This article is another edition to address the equity financing challenge of Small and medium scale enterprise sectors of most developing countries who continue to struggle on the easier approach in accessing equity financing beyond the domestic economy when the avenue for the local support is very weak due to shallow financial market challenges.
Generally, foreign investors whether corporate or Individual build the risk model estimate of any business/project located in any country based on the sovereign credit rating. This type of country credit rating results in their structured risk ranking on the global economic trading index by qualified international rating agencies.
In other to establish clarity to my argument of how domestic business of Africa risk index is perceived per standard metrical analysis, let examine the 54 African State recognized by United Nations, you will realize only 32 out of the 54 of this countries are recognized by the world index report as developing countries easy to measure the status of their sovereign credit risk. Just for an easy understanding of non-economists to appreciate the description in measuring the risk status of a performing economy, I will briefly explain in context.
The Credit agencies apply the term ‘Prime’ for countries with Zero risk level towards investment, hence accorded the trading economic value as 100%, which none of the countries on this earth has ever qualified at that rate. The next ranking is defined as ‘High Grade’ with the trading economics rated in the range of 95-85% meaning strong economic fundamentals to assure and guarantee investment rewards. Followed is the ‘Upper Medium Grade’ with its trading economics rated within 80-70%, followed again by ‘Lower Medium Grade’ with the trading economics rated at 65-55%. From 50-40% it is termed as ‘Non-Investment Grade Speculative’. Below 35-25% is defined as ‘Highly Speculative Grade’. 20% and below are termed as ‘Substantial Risk’ economy. The rating description from 15% and below is nothing to write home about therefore will ignore it in the context of this article.
As at 2019/2020 the risk rating among the 32 developing African countries, Botswana was leading in quality investment environment of 72% in trading economics and graded as ‘Upper medium grade’, followed by Mauritius 65% in trading economics, followed again by Morrocco 53% and South Africa 50% with the rest hovering around 49% and below, rated as Non-Investment grade speculative, with such condition to be defined by any potential investor as a high-risk market to venture, which definitively demands high premium on investment by any potential investor prepared to venture into such market resulting into an increase of interest rate as a capital cost on such market. And sometimes demand quality collateral conditions, which is mostly easy for the government to afford but not a private-sector venture, especially for the SME industry, it becomes a no cross border area.
Analyzing the investment climate of West Africa, Which had 10 countries classified as developing economies, Benin, Burkina Faso, Cape Verde, Ghana, Ivory Coast, Mali, Niger, Nigeria, Senegal and Togo, only Senegal and Ivory Coast were leading with the trading economics as 37% with a moody’s rating as Ba3 for both. In this category, the lowest-performing economic environment for Investment was Ghana, Mali, and Niger with their trading economics as 23% ranked B3 for these three countries, which fall within the description of the highly speculative and substantial risk environment.
Appreciating such a risk climate conditions established in the mind of International Investors, there are very few African Investment Bankers who will selflessly and unprofitably go through the thick and thin to promote Vulnerable SMEs market consisting of local businesses and infrastructural projects of Africa by selecting exceptionally and quality performing Small and Medium Scale Enterprises to empirically justify their risk mitigation strategies to attract section of the investment market to their favour.
As a result, this article requires you as a business or project promoter(s) to understand the fundamental structure demand in terms of elementary factors to attract equity financing as outlined below;
[I] The business promoter(s) should have an equity commitment to the business as an injected start-up capital and at least should hover around 20-50% valued in the currency your debt-equity funding will be raised from.
[III] The promoter(s) should possess a quality bankable documentation of the business as my previous article titled “The complexity in attracting quality investment to SMEs in Africa”, succinctly explained. Attached below is the link as a reference guide https://fbiresearchedu.org/homepage/2020/01/the-complexity-in-attracting-quality-investment-to-smes-in-africa
[II] The business promoter(s) should have strong credibility, without criminal records and if there is, the need to examined the root cause to guide investment decision.
However, the observed challenge with this kind of documentation is a situation known in Ghana, where most of the SMEs business promoter(s) in their attempt to seek for equity partners engage experts mostly Chartered Accountants at high cost to developed business plan, with the final draft of such kind of document drawn under account-based metrics, which is mostly useful for soliciting short term credit funds from Commercial Banks. This type of expert fails to distinguish between the two types of fundraising documentation which is equity financing by Investment Bankers and credit support by Commercial Bankers, and it is because in such a developing market there is no clear distinction between the investment and the commercial market, the same banks undertake both services under a universal license.
This article does conclude as a caution to Venture owners, in aspiration to get their business dreams realized, this basic information should serve as an instructional guide to avoid falling into unnecessary pitfalls in a form of expenditure cost as well as having the ability to assess the projects/business structural value independently whether it has the element to attract equity financing before pursuing the journey of engaging the service of an Investment Banker at a cost.
Emmanuel TWENEBOAH SENZU is a professor of Applied Economics and Investment Banking. The Head of Research, Frederic Bastiat Institute Africa. Any technical support for Investment, contact any of our Offices (Ghana, Sierra Leone, Kenya, South Africa). Tsenzu@fbiresearchedu.org