Experts call for greater local participation in venture capital investments

Experts in venture capital and private equity industry are advocating increased local participation as limited partners (LPs) in investment funds, in a bid to promote economic growth and insulate businesses from global financial turbulence.

At a recent summit on the state of the industry, Hannah Acquah, CEO-Ghana Venture Capital and Private Equity Association, emphasised the importance of having local institutional investors like pension houses and insurance companies partake in funding Ghanaian companies.

“It’s important that we get local LPs, like the pension houses and insurance houses, to also partake in this,” Ms. Acquah stated. “Because when they do, they’re allowed to have cedis investing in cedis. So this means that when things fluctuate in price because of the dollar or pound denomination compared to the cedi, we’re not then raising more cedis to pay foreign currency,” she said.

Ms. Acquah’s comments highlight a recurring challenge faced by Ghanaian companies heavily reliant on foreign direct investments (FDIs).

Currency fluctuations can significantly impact the cost of servicing foreign-denominated investments, putting strain on businesses during economic downturns or periods of global instability.

The cedi has been under considerable pressure since end of the first quarter, echoing its sharp decline in the second half of 2022. The situation has stoked fear in some quarters that the local unit could exchange for more than GH¢18 to US$1 before close of the year, especially when pre-Yuletide pressures kick in.

Already, market analysts have stated that the cedi is expected to depreciate further against major currencies like the US dollar in the near-future. This is due to a lack of US dollars in the forex market and high demand from businesses that import goods. The central bank has been trying to support the cedi by selling US dollars, but demand is still outstripping supply.

Analysts predict the cedi could fall to around GH¢15.4-15.6/US$ by the end of June 2024. This is because businesses need US dollars to buy goods from abroad and there is not enough supply to meet demand.

By encouraging local institutional investors to allocate funds for venture capital and private equity firms, Ms. Acquah believes Ghanaian companies can mitigate this risk and foster a more resilient business environment.

Ms. Acquah said: “No matter what is happening, whether it’s an election, the Ukraine war or any other global event, we can still manage ourselves because we’re not dependent on foreign investments”.

Her sentiments were echoed by Alex Asiedu, board chair of Impact Investing Ghana – who stressed the importance of bridging the gap between capital suppliers and those requiring financing, especially in the private sector.

“We’re all in Ghana, and we know that the state has been unable to fill those gaps,” Mr. Asiedu said. “If we can get a platform where those who are supplying capital – pension funds, private equity, traditional actors in the fund management space – can converge with those who need it, like SMEs, then I think it’s a good thing.”

While acknowledging the availability of capital in the market, he highlighted the need to address challenges such as lack of information, capacity and trust, which often hinder the optimal allocation of funds to businesses in need.

The call for increased local participation in venture capital and private equity investments comes as the industry grapples with historical challenges, as outlined in a recent report launched by the Ghana Venture Capital and Private Equity Association.