Private Equity and Capitalisation of SMMEs in South Africa: Quo Vadis?

This paper is a part of a multi-country project that seeks to understand the risks that low- income entrepreneurs face, their coping strategies, and the potential role that insurance can play in managing those risks. The focus of this paper is the South African insurance industry.

As per the author, some of the requirements that venture capital financiers normally set before investing in small, micro and medium enterprises (SMMEs), are:

• Appropriate entry or acquisition price for the particular fund;
• Existence of a proven market for the products/ services of the business to be financed;
• Proven committed management;
• Sustainable market position.

The author states that the inherent risk in SMMEs in South Africa is quite high:

• There is a lack of an entrepreneurial culture in South Africa and a severe shortage of management skills;
• The highest unemployment rate in South Africa is among the unskilled workers.

As per the author, immediate actions to assist in improving the use of private equity should include:

• Focus on those areas where more information is available first, such as the firms working with SMMES and facilitating transactions and market opportunities;
• Identify how information constraints can be alleviated over the longer term;
• Identify opportunities and support the formation of funds that are willing to make smaller minimum investments.