Exploiting growth capital opportunities
ACCESS to growth capital is one of the key drivers to attaining and maintaining a vibrant and innovative economy. Unlike working capital that is meant to cover routine bills and basic expenses, growth capital is designed to accelerate a company’s growth by way of expanding business operations, entering new markets or consummating strategic acquisitions.
Technically, this is growth-focused capital that can be internally generated by the business overtime or take the form of growth equity which lies at the intersection of venture capital and buyout private equity.
A manufacturing company might decide to build up growth capital internally in form of a capital fund. A capital fund is extra revenue generated from the business that can be set aside for investment purposes and is a product of maintaining a positive working capital ratio. A positive working ratio entails that the liabilities are costing a business less money than the assets they are bringing in, thereby enabling a sustainable operating position. The decision to use only internal resources will mean that a company will grow at a slower and controlled pace but also build the necessary resilience to navigate the different market cycles and pressures.
An alternative is the decision to attract growth equity from domestic, regional or global investors. Growth equity almost always takes the form of preferred equity and involves the taking up of minority stakes by investors in high-growth companies that have moved beyond the start-up stage. Growth equity is a non-traditional but still preferred form of investment as it accords the investor minimal risk (execution and management only) as well as minimal control over the company’s strategy and operations.
A 2020 study report by the Southern African Venture Capital and Private Equity Association (SAVCA) revealed that financial and business performance had been positive in equity backed South African companies with average growth of 24.0% in total sales, 18.4% in gross earnings, 22% growth in employment, 26.6% in capital expenditure after an investment period of one year. This substantiates the high growth potential that can realized through acquiring growth equity.
A manufacturing company that is looking to attract growth equity must have acquired significant stability in terms of business growth and market share. Basically, most growth equity investors would request proof of organic revenue growth in the past most commonly targeted at a healthy rate of 10-20% annually. On the other hand, market share indicates the percentage of total sales in an industry generated by a particular company. Fundamentally, business growth is a good indication of business profitability while market share indicates both organizational competitiveness. These are key aspects of the company that should be clearly defined for a company that is seeking to attract growth equity
Furthermore, building a well-functioning management team (structure) is a critical issue for growth stage businesses seeking to acquire growth capital. A future ready management structure will cater to the critical corporate functions like strategy, finance, marketing and operations. In the same accord, it is also vital to put in place an important tool like an offering memorandum that will provide potential investors with information on terms of engagement, potential risks associated with the business, and a detailed description of the operations of the business thereby facilitating the investment process.
ZAM has been facilitating equity for companies in the growth stage from various sources. In 2021 ZAM partnered with the Enterprise Development Fund where grant match funding was being offered to companies with turnover of more than US$1million with projects to increase the participation of smallholder farmers in market-integrated and nutrition-sensitive value chains. A fourth call for proposals for projects in investments by agribusinesses via capital expenditure on “green technologies” has been made.
Another partnership between ZAM and UNIDO anchored on Investment Opportunity Profiling has exposed local companies to an investment matching platform known as Digital Investment Profiling System (DIPS). Ultimately, this opportunity provides local companies with access to Foreign Direct Investment (FDI) as well as technical assistance from Secretariat in developing an investment profile.
In conclusion, a key aspect of company success and growth involves putting in place a realistic and action-oriented plan especially one designed to bring in the required financial input. When it comes to acquiring growth capital, a properly sourced, negotiated and executed financing source can greatly accelerate a company’s revenue and profitability.