annual report on operations for 2010 · forum will provide a platform for private equity managers...

VENTURE CAPITAL TRUST FUND

2010

Annual Report on

Operations for 2010

Venture Capital Trust Fund

[ T Y P E T H E C O M P A N Y A D D R E S S ]

Report on Operations of Venture Capital Trust Fund 2010

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Table of Contents

About Venture Capital Trust Fund ..................................................................................... 3

Chairman’s Statement ................................................................................................. 5

Chief Executive Officer’s Report ........................................................................................ 8

Distribution of Investments ........................................................................................... 9

Economic Impact of Portfolio Companies ...................................................................... 11

Sustainable Funding ................................................................................................... 18

Venture Capital Finance Companies ............................................................................. 19

Industry Programs ..................................................................................................... 19


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About Venture Capital Trust Fund

The Venture Capital Trust Fund (VCTF) was established by Venture Capital Trust Fund

ACT, 2004, an Act of Parliament, (ACT 680, as a Government of Ghana initiative to

provide finance to Small and Medium Enterprises (SMEs). Operations of the Trust Fund

begun in January 2006.

The Government’s objective in establishing the VCTF is to promote and support the

private sector as an equal partner in achieving the country’s developmental goals.

Our Mandate

In accordance with the VCTF ACT 680, 2004 the VCTF is to: “Provide financial resources

for the development and promotion of venture capital financing for SMEs in Ghana by;

i. Providing financing to eligible Venture Capital Finance Companies (VCFCs) to

support SMEs; and

ii. The provision of monies to support other activities and programs for the

promotion of venture capital financing”

Mission

To provide low cost alternative source of funding to SMEs that will lead to efficient and

profitable operations to create jobs and wealth.

Vision

Our vision is to create a vibrant and well structured venture capital industry boasting of

investments in various sectors, leading to poverty reduction through job and wealth

creation with a collateral growth in government revenues.

Format of Operations

Our financing are undertaken through Venture Capital Finance Companies (VCFCs),

which are managed by Fund Managers, licensed as Investment Advisors by the

Securities and Exchange Commission (SEC). VCFCs are the intermediaries between

SMEs requiring funds for operations and the VCTF. The maximum funding limit in an

investee company is 15% of total capitalization of a VCFC.

The Trust Fund also invests in Value Chain Projects under our Special Purpose Vehicle

Structure. These investments are undertaken with the primary objective to produce

critical raw materials locally, to feed our industries.


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In 2010, the Trust Fund piloted a Soybean Value Chain Project in partnership with other

stakeholders to provide for the edible oil industry, the paint industry and as a

sustainable source of feed ingredient for the multimillion dollar poultry industry.


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Chairman’s Statement

Once again another year has passed and it

is my humble duty as Chairman of the Board

of Trustees of the Venture Capital Trust Fund

to present the Annual Report for Year 2010.

The New Chief Executive Officer

It must be recalled that, on June 11, 2010,

the President in consultation with the Board

appointed Mr. Daniel Duku as the Chief

Executive Officer of the Trust to steer the

affairs of the Trust which he has successfully done.

I am happy to report that having worked with him for six months, the Board is satisfied

with his performance and it is believed that the confidence reposed in him will manifest

in the robust and accelerated growth of the venture capital industry in general and the

Fund in particular as per his zeal, commitment and visionary leadership showed so far.

The Operating Environment

The Year 2010 saw the stabilization of the Ghana cedi, inflation receding and the

slowdown of the global economic crisis, it has been noted that the Ghanaian economy

has taken off after the initial stagnation.

Macroeconomic stability was one key goal of the government upon assumption of

office in 2009 as presented in the 2009 Budget in March. Inflation showed a downward

trend to register a percentage of 8.9% at the end of 2010 as compared with 15.97% in

December 2009. The country’s financial and capital account amounted to $1.9 billion

on account of increased foreign direct investments (FDI’s) and investments by non

residents while exports rose by 40% to $5.9 billion.

