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First open SME equity fund in SA launched

THE first ever open equity fund specifically for SME's in South Africa has just been launched in Johannesburg. Funded by First National Bank to the amount of R10 million and known as SBP Private Equity Investments, trading as SME Investments, it is being managed by the Small Business Project (SBP), a Section 21 company.

"The SME Investments equity fund business model is based on contracts awarded by large corporates to SME's and serves as security for the fund's investment. Thus the risk of lending to a small enterprise, which would otherwise lack collateral, is reduced,” Mr. Ketso Gordhan of FNB states in a media release. The funding will be used to take equity in viable small businesses. Potential investments will be identified through the SBP's business linkage programme and managed by the company's business development officers.

The Anglo American SME development unit, Zimele, has been involved in designing SME Investments, basing it on a model also introduced by Anglo American in Kazakhstan, Botswana and Zambia. The average size of investment in SME Investments is expected to be in the region of R250 000. The fund will take a minority stake in the enterprise, typically 20-49%, although the proportion of funds invested may be considerably higher. In some cases the fund will contribute up to 90% of a small firm's capital requirements.

SBP's executive director, Ms. Chris Darroll, says: “Contracts will come from more than 80 companies involved in our linkage programmes and will be widespread in nature, including food services, small manufacturing and light engineering. In order to demonstrate their commitment, entrepreneurs will be required to make a financial contribution. The fund will exit from each of its investments over a number of years as the entrepreneurs buy back equity using retained profits. In all cases the fund will seek returns as it is understood that profitability is the only appropriate benchmark for success in small business development."

The equity fund also meets the requirements of emerging entrepreneurs where otherwise they are getting finance of 90% or more borrowings and only 10% or less equity. High interest rates render most SME's extremely vulnerable to fluctuations in interest rates, demand and input costs, with the result the track record showing that 60-70% fold within their first two years. Now by minimizing reliance on gearing, the equity-financing model offers considerable potential for small business development.

A recent survey found that 94% of large companies in South Africa outsource some of their operations, compared to only 2% in 1990. However the volume of operations outsourced is expected to grow rapidly as 70% of these companies had attempted outsourcing for the first time only in the last four years.

More information could be obtained at tel: (011) 484-4666.