Private equity the way to go for small enterprises

Establishment of a successful business venture is an aspiration for many young people, especially with the current crisis of unemployment facing the country.

Successful business ventures help to create job opportunities, improve living standards and contribute to economic growth.

Consequently, the Central Bank of Kenya (CBK) targets a credit growth rate of between 12 percent and 15 percent for Small and Medium Enterprises (SMEs). Last year, credit growth was 3.4 percent for the sector, with the slowdown being attributed to the capping of interest rates.

Funds required to grow a business mainly come from business profits, borrowing from family or friends and borrowing from banks and other financial institutions. However, these sources of finances may be difficult to access particularly for SMEs.

With capping of interest rates in September 2016, a stifling effect in the credit market was created as banks became more cautious in their lending.

“The interest rate caps have hampered access to credit by growth sectors, particularly Small and Medium Enterprises,” said Dr. Patrick Njoroge, CBK governor.

However, with new measures under Chapter 49 of the Banking Act, bank executives risk fines of up to Sh100,000 or a two-year jail term for failure to allocate 20 per cent of their lending to SMEs.

In spite of the new measures, the allocated percentage may not be enough for small and medium business ventures. This has made Private Equity (PE) a suitable alternative and a sure bet for business growth.

Private equity investors provide business funding over the medium or long term. In exchange for the cash injection, the investors get a stake in the business.

There are various forms of PE investments including venture capital, leveraged buyouts and mezzanine capital.

Over the years, it is notable that PE has increasingly become a suitable alternative source of financing for high growth potential SMEs. PE investments have helped the small businesses to achieve their expansion objectives and provide strategic advice in their various stages of development.

“I knew of private equity funding in 2015 from an investment seminar at the Nairobi Six-Eighty Hotel. I took a bold step to apply and since then it has helped me grow my business,” said Nelson Mutwa, an entrepreneur.

However, there may be some challenges by entrepreneurs taking on PE funding, with one of them being fear of losing control of the business by involving other parties.

Such fears hold founding entrepreneurs from advancing to growth stage, as they opt to have low returns but remain in full control of their nascent businesses.

Although involving investors means having a smaller piece of a large pie, it can be a sure bet in taking your business to the next level.

Ms Kagundu is Executive Director, Fusion Capital Limited.