The 91-day Treasury bill rate declined from 12.7% to 12.3% and the 182-day Treasury bill

rate declined from 13.1% to 12.7%. Average base and lending rates of the banks

declined by 93 basis points to 26.2%, while average leading rates declined by 87 basis

points to 27.6% over the same period. The Monetary Policy Committee (MPC) of the

Bank of Ghana (BOG) revised its policy rate from 18% at the end of 2009 to 13.5% at the

end of the year. This was the existing environment that the Trust operated.

Corporate Governance

The various committees of the Board have ensured the compliance as to the work of

the Trust as well as the Fund Managers. The Committees continued to provide legal as

well as financial directions to ensure compliance. This is to ensure that the Venture


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Financing Companies are working within the confines of our mandate and also to

ensure prudent investing and good returns. In this regard the Audit and the Finance

committee have been working in moving its Trust’s Financial Reporting to be IRFS

compliant.

Collaboration

The Trust continues to nurture good relationship with Global private equity industry

players such as EMPEA, AVCA, PE to ensure that the best practices for Private Equity

and Venture Capital are maintained in our operations. Our association with Africa

Venture Capital Association (AVCA) has been strengthen

with the proposition of hosting AVCA Annual Conference in Accra. The Board will

provide strategic direction to ensure successful hosting in the coming year or years. This

forum will provide a platform for Private Equity managers and Venture Capitalists across

Africa and the emerging markets for venture capital financing.

Challenges

Additional sources of funding continue to be the main challenge facing the

Trust Fund. The growth of the Venture Capital Industry, in terms of establishment

of more venture financing companies through partnerships and the creation of

more special purpose vehicles is impeded without any other source of funding.

Another major challenge that the Trust faces is the low level of appreciation of

the operation and process of venture capital funding. As an antidote to the low

level of public awareness, the Trust embarked on a Nation-wide Roadshow to

educate to business communities of the operations and the procedure of

accessing venture capital financing. This took the Trust to all the ten regional

capital of Ghana. The Roadshow 2010 has helped in educating the captains of

the industries leading to quality business proposal being submitted to the

Financing Companies for deal flows.

Performance

The traditional revenue stream of the Fund has been the interest income on committed

undisbursed funds which are usually deposited with the local banks. In-spite of the

downward trends in interest rates, the Fund through prudent financial management,

achieved modest results in the year ending 31st December 2010.

Outlook for 2011

Ladies and Gentlemen, sustainable sources of funding have been identified as a major

threat to securing the future of Venture Capital financing in Ghana. The Government in


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its 2011 Financial and Economic Policy Statement read in November 2010 made a

budget allocation of GH¢10 Million to the Trust Fund. On behalf of the Board of Trustees,

Management and Staff, I wish to express my profound gratitude to the Government for

such an allocation despite resource constraints. We will like to assure the Government

that we are committed to judicious use of the fund as always has been while we work

closely with the Ministry of Finance and Economic Planning to identify sustainable long-

term financing source for the Trust Fund.

The reconstituted Board in 2009 was tasked by Hon. Dr. Kwabena Dufour, Minister of

Finance to lead the effort in establishing Angel Inventing in Ghana. Angel Investing

when implemented will provide a platform for budding entrepreneurs and Business

Angels for networking. In 2011, the Board will provide all the strategic direction

necessary to ensure the fruition of Angel Investing in Ghana.

Although some successes have been recorded in the creation of public awareness,

there is still some misconception regarding venture capital financing. The Board of

Trustees will support Management and the entire staff to develop innovative programs

to reach out to the public through public awareness campaign and its educational

programmes.

The Board and Management of the Trust will deepen its association with Ghana

association of Industries (AGI), the Chamber of Commerce and other related

association to educate and inform its members on the operations of the Trust.

