of would-be entrepreneurs.
Kenya has a wide range of players in the financial sector whose core mandate is either the provision of equity or debt capital or a mix of both. This includes banks, private equity firms, venture capital players, shylocks, and angel investors. The Capital Markets Authority also offers an opportunity to access capital.
Private capital has emerged as a viable alternative source of financing for start-ups and micro, small and medium enterprises (MSMEs). Kenya has indeed experienced a surge in private capital over the years with many businesses tapping into this avenue to finance their working capital as well as fund their growth initiatives.
According to 'Africa: The Big Deal', a tech research firm, Kenya attracted the most funding (28 percent) of the continent’s total funding to start ups in 2023. It noted that 93 startups raised $100,000 or more during the period.
There have also been significant transactions with bigger ticket sizes targeting established businesses. This has been across a wide range of industries including, agribusiness and healthcare, energy, manufacturing, fast moving consumer goods, hospitality, education and real estate.
Private capital can be in the form of an equity investment into the business in exchange for shares. It could also be in the form of debt which could be a convertible loan note or other forms of credit. A combination of both equity and debt is also common in Kenya. It is noteworthy that the metrics that are used as part of the assessment by private capital players to determine the credit worthiness of a business tend to be different compared to banks.
Additionally, private equity players tend not to just provide financial capital but also act as strategic investors. Since they have teams that are dedicated to specific portfolio companies, they can provide market insights to drive the growth of the businesses. They also in some instances assist SMEs to formalise their operations by putting in place proper structures, processes, and governance.
By and large, SMEs should explore the potential of the entire spectrum of financial market players in the country. They should also evaluate the suitability of each player based on their needs, long-term objectives, accessibility, value addition among other factors. They should also endeavour to seek support from professionals to guide them through the journey. It is in the interest of every person for SMEs to flourish in the economy.
The writer is an Associate Director at Ernst & Young LLP (EY).
