INTERNATIONAL EQUITY FINANCING INSTRUCTION GUIDE FOR SMEs ESTABLISHED IN SOFT-CURRENCY ECONOMIES

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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 towards the easier approach in accessing equity financing beyond the domestic economy, when the avenue for the local support is actually non-existing, due to shallow financial market challenges of such fragile economies.

Generally, International investors, whether corporate or private, establish their risk perceived 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 of the performance of their economy on the global economic trading index by qualified international rating agencies.

In other to establish clarity to my argument of how the domestic businesses cum Entrepreneurs of Africa, struggle with their venture operational performance in such an outlined risk index analysis of the global ranking, let examine the 54 African States recognized by United Nations, you will realize only 32 out of the 54 of this African countries are recognized by the world index report as developing countries, easy to measure their status, and as well rate their sovereign credit risk. Furthermore, for such an argument to be simply understood by non-economists to appreciate the description effect in measuring the risk status of a performing economy market, I will briefly explain in simple language in the subsequent paragraph.

The Credit agencies apply the term ‘Prime’ for countries with Zero risk level towards investment, hence, accord them the trading economic value as 100%, which none of the countries on this earth has ever qualified at that rate because each sovereign country is expected to have some level of risk in the operational performance of its economy. 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 in such an operating economic market. It then followed by the ‘Upper Medium Grade’ with its trading economics rated within 80-70%, further 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 of 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 a high premium of investment as a cost burden of raising capital by any potential investor prepared to venture into such market, resulting into an increase of interest rate 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 SMEs sector, 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 was 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 the 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 and promote them for Investment attraction towards the international market to their favour.

As a result, this article requires you as a business Entrepreneur or project promoter of Africa origin to understand the structural foundation 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, in which the business debt-equity funding will be raised from.

[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.

[III] The promoter should possess a quality bankable documentation of the business as recommended in my previous articles titled “The complexity in attracting quality investment to SMEs in Africa” https://fbiresearchedu.org/homepage/2020/01/the-complexity-in-attracting-quality-investment-to-smes-in-africa  clearly espoused.

However, the observed challenge with this kind of documentation is a situation known in most West African countries, where the SMEs business promoter(s) or Entrepreneurs in their attempt to seek equity partners engage experts mostly Chartered Accountants at a high cost to develop a Bankable Business Plan (BBP), with the final draft of such kind of document drawn purely 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 line by Commercial Bankers because in such a developing financial market there is no distinction between the investment and the commercial Banking services, the same bank undertake both services under a universal license.

This article does conclude as a caution to Venture owners or Entrepreneurs in their aspiration to get their business dreams realized, to follow the above instructional guidelines to avoid falling into unnecessary pitfalls in a form of expenses as well as having the ability to assess the projects/business independently in their own capacity, whether it has the elementary requirement to attract equity or debt financing before pursuing the journey of engaging the service of an Investment Banker at a cost.


By: Prof. Emmanuel TWENEBOAH SENZU, School of Social Sciences & Law, Njala University, Sierra Leone.

Post source : Library of Frederic Bastiat Institute

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