Ladies and Gentlemen, let me take this opportunity to acknowledge fruitful

collaboration with Ministry of Food & Agriculture, GoG/Donor Projects, and hardworking

farmers to delivering results in the Agricultural Value Chain financing. The Board of

Trustees is committed to ensuring financial and technical support is provided to Value

Chain actors to promote commercial agribusiness endeavors in the country. We have

therefore empowered Management to explore opportunities in other crops such as

Yellow Maize to complement the Soybean to make local poultry and livestock industry

more competitive.

Conclusion

Let me take this opportunity to thank my Board members, Management and Staff of

the Trust for a good job done within the period and encourage them and our partners

to aspire to greater heights in the coming years. It is our firm belief and conviction that

a well structured and vibrant venture capital is being established in Ghana and the

Board and management shall strive to move the industry into the Global market place

and market it attractive for foreign participation within the right legislation. It is our

hope that the perennial lack of permanent source of funding for the Trust will be

resolved in collaboration with Ministry of Finance and Economic Planning (MOFEP).


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Thank you.

Hon. J. Owusu Acheampong, Chairman

Chief Executive Officer’s Report

The Venture Capital Trust Fund, operating

as a fund of funds, has invested in five

venture capital and private equity funds

since 2006. These funds, known as

Venture Capital Finance Companies

(“VCFCs”), are engaged in providing

equity, quasi-equity, and debt capital to

SMEs who qualify under Clause 28 of the

Venture capital Trust Fund Act 680. As part of its mandate, VCTF conducts an

assessment of the impact of all investments by its partnership VCFCs throughout the

investment period. The Trust Fund monitors the development of jobs created, annual

revenue, net income, taxes, distribution channels, value addition, import substitution,

export activity, production volumes, and other key performance indicators pertinent to

investee companies to ascertain the broader financial and economic impact of its

investments on an annual basis. Below is the report of the Trust Fund’s activities for

the 2010 financial year:

Overview of Venture Capital Finance Companies

With increasing awareness of venture financing options, the VCFCs recorded a total of

142 new applications in 2010 of which 8 were approved and have since graduated into

portfolio companies.

The accumulated number of applications since 2006, increased to 696 in 2010, out of

which about 60% came from the Greater Accra region. The services sector accounted

for the largest number of applications at 44.7% of total applications received followed

by Agricultural Sector at 35.6% and Industry at 19.7%.

As of the end of the reporting period, the VCFCs had disbursed a total of GH¢19.9

million to portfolio companies. This amount represents 86.6% of total funds

committed to the 39 portfolio companies. The fund managers continue to evaluate

new applications to increase the size of their portfolios. However, emphasis has been

placed on diversifying portfolios away from the heavy concentration of start-ups. The


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following table provides a brief overview of the VCFCs as of the end of the reporting

period.

The Trust Fund has chalked a measure of success in establishing five Venture Capital

Funds that provide financial assistance to SMEs. In accordance with its mandates, the

Trust Fund has taking steps to refine the operations of the nascent Venture Capital

Industry to align with international best practices.

In line with this, the Trust Fund initiated the process of restructuring its funds under

management to ensure efficiency and effective implementation of policy. The first

phase of this exercise was successfully completed during the third quarter of 2010.

The Trust Fund as part of its capacity building mandate has set aside a GH¢2 million TA

fund to provide business support services to investee companies. In 2010, VCTF spent

GH¢37,000 providing Technical Assistance for investee companies.

Operations of Venture Capital Finance Companies

I am pleased to announce that the Gold Venture Fund, which had remained dormant

since 2006, appointed a new Fund Manager, Boulders Advisors in April 2010. The new

Fund Manager has successfully invested in three companies before the close of the

year. During the year, the VCFCs invested an additional GH¢2.5 million in eight new

portfolio companies which increased the total amount invested by the VCFCs to a total

of GH¢23 million. Fund Managers continue to evaluate numerous proposals to

expand their portfolios as they remain, largely, within their respective investment

period.

