The resurgent Venture Capital Trust Fund is not only providing financing that ensures the commercial growth and sustained viability of beneficiary SMEs; it is actually establishing a new financial industry that enables SMEs to access equity finance rather than inordinately expensive debt finance. TOMA IMIRHE examines the potential for this to reinvent the growth trajectory of SMEs in Ghana.

One of Ghana’s most strategically important state institutions, the Venture Capital Trust Fund (VCTF), has under the radar of public attention, resumed its pivotal role in the financing of startup and early-stage small and medium-sized enterprises in the country. Most importantly it is the only state-owned financing institution that directly invests and mobilizes equity capital into needy and deserving SMEs rather than the relatively high-cost debt capital which has led to an inordinately high business mortality rate among SMEs that over-rely on such high-cost debt.

Established by the Government of Ghana in 2004, it had suffered severe funding shortfalls by the middle of the last decade which seriously hampered its activities.

Since the beginning of the current decade however, the VCTF has been revitalized, not just through renewed support from the Government of Ghana itself, but even more pivotal from the World Bank which, in recognition of the key role the institution can play in facilitating sustainable business growth among the country’s start-up and early-stage SMEs provided a total of $47 million in new financing in 2019.  Of this, $40 million is for Investments, $5 million is for Technical Assistance and $2 million is for Institutional Capacity development.

This new financing is already being used by the VCTF to take Ghana’s venture capital and equity financing industry to a whole new level.

“This support has significantly increased VCTFs capacity to anchor new funds” said Yaw Owusu Brempong, VCTF’s Chief Executive Officer.  “Currently, six additional venture funds have been anchored with some more to be anchored in the coming months. The funding has also helped us acquire the services of professionals in our activities and has also increased our work with sister organizations and industry stakeholders”.

For the year 2024, the Trust Fund would target to deploy up to $18 million. This will go into up to between three to five funds. The sectors targeted include agribusiness, education, manufacturing, healthcare, technology (Fintech and Agritech) among other priority sectors set by the government.

These new venture capital funds are coming at a crucial time when commercial lending is at a low - especially for medium to long term tenors - and interest rates on loans are too high for many businesses to use such financing and remain viable on a sustainable basis.

To be sure, even before these new venture capital funds are fully set up, there are plenty already up and running that have provided huge amounts of direly needed equity capital for start-up and early-stage SMEs that are thriving commercially in ways that would not have been possible without venture capital equity financing or even with relatively high-cost debt financing. These are funds that are financial partnerships between the VCTF itself and various financial institutions which have contributed to funding the various venture capital funds.

Most importantly, the VCTF’s strategy of partnering specialist financial institutions and investment management firms is attracting far more privately mobilized capital into the venture capital funds than the VCTF itself could possibly afford - indeed five times as much currently.

So far, VCTF has invested a cumulative GH¢173.2 million into 13 funds, with most still actively investing in SMEs. A particularly exciting aspect is the leverage achieved - for every GH¢1 invested by VCTF, up to GH¢5 in additional funding is mobilized, resulting in a leverage ratio of 1:5.

“The leveraging ratio is 1:5 presently” affirms Yaw Owusu-Brempong (CEO). But the potential is even greater. “This could increase further with more engagements with local investors like the pension fund managers and other Local Partners” he asserts. “With our leveraging ratio, further funding to the Trust Fund would help us to crowd in more private sector funding.”

Effectively this is a call to action for institutional investors such as insurance firms and pension scheme managers who have large caches of medium to long term funds and are seeking returns that can grow over time as SMEs financed with venture capital gain ground commercially. To be sure there are lots of opportunities; according to the last ecosystem review carried out by Boston Consulting Group, SMEs in Ghana face financing constraints resulting in an estimated funding gap of US$15 billion per annum.

Importantly, with venture capital serving as start-up and early-stage capital, venture capital financing comes with a clear exit strategy so that beneficiary companies can eventually continue on their own.

“Exit proceeds become part of VCTFs investible funds, available for commitment in subsequent funds” explains Percival Ofori Ampomah Esq. (General Manager). “The exit methods that have primarily been used are trade sales, self-liquidation and management buyouts.”

But perhaps the longest lasting legacy of the VCTF’s pivotal efforts towards providing relatively low-cost, long-term equity capital for budding SMEs in Ghana will be the creation of a venture capital and private equity industry that is entirely private sector owned and managed, and therefore sustainable beyond government’s developmental efforts. Here the VCTF has promoted the industry and provided assistance and guidance to fully privately owned industry players operating independently.

“There is an inflow of privately owned Venture Capital funds that have no direct participation by VCTF “affirms Percival Ampomah.”

The government's reinvigorated support for VCTF and the renewed focus on developing a vibrant venture capital ecosystem signify a promising future for SME financing in Ghana. With continued commitment from the Ministry of Finance and effective policy initiatives, we can look forward to a sustainable framework that allows SMEs to access equity capital more readily. The proliferation of privately-owned venture capital funds operating independently is a testament to the success of VCTF's efforts in nurturing this industry. As this sector continues to gain momentum, SMEs can anticipate a broader range of financing options, fostering their growth and contributing to the nation's economic development.