Leonard John Businge, the country coordinator of East Africa Venture Capital and Private Equity Association Uganda Chapter. PHOTO/JOAN SALMON
Most venture capitalists are not sharing what they are offering. Why is that?
By nature and design, our industry relies on a few investment parameters that vary from player to player, but they are merely a guide towards making a deal that suits both the investor (venture capitalists (VCs) and Private Equity (PE) and the investee (entrepreneur/business).
That is because every partnership depends on particular and very peculiar set of circumstances such the investment climate, market opportunities and other investor considerations such as their exit strategy, all of which influence the risk factor associated with the business and the kind of return the business/investment will bring to the investor, not forgetting the negotiation of both parties to the deal.
All of these factors are shaped by the outcomes of the due diligence process conducted by the investor on the potential investee. The investee vetting also guides investors in creating the term sheet, which is the underlying investment document.
The only things that are certain could be the kind of businesses (stage and industry the investor typically invests in or what is popularly known as the investor bias and their Internal Rate of Return (IRR).
What is your target audience?
East Africa Venture Capital and Private Equity Association (EAVCA) is a member organisation, hence our target audience is players across the private capital space including financing institutions such as Development Finance Institutions (DFIs), private equity and venture capital funds, impact funds, angel investors, family offices and intermediary advisory companies as well as transaction advisors in the private capital space such as lawyers, accountants, fund managers etc. Typically, our members target businesses across the entire spectrum, depending on their bias, whether they be early stage, growth stage, and/or high growth.
What is your contribution to the financing ecosystem?
EAVCA serves as the interlinking platform for public stakeholders, local businesses and private investors, building on dialogue and industry insights to create a sustainable, informed ecosystem that advances economic growth, social and environmental welfare and wealth creation in the region.
We bring together private capital providers and their potential investees (entrepreneurs/businesses) through our four pillars of market intelligence, advocacy, training and network facilitation to connect private capital to advance economic transformation.
What is the shortest or longest a venture capitalist can stay within the market?
Most private capital provider funds typically have a lifetime of between seven to 10 years. Once the funds have been deployed/invested, the remainder of that fund’s lifetime is for portfolio management where the investment is managed to a good operation, wrap up/exit.
At the end of the investment period, the investor could wrap up completely or raise a subsequent fund. We also have evergreen funds that don't have a fixed term (they are always open) and one of these in Uganda is Iungo Capital.
One example of a fixed-term fund is the Yield Fund (Uganda’s first locally-domiciled fund) which invested in and has successfully exited from Enimiro Uganda Products Limited. Yield Fund is now in the portfolio management stage, awaiting exit from their other investments.
Give me a scenario of how a wrapping up of an operation with a VC or a private equity happens.
There are several options but these depend on the nature of the fund, its term and the instrument used for investment. For example, if it's straight debt, wrapping up is the investee repaying the debt sum advanced to them. If it is quasi-debt (convertible debt or debt and equity, it could be either the investee repays the debt by a certain period or it is converted into shares in line with the terms and conditions of the investment documentation. Regarding the latter, these could be ordinary shares, making the private capital provider an ordinary shareholder in the company or redeemable shares where the company can buy the shares back from the investor. There is also an option of selling the company altogether or selling off the shares in issue to another shareholder/investor, depending on the level of the debt at the time of conversion/sale.
What next for an entrepreneur when a fund exits?
The partnership between an investor and entrepreneur always has an end time. Therefore, every entrepreneur, even before signing the investment contract, should always have the exit in mind, just as the investor does.
Exit might mean that the investor’s debt is fully repaid by the investee or the investor sells/transfers their investment to another, usually a bigger investor, or the investor sells back their shares to the company through a share redemption. That way, the investor can recover their investment coupled with the agreed upon return.
On the side of the investee, a successful exit may attract additional investment, depending on the needs of the business. A successful exit for the investor may also result in increased value for the shareholders of that business, especially in the event that the company’s value appreciates as a result of the exit.
For the entrepreneur, an investor exit may necessitate additional fundraising for the next stage of the company’s growth or a lot of introspection and reorganisation on their part if the investor’s exit was not well managed.
What are the terms and conditions of venture capitalists becoming members of EAVCA? How does EAVCA ensure harmony between its members and the investees?
Upon payment of the requisite membership fee and acceptance into membership, all EAVCA members are expected to act in an ethical way that is beneficial to the image and interests of the private capital industry in the region, in addition to complying with the laws, regulations and guidelines of the jurisdiction in which the EAVCA member firm operates.
Part of creating an enabling environment for the private capital industry in Uganda to thrive involves fostering harmony between our members and all stakeholders, including the investees. We do this through active dialogue and engagement with all stakeholders through various public and private for such as our advocacy and network facilitation events. We make it a point to encourage mutual respect across the board. So far, this is the winning formula we intend to stick to.
What makes private capital providers better than other financial sources?
Private capital is better than other financial sources.
Unlike traditional finance providers, private capital providers partner with the entrepreneur. Therefore, they are not just offering you money and sitting back in earnest waiting for their pay/return, but work with the entrepreneur because their success is a shared win. That includes helping the entrepreneur align their systems and processes, and connecting them to networks for growth, which is unlike traditional financing.
In addition, private capital is also patient, unlike traditional financing that requires repayment to commence immediately, private capital is flexible, with the flexibility extending to interest rates, repayment terms, and collateral requirements.
Since private capital is often pegged to the growth of the investee, this enables entrepreneurs to align their capital requirements with the growth of their businesses, a benefit that is not often the case with traditional finance models.
How can we improve their impact?
It will take a concerted effort from all of us. We encourage our regulator – Capital Markets Authority (CMA), to adopt a light-touch perspective when it comes to the industry and to be fair to them, they are walking the talk! We continue to engage URA [Uganda Revenue Authority] to clarify the position on Capital Gains Tax (CGT) to ensure total tax transparency for venture capitalists/ private equity vehicles so that the gains from the Partnership Regulations are not sacrificed at the taxman’s altar.
To establish a valuable pipeline, it is essential to provide further education and preparation for both the general public and the business community on investor readiness and the advantages of private capital.
What is the future of private capital providers and how can their impact be improved?
The future for private capital in Uganda is bright. As the appetite for alternative financing grows, coupled with a voracious entrepreneurial spirit in Uganda and an increasingly favourable enabling environment, we should see more inflows of private capital into Uganda.
With the consolidation of the tax transparent treatment for private equity and venture capital funds through the codification of the Income Tax Act and soon-to-be-passed Partnership Regulations allowing for more funds to be locally domiciled, the sky is just the beginning. Once these are passed and tested, we expect to see more venture capitalists/private equity funds locally domiciled, which will increase the private capital deployment in Uganda.
