Business Daily (Nairobi)
Steve Mbogo
26 May 2008
Nairobi — Poor corporate governance is deterring foreign firms and equity funds from partnering with small and medium scale enterprises.
Foreign -based private equity funds have been on the prowl for opportunities to tap into high investment returns in Africa.
A handful have shown interest in Kenya but analysts believe the interest is weighed down by concerns over governance structures and operational systems. On the other, foreign investors have failed to take keener interest in the running of local SMEs to gauge possible entry point.
Being investment ready requires companies to have a strong management team, use international accounting standards and have exit plans for investors, among other corporate governance issues.
Additional capital
Mr Scott Haughton, head of United Kingdom-based corporate finance firm Envestors LLP said the aspect of being investment ready for Kenyan SMEs should be looked into urgently so that such businesses can raise additional capital with ease.
"UK private investors are not keen on Kenyan investments because of the same reason (investment readiness). We are trying see how we can help SMEs do that," said Mr Haughton.
Investors LLP matches entrepreneurs with investors in the UK keen to invest between Sh2.4 million to Sh240 million in "high quality early stage ventures." The company also helps SMEs in the UK become investment ready.
Speaking to Business Daily during the ongoing World Entrepreneurship Summit organised by the Sahara Communities Abroad (Sacoma), Mr Haughton said new partnerships between the UK investors and Kenyan SMEs were made difficult by lack of awareness.
"We are looking at issues like valuation where an SME here may value itself higher than what the UK investor values it. We are talking of having an exit route once the investment objectives are achieved."
He said UK investors are generally looking at SMEs which have potential for "explosive growth" and have a management team that cannot risk the business failure.
"At the moment, I see a situation where UK-Kenya SMEs partnerships may be pioneered by the Kenya diaspora who may have a deeper understanding of SMEs industry here."
Kenya-UK corporate association is limited to multinationals like Diaego, Barclays, Standard Chartered and Vodafone.
There are about 60 British companies operating in Kenya, according to British Embassy in Nairobi.
This limitation is, however, mitigated by emergence of venture capital funds, who because of their local presence are able to understand SMEs better.
In the last five years, nine private equity funds have set up shop in Kenya. Of these five with a combined capital base of over Sh4.9 billion have targeted SMEs in East Africa.
They include Business Partners International Limited (BPI), Grofin East Africa, Acumen Fund, InvesteQ Capital Limited and African Agricultural Capital that focuses on agriculture related businesses.
The local SMEs industry is also expected to benefit from the planned creation of the East African Development Bank (EADB) venture capital fund of about Sh2.8 billion.
Sacoma, which is recognised as a business centre for excellence in the UK and now in Kenya will also start helping local SMEs set up partnerships with UK investors.
According to the International Finance Corporation, the World Bank arm that finances SMEs in Kenya, there are many entrepreneurs with good ideas but are limited by lack of affordable funding and technical assistance, especially for those requiring five million shillings to Sh80 million expansion or start-up capital.
"This has resulted in endemic under-capitalisation and slow growth for many SMEs and is a primary reason for the collapse of many such businesses. In almost every part of the world, limited access to finance is considered a key constraint to private sector development and growth," notes the IFC.
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