06 The Venture Capital Trust Fund, Ghana
The Venture Capital Trust Fund, Ghana
Build Market Infrastructure and Capacity
Toolkit step: Build Market Infrastructure and Capacity
In Brief: The Government of Ghana’s Venture Capital Trust Fund (VCTF) aims “to provide financial resources for the development and promotion of venture capital financing for Small and Medium Enterprises (SMEs)”.1 Since its creation in 2004 by the Venture Capital Trust Fund Act (Act 680), the VCTF has deployed US$ 17 million, financing 48 SMEs through five intermediary funds, in addition to providing technical assistance for investors and entrepreneurs.
Social enterprise is a growing subset of Ghana’s emerging SME market. In a developing economy such as Ghana, many SMEs supported by the VCTF provide employment for previously jobless individuals and often improve access to basic services in healthcare and education. In addition, the VCTF has advocated for industry infrastructure development, including an angel investor network, a research programme and a partnership with the Ghanaian stock exchange.
The VCTF provides several considerations for implementing similar reforms for policy-makers looking to Ghana as an example of how to build market infrastructure and capacity, including:
- Craft legislation providing flexibility to achieve field-building goals
- Identify appropriate sources of seed funding that leverage limited government resources to ensure programmatic sustainability
- Provide technical assistance to stakeholders throughout the market ecosystem
Policy Goals and Development
In 2004, SMEs represented 90% of all registered businesses in Ghana, employing more than 60% of the workforce and comprising 30% of GDP.2 However, as a 2004 UN Industrial Development Organization report explained: “Long term financing in terms of equity capital, needed by growth-oriented mainly small and medium companies, is virtually non-existent.”3 Previous government-run SME financing programmes – such as the Export Development and Investment Fund (EDIF) – attempted to address this financing gap. These programmes met several challenges, including strict regulatory restrictions and a lack of supporting market infrastructure, but illustrate the Government of Ghana’s commitment to close the SME finance gap.4
Following these initial programmes, a group of international development finance institutions (DFIs) and local Ghanaian investors suggested the Government of Ghana consider formal legislation that would not only provide financing options to SMEs but would develop the supporting market infrastructure. In response to these suggestions, the Government convened an advisory group of bankers, private investors and international DFIs to explore various incentives and policy reforms to boost the venture capital industry.
The advisory group’s efforts informed the Ghanaian Parliament’s passage of Act 680 in 2004, establishing the VCTF. Between 2004 and 2006, 22.4 million Ghana cedis (at the time, US$ 22.4 million)5 were raised for VCTF programmes through a 25% commitment from the National Reconstruction Levy. This Levy was created to fund government-run development programmes and faced opposition by the business communities on which the tax was imposed. In addition to the Levy, Act 680 indicated that additional VCTF funding could be raised through other private investments or donations.
Following the passage of Act 680, the President of Ghana appointed VCTF’s Board of Trustees, comprised of government and private sector representatives. Shortly thereafter the President also appointed a chief executive officer to the VCTF, a government official responsible for updating the ministry on the operational status of the VCTF.
Policy in Action
Using Levy funds, the VCTF invested in market infrastructure by developing intermediaries, known as venture capital finance companies. By the end of 2006, the first two of these finance companies were launched – Activity Ventures and Gold Venture Capital. Each was seeded with approximately US$ 4 million from the VCTF and US$ 6 million from other local investors (mainly banks and insurance companies). With these first finance companies, the VCTF was actively involved in developing business plans and setting investment criteria standards for investing in SMEs with social or environmental missions. The inaugural funds provided a reference from which subsequent financial service providers were able to submit proposals in line with VCTF objectives.
In 2007, the VCTF launched two more finance companies, Bedrock Venture Capital and Fidelity Equity Fund II6 (see the “VCTF on the Ground” box in this section). By the end of 2007, the VCTF had raised a total of US$ 47.2 million, including both Levy dollars and private investment that leveraged tax incentives for investing in the finance companies. In 2009, a fifth finance company was established, Ebankese Fund Ltd.
In keeping with the second mandate of Act 680, the VCTF continued to build the Ghanaian venture capital market, developing a network of private stakeholders to support its fundraising and technical assistance activities. To initiate connections between the SME community and investors, the VCTF held joint investor/SME roundtables across the country. In addition, VCTF staff realized that more than 60% of SMEs applying for capital from finance companies came from the Greater Accra Region, which represented only 12% of the country’s population.7 In 2010 the VCTF began a countrywide “road show” to educate entrepreneurs in other regions about their services. Furthermore, in 2011 it established the Ghana Angel Investor Network to formally organize wealthy individuals to invest in and mentor entrepreneurs.
