A case for a secondary capital market for SMEs

Of all things that private equity funds in East Africa would want to ease their operations, a secondary capital market for SMEs ranks top.

This would answer their prayers when it comes to exiting from the SMEs in which they have acquired equity.

“We are sometimes forced to sell back the equity to the entrepreneur,” says Fusion Capital chief executive officer Luke Kinoti. Usually, this is at a much higher cost.

“Regulators need to develop a framework for easy selling and buying,” Mr Kinoti adds.

Fortunately, Kenya could soon have its first ever counter exclusively for SMEs, which would make it easy to raise capital and, when the time comes, a smooth exit by private equity funds.

Under such an arrangement, the private equity funds would trade their stake to the public at the stock market.

The private equity fund landscape is currently unregulated thus keeping away many individuals and institutions with a high networth.

The painful exits are only second in difficulty to the process of investing private equity in an SME.

For many of them, especially family businesses, having a stranger sit in at board meetings is not a welcome idea.

But the entrepreneurs need not fear for private equity fund managers are only seeking to help them achieve their dreams faster.

Loan option

Where entrepreneurs reject the private equity option, Fusion Capital offers loan products to SMEs to build confidence before giving private equity.

These are some of the challenges that Fusion Capital has been grappling with over the past four years that it has been in operation. However, this is gradually changing.

“Acceptance is slowly creeping in,” says Mr Daniel Kamau, the business development manager at Fusion Capital.

“The environment is much friendlier to innovative financial instruments such as private equity,” concurs Phil Goodwin, the firm’s chairman.