Debt or Equity for African SMEs?

EAC Regional:
Monday, 15 June 2009

SME financiers Grofin argue that debt is more suited as a financing mechanism for small and medium enterprises in sub-Saharan Africa as it meets entrepreneurs’ demands and allows an easier exit. Rachel Keeler takes a closer look at their business model.

Risk financiers in East Africa tend to agree on the portion of the lending market that holds the most potential for growth: “Within the USD50,000 to USD1m range is where most of the businesses that have restraints acquiring capital in Africa fall,” says Guido Boysen, CIO of Grofin Africa, a risk finance and development company operating across the continent. A host of new private equity funds popping up in the region focus their attention on the USD50,000 to USD2m deal range that they call “the missing middle” – too big for microfinance, too risky for commercial lending. SMEs are the agreed upon target, but that is largely where the agreement ends.

While private equity funds in Kenya like TBL Mirror Fund look for start-ups and fast growing companies to take a longer-term shareholder stake in, Grofin provides shorter-term self-liquidating loans and external business advice to a wide variety of small enterprises and established entrepreneurs. Grofin argues that its debt-based model is better suited than equity to meet the needs of the majority of African SMEs: “Local entrepreneurs need a specific type of advice and a specific type of finance. The typical entrepreneur [in Kenya ] doesn't want you to take a position in his company,” Boysen says.

Neither debt nor private equity function according to very traditional roles in emerging market finance, but is this statement a realistic assessment of the market?

Read more.