Portfolio Reporting

Distribution of Investments

The following charts provide details of investments distributions by invested amounts

and by number of investments:

Activity Bedrock FFEF II Gold Ebankese Total

Total # of Investments 18 11 7 3 - 39

Sub Total Amount Invested (GH¢) 5,301,153 3,342,905 - 1,150,000 - 9,794,058

Sub Total Amount Invested (USD) - - 9,200,000 - - 9,200,000

GHS/USD Exchange Rate* 1.44 1.44 1.44 1.44 1.44 N/A

Total Amount Invested (GH¢) 5,301,153 3,342,905 13,248,000 1,150,000 - 23,042,058

% Commited Capital Invested 36.8% 23.2% 39.7% 20.0% 0.0%

Total Amount Disbursed 3,126,644 2,951,682 13,208,671 620,000 - 19,906,996

VCFC Overview


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Regional Distribution of Investments by Number of Investments and Amount Invested

60.4%

38.3%

1.3%

VC Amount Invested by Stage

Start-up Capital

Growth/Expansion

Buy-out

46.2%

51.3%

2.6%

VC Number of Investments by Stage

Start-up Capital

Growth/Expansion

Buy-out


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Venture Capital Finance Companies & Fund Managers

Economic Impact of Portfolio Companies

Agro Processing

Animal Farming

Aquaculture

Beverage Manufacturing

Education

Health Care

ICT

Manufacturing

MicroFinance

Pharmaceutical Manufacturing

Real Estate

Savings and Loans

Tourism

Waste Management

15.6%

1.2%

1.6%

2.1%

3.6%

21.1%

9.8%

9.0%

0.0%

14.3%

9.4%

7.5%

2.2%

2.7%

Distribution OF Invested Funds Per Industry

Activity

Venture

Finance

Company Ltd.

Bedrock VCF

Company Ltd.

Fidelity

Equity Fund

II Ltd.

Gold Venture

Capital

Limited

Ebankese

Fund

Limited

Fund Size

(GH¢ms) 10 10 23.2 4.0 12.5

Date

Established 2006 2007 2007 2007 2009

Fund

Manager

Black Star

Advisors

SIC-Financial

Services

Fidelity

Capital

Partners N/A

Oasis

Capital

Focus Generalist Generalist Generalist Generalist Real Estate

Investment

Partners GCB, ADB

SIC

Insurance,

NIB

European

Partners,

SSNIT,

Gold Coast

Securities Ltd.

HFC Bank,

GUA,WDBI

Ltd, Oasis

Capital


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The Trust Fund has a double bottom-line approach to evaluating the performance of its

funds under management. This approach combines the pursuit of both profit and

developmental goals to achieve the objectives of the Trust Fund Act. On one hand,

Fund Managers must invest shrewdly and generate returns; on the other they must

facilitate the economic development of the country. The broad objectives of VCTF as

specified in ACT 680 is to provide necessary financial resources to support growth

within the SME sub-sector , which is considered as the engine of growth for the

Ghanaian economy. It is anticipated that growth within the SME sector will translate

into job and wealth creation for Ghanaians. In view of this fact, VCTF continues to

assess portfolio companies to ascertain the economic impact of its investments in line

with its mandates.

The following are some key highlights from the assessment for the year end 2010:

A total of 819 direct jobs have been created by the investments in the 39 portfolio

companies. Although not easily assessable, ancillary jobs resulting from the

increased activity from the investee companies and employment emanating from the

trickledown effect of improved demand for inputs, including raw materials and

human capital, is estimated to be in excess of 1,500.

Job Creation From Portfolio Companies

Aggregate post investment revenue amounts to GH¢7.6 million from pre-investment

revenue of GH¢5.3 million. The intervention of VCFCs have enabled portfolio

0

100

200

300

400

500

600

700

800

900

Activity Bedrock FFEF II** Total

287209

323

819

Jobs Created By VCFCs


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companies increase their annual revenue by an annual growth of 111.2%.

