Equity finance for SMEs

Project Active from to Firms

Access to affordable long-term finance is one of the biggest barriers to development of small and medium enterprises. Growth oriented small and medium enterprises face a momentous challenge of raising capital.  Debt finance is not only expensive and difficult to get, but also inconvenient given the relatively short maturities of loans. Equity finance offers an opportunity for SMEs to raise capital, share risks, complement knowledge and skills, etc. Yet, it is grossly underdeveloped. The private equity industry has not sufficient adapted to the local institutional environment in developing economies like Tanzania. There are many policy initiatives to promote access to finance for SMEs, including equity in developing countries including Tanzania. There are also many individuals, enterprises and institutions, both local and foreign who are engaged in various forms of equity finance. Some institutions, such as the Dar es Salaam Stock Exchange are actively promoting equity finance. All these need locally relevant knowledge of equity finance.

The objective of the study was to generate lessons on the experience, successes and challenges of equity investments in Tanzania.

The specific research questions were:

  1. What types of investees or firms have benefitted from equity investment and why? Are there investees or categories of firms that are more attractive than others for equity investment and why is it so. Does scale, ownership structure or sector matter?
  2. How do investors identify and select investees? How do investees identify and decide on investors? What criteria are used and what is the selection process? How do successful and unsuccessful investees differ?
  3. How do firms balance equity and debt? How does the tax structure or administration inform the choice between debt and equity? What intermediaries or facilitators exist and what role do they play in private equity placement?
  4. What challenges do investors and investees face and how do they differ by type of investor, ownership structure, background of investors and investees, size of investment, facilitation?
  5. What is the balance between foreign and local investors?
  6. What exit opportunities are available to investors?
  7. What could be done to scale up equity investments in markets like Tanzania?