By Tom Minney, CEO of African Growth Partners Limited
Roadside mechanics fixing tyres and engines, street vendors hawking telephone cards, a factory turning old tyres into luxury sandals for the world – small and medium enterprises (SMEs) are creating the productivity and jobs that Africa needs.
Africa has an estimated 40m micro, small and medium enterprises and their importance is widely acknowledged. “96% of Nigerian businesses are SMEs,” says Dapo Okubadejo. KPMG lead for Africa merger and acquisitions, private equity and transaction advisory, citing statistics from the Central Bank of Nigeria.
A World Bank report found SMEs provide more than 60% of employment in developing countries. They contribute 51% of the gross domestic product in high-income countries but only 16% in low-income countries, suggesting much room to grow, but the lack of long-term risk finance is slowing Africa’s SME growth revolution.
Banks are key, but bank loans are short term and have to be paid back, putting pressure on cash flows and slowing growth. Banks require collateral, which can be difficult.
Equity investors can be a better fit, whether family, friends, angels, venture capital investors, or specialist funds such as GroFin, Business Partners International and African Agricultural Capital, which are active in the market.
Shareholders share risks and rewards and the business usually never pays back, as a shareholder sells to another. Good equity investors add management and strategy, and build growth platforms by improving governance, operations and accounting.
Thirteen African securities exchanges have created specialist trading boards to help SMEs access equity since 2002. The boom year was 2013, when Ghana, Nairobi, Nigeria and Dar es Salaam securities exchanges opened growth boards.
Nicole Cheyne, business development manager at the Johannesburg Stock Exchange (JSE), says the best finance mix for an SME “depends on, among other things, the size of the company, where it is in its life cycle, and what its future strategic intent is. The debt vs equity debate still stands. The benefits of listing cannot, however, be achieved through bank funding. There is a limit to the amount of gearing that a company balance sheet can sustain and therefore an appropriate mix of equity and debt is desirable.”
Geoffrey Odundo, CEO of the Nairobi Stock Exchange, explains the enthusiasm for Kenya’s Growth and Enterprise Market Segment (GEMS): “The SME board is an excellent use of resources, especially considering the massive contribution of SMEs to both the local and global economy. The SME board offers cheaper and longer-term capital compared to banks. GEMS offers other benefits such as improved corporate governance and operational efficiency, while boosting the public profile of the listed company.” GEMS was launched in 2013 with plans to list five companies a year. The first listing was Nairobi builder Home Afrika Ltd, followed by three more companies in 2014.
“Regulators (whether the exchange or the securities regulator) in various jurisdictions have recognised the importance of reducing the cost for SMEs of accessing capital market financing,” says Siobhan Cleary, head of research and public policy at WFE.
“The trick is to find the balance where investors have what they need in order to make informed decisions and SMEs are still able to access capital markets in a cost-effective manner. Transparency is a central component of the listed environment, as is flexibility, to ensure SMEs get the support they need,” she continues.
Listing requirements for growth or SME boards are usually more relaxed compared to the main trading boards, with the aim of cutting barriers. For example, to join the Ghana Alternative Exchange (GAX) run by Ghana Stock Exchange, companies only need 250,000 cedi ($65,000) in capital and 20 shareholders.
They do not need a track record of profits but only a business plan suggesting they will make profit by the third year. Companies listing on the main board need 1m cedi ($260,000) in capital, 100 shareholders and three years of profit history.
SME issuers may publish online instead of in print and advertisements. Listing and annual fees may be reduced. However, the information quality of the disclosure is usually the same, so investors can make informed decisions.
Many follow the AIM model, at the London Stock Exchange where experienced Nominated Advisors (Nomads) help SMEs with listed-company skills. The JSE’s AltX requires a designated advisor and an issuer’s directors must pass an induction programme. Licensed intermediaries on many African exchanges screen companies to see if they are healthy and ready for public investors. They also ensure issuers comply with ongoing governance and listing rules.
Some exchanges subsidise research houses to publish one or two reports a year on listed SMEs. Exchanges can also help SMEs with visibility to advertise their products and gain credibility associated with good governance and accounts. There is often little liquidity but that could also be said for all except leading companies on the main boards especially in Africa.
SME boards may start slow before picking up momentum. Since the JSE’s AltX was established in 2003, it has listed over 123 companies and raised more than R48.9bn ($3.4bn). 31 companies have migrated from AltX to the JSE Main Board. As Cheyne says: “An overwhelming majority (of senior executives of AltX issuers) have mentioned that their listing was instrumental in accelerating their growth.”
Families who own SMEs were initially resistant to disclose trading results or share voting control, but that is changing. As Odundo says: “We expect about four listings in the course of the year [on GEM in Kenya], two of which are already being processed.”
Incentives also help listings. One is to reduce tax for five years: 25% income tax for companies which list by introduction, while companies that list at least 40% of their shares pay only 20%, compared to Kenya’s usual 30% rate. Other incentives include no stamp duty on additional share capital and no capital gains tax on sale of shares for listed companies.
More than 200 SMEs are listed across Africa, including 43 on the Stock Exchange of Mauritius Development and Enterprise Market, 33 in Morocco, 32 in Egypt and 2 on each of the Botswana Venture Capital Board and GAX.
KPMG’s Okubadejo calls for active promotion and incentives. As he says: “SMEs are the spark that will ignite and launch the economic rocket that is Africa.
