Pre-IPO Financing for a Sustainable growth of Capital Markets

In our quest to develop, we use various financing tools to finance our economic agents, businesses and enterprises. As we know it, our business enterprises are financed via personal sources, and largely by borrowing from financial institutions – while all aspects of equity financing beyond family/friends for business enterprises is less considered. Rightly so, because of limited in awareness, but also given business growth cycle and maturity of businesses with the economy. And, because of this agents like the DSE has introduced capital raising platforms to enable Start-ups and SMEs to access public funding via issuance of financial instruments (such as shares and bonds) to accelerate their business expansion and hence creations of jobs and enhanced tax revenue to the Government, among other benefits – but with minimal success.
Whatever reasons for not growing the equity side of financing that we front – the fact is that for us to actively finance our growth and development, as long as development and financing goes hand in hand, we need a full range of capital raising options in our finance sector ecosystem. For instance, consider this sustainable and graduating form of financing SMEs: it should start with own sources, then banks and microfinance institutions, before seeking Government grants (if any—especially if in area of R&D), then pursue financing from venture capital and private equity funds before lastly engage the entire public via IPOs and listing to the stock exchange. This is how it is supposed to be.
Where are we in this, our start-ups and SMEs finance are over 90 percent by friends/family and debt finance from banks. There is less than 10 percent risk-based equity finance. This a key gap in our financing, and of course there are other gaps in Tanzania compared to many other markets. In the UK, between 30 and 50 percent of all IPOs emanates from venture capital funds and private equity exits, as it is in Korea, Singapore, etc. Based on the above, one will clearly see the structural gaps in the finance for Start-ups and SMEs to be are as follows:
• no local venture capital or other forms of private or public equity;
• almost no bank equity investment by Tanzanian banks, meaning there is no process for banks to grow companies via equity financing and achieve an exit multiplier as they are almost 100% focus on debt rather than equity;
• no crowd funding and there is minimal debt or grant funding direct to SMEs from Government or Donors.
These gaps mean there is no feeder to the DSE. Unless, all stakeholders work to fix these structural gaps, the capital markets will always face growth and sustainability challenges.
My colleagues and I were recently in Korea, to learn from their experience, as preliminaries towards establishing the Enterprise Acceleration Program at the DSE. We learnt that previous Korean had problem like ours, where it took at least 12 years before a company is potentially ready for listing in the Korean Exchange. This was until the Government pro-actively started working with the private sector to initiate Acceleration Programs (currently there are more than 200 Programs) that includes pre-IPO/listing financing by Venture Capital Funds (partly owned by the Government), Government owned Industrial and Development equity financing divisions as well as investment banks’ specific programs to finance acceleration of Start-ups and SMEs prior to their IPOs and listing in the Exchange.
As a result, the period from Start-up to IPO in Korea has been shortened to 6/7 years from the previous 12 years. Since then, there has been a significant increase in IPOs and companies that have listed in the Starts-up Market segment, the SMEs and technology market segment as well as in their Main Investment Market segment of the Korean Exchange. In a way, this approach by the Government to be hands-on in ensuring there is complete ecosystem in the financial sector and its supporting institutions is a sustainable way towards inclusive and sustainable financing of the economy.
Under normal circumstances, the business of ensuring there are structures and supporting institutions for the financial sector ecosystem could be fronted by both the private sector and government. But then, if one consider and compares cases like that of Korea – a country that moved from the GDP per capital of less than US$ 100 during their independence in 1958 to more than US$ 30,000 now; and Tanzania, which like Korea was with a GDP per capital of about US$ 100 GDP in 1960s, still at around US$ 1,180 – somehow it tells that the examples of countries such as Korea and their approaches where the Government pro-actively engage in not only developing policies and legislative actions but also compliment/supplement these by establishing the necessary supporting institutions and financing them is the right approach to pursue. In the context of our local capital markets growth and development – institutions like venture capital funds, public equity funds, development and industrial banks as well as investment banks for market making and liquidity creation are necessary for a vibrant capital market. These will feed into the current existing structures and institutions, like the DSE for the sustainability of financing our projects and enterprises, while minimizing risk to the less sophisticated well-meaning citizens

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