Time for equity - deepening financial sector requires private equity (II)
An opportunity exists to nudge institutional investors, and to a limited extent, retail investors to make more private equity investments to fill the financing gap. More generous tax and regulatory-based incentives, combined with matching grants, should provide the required draw.
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The goal of these policies will be to significantly increase the amount of equity investments in privately held businesses that meet specific criteria.
As has been the case for the few venture capital and private equity funds that have been set up, institutions that are likely to take advantage of these incentives include investment banks, insurance companies, asset managers and pension funds.
What all these institutions have in common are large pools of money available for long-term investments which would generate appreciable investment returns and provide retirement income to their clients.
Too much money chasing debt products
Pension reform has translated into a pile of approximately GH¢6 billion in investible funds that has largely been parked into government debt and fixed income instruments issued by banks.
This asset pile is growing at a healthy clip – estimated at approximately 60 per cent per annum – and represents a readily accessible source of funding for private equity.
While other African countries such as Nigeria, Kenya, South Africa and Botswana allow pension funds to allocate between five per cent and 10 per cent of their assets under management to private equity and venture capital investments, current investment guidelines in Ghana do not.
If Ghana should follow suit and amend its asset allocation guidelines accordingly, this will represent a momentous step in ultimately addressing the scarcity of external equity financing in the SME sector. Doing so will undoubtedly unlock long-term patient capital for investment.
Likewise, additional tax incentives over what currently persists in our existing tax code would certainly bolster the interest and participation of local fund managers - regulated firms that provide investment advice and assist clients to invest their money.
The policy goal of any tax and regulatory incentive scheme to encourage the private equity and venture capital industry should accordingly seek to increase the volume of private equity investments in emergent and SME companies.
The use of tax credits, both on the “front end” when equity investments are made and on the “back end” through a capital gain exemption that reduces tax on the gain realised on successful investments, are approaches that have proven successful in a number of jurisdictions.
Other more aggressive incentives could include an outright exemption from withholding taxes on income distributions such as dividends to shareholders, or from corporate, income or value-added taxes (VAT).
Incentives can also be delivered – either to investors or to the companies in which they invest - directly through a matching grant programme.
Looking ahead
As the number of private equity and venture capital funds increases and the ease with which businesses are able to access equity capital improves, the merits of a stock exchange as an avenue to raise capital or to facilitate the trading of equities becomes even more notable.
In this regard, the stock exchange serves as a conduit for private investors to monetise a portion or all of their holdings, while enabling the company to swap any exiting investors with new public investors.
Over time, a critical mass of businesses with external private investors will develop, serving as a healthy pipeline for future stock market listings.
Additionally, the stock exchange would channel the much-needed capital to sectors of the economy that require financing and provide private investors with an accessible exit for their investments.
Finally, a robust economy with prudent fiscal and monetary policies that boost private sector growth and reduce economic uncertainty would also support the stock market.