The VCTF was instrumental in creating the Ghana Alternative Market (GAX), an alternate listing on Ghana’s stock market specifically for SMEs, scheduled to open in 2013. As the entry cost into the primary market exchange is too expensive for smaller businesses, the GAX will offer a more accessible option for SMEs to attract investment. The VCTF is also working with the Ghana Stock Exchange to establish a fund dedicated to helping SMEs cover the upfront cost required to list on the Exchange.8
By 2012, the VCTF raised a total of US$ 58.2 million, deployed as investments into finance companies and used to support VCTF operations. However, the main source of VCTF funding, the Levy, was repealed in December 2006 due to opposition from large corporations. As a result, the VCTF has not had sufficient funding to launch another finance company since 2009. Moving forward, the VCTF is looking for new funding opportunities with DFIs and other international financial institutions with the hope of raising additional capital and achieving sustainability.
Impact to Date
As of spring 2013, the five venture capital finance companies have invested more than US$ 17 million into 48 SMEs across various sectors of the Ghanaian economy, including in healthcare, education and agro-processing enterprises producing items such as inexpensive packaged foods and filtered water. These SMEs provide more than 1,000 direct jobs and an estimated 3,000 indirect jobs through the expanded operations of portfolio companies.
The VCTF has placed Ghana at the forefront of the African venture capital field. Due to the VCTF’s awareness-building activities and groundwork, other venture capital funds have begun to emerge in Ghana. Further expanding its work, in 2012 the VCTF received a US$ 150,000 grant from the Rockefeller Foundation to develop the impact investing market in Ghana. This funding will be used to perform a comprehensive landscape of the country’s impact investing marketplace and to establish the Ghana Institute for Responsible Investment.
Policy Recommendations for Scaling Social Innovation
The VCTF is in many ways a unique model specifically designed to work within the Ghanaian market. However, the organization and the Act that established it address many broader issues from which other governments can learn:
Craft legislation providing flexibility to achieve field-building goals
Key to the expansion of the VCTF was the flexibility granted through the second clause of Act 680, permitting it to use funds to “promote venture capital financing in general”. While the Board of Trustees is composed of government appointees who must report to the Ministry of Finance and Economic Planning, the second clause allows them to make programmatic decisions independent of government. The industry’s growth necessitated new solutions unforeseen at the time of the VCTF’s establishment and this flexibility allowed it to adapt, for example by creating an angel investor network and an SME-specific stock exchange.
Identify appropriate sources of seed funding that leverage limited government resources to ensure programmatic sustainability
While the Government of Ghana continues to support the VCTF and the role it plays in Ghana, it is not able to provide adequate funding without the repealed Levy. To facilitate a strong, sustainable programme, the VCTF is seeking a longer-term and more consistent source of seed funding that leverages limited government resources in order to attract additional private funds and enable the programme to have far greater reach.
Provide technical assistance to stakeholders throughout the market ecosystem
The VCTF takes a comprehensive approach, providing technical assistance to investors, fund managers and SMEs. This is seen through the VCTF’s work in establishing the first venture capital finance companies, training fund managers to choose investments with social or environmental benefits and facilitating the Ghana Angel Investor Network. These programmes have provided a foundation for the growth of the venture capital market, allowing the VCTF’s efforts to be sustained, replicated and multiplied.
VCTF On the Ground
Fidelity Equity Fund II and Adehyeman Savings and Loans
Adehyeman Savings & Loans Limited (ASL) is an Accra-based microfinance company serving underserved entrepreneurs by providing the financial services necessary to grow their microbusinesses. ASL’s clients include entrepreneurs like Ellen Osei Owusu who, through two loans for a total of GHC 3,500 (US$ 1,800), has been able to develop her business selling locally printed cloths. Using the ASL loans, she has contributed to the growth of the local artisan economy by opening a second shop and is planning to apply for a third loan to pursue designing her own fabrics.9
Fidelity Equity Fund II (a VCTF finance company) invested a total of US$ 1.5 million in ASL in February 2008 to fund branch expansion, managerial capacity building and technology upgrades. With this investment, ASL has been able to grow from one branch to six, greatly expanding its geographic reach and social impact.