Asset growth, which mainly reflects changes in capital expenditures, reached an

average of 105.9% for all portfolio companies. Such capital assets have been

purchased from both local and foreign suppliers thereby bringing direct revenue to

dealers or indirect import taxes to the government. Additionally, booming

production of investee companies translates into increased productivity for

integrated industries and companies offering products and services to the portfolio

companies. Although difficult to measure, this growth culminates into increased

revenue and employment creation.

Through the active support provided the various investee companies, production

volumes as measured in various units have risen by an average rate of 24% after

investments,

Government tax revenue resulting from the 39 portfolio companies increased by an

average rate of 264.5% per annum after the venture financing intervention. Tax

revenues have increased from about GH¢264,244 per year before investments to

GH¢548,836 per year after investments. It should also be noted that several

portfolio companies, being start-ups, continue to declare net pre-tax losses, while

others operating within the construction and agro-based industries are enjoying

targeted sector-specific or location-based tax breaks. Therefore, the tax revenue

0.0%

200.0%

400.0%

600.0%

800.0%

1000.0%

1200.0%

Activity Bedrock FFEF II Gold Ebankese Total/

Average

Key Growth Rates

Average Revenue Growth (%) Average Growth in Assets (%)

Average Growth in Taxes (%) Average Growth in Customer Base


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could be a lot higher when such companies begin to pay taxes either by way

increasing earnings or by the expiration of tax incentives.

The intervention of VCFCs has also enabled various SMEs to expand their customer

base. Total customer base for all 39 portfolio companies more than doubled from

14,080 before investments to 29,268 after investments, representing a 52.9%

growth. This have also helped to increase accessibility to products such as banking

services, microfinance, quality drinking water, quality pharmaceutical products, and

healthcare services etc. to the Ghanaian population.

-

100,000

200,000

300,000

400,000

500,000

600,000

Activity Bedrock FFEF II Gold Ebankese Total/Average

Growth in Government Tax Revenue

Aggregate Taxes Post Investment (GH¢) Aggregate Taxes Pre Investment (GH¢)


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The Special Purpose Vehicle (SPV) Financing Scheme

Over the years, Ghana’s dependence on foreign agricultural produce to support local

processing companies has been of great concern. In the anticipation of further food

crises, this situation calls for urgent attention in a bid to improve Ghana’s food security.

In recognizing this, VCTF identified the need to invest in agricultural commodities

through value chain financing approach.

In the year under review the Trust Fund reduced its funding to Sorghum due to the

stock levels at the warehouses across the three northern regions. The sole bulk buyer

was reluctant to buy due to reasons undisclosed to the parties. The drastic drop in

barley (which is a good substitute) price at commodity futures accounted for poor

market for local produce. However the prospect for Soybean was bright. The Fund in its

pilot phase invested GHS 0.436 million in the production of certified seed and grain

production as well as post harvest activities.

-

5,000

10,000

15,000

20,000

25,000

30,000

Activity Bedrock FFEF II Gold Ebankese Total/Average

Growth in Customer Base of Investee Companies

Number of Customers Post Investment Number of Customers Pre Investment


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To date, the Trust Fund in collaboration with partners has committed about GHS4.07

million in Soybean and Sorghum value chain activities. Despite numerous challenges

confronting the sector, significant achievements have been made which have positively

impacted on farmers in particular and the economy in general. To date, estimated

8000 smallholder farmers have been integrated in the global supply chain in the local

industries with ready-made market for their produce.

An estimated 12,600 metric tons (valued at GHS7.4 million) have been produced out

of which 6,600 metric tons (valued at GHS4.6 million, approx. $3.3 million which

otherwise had been imported) have been sold to industries.

An estimated 1400 jobs (full time equivalent-FTE) have been created in the

participating communities and farmer-base organizations (FBOs). Additionally, over

GHS45,400 have been paid to communities and districts as local council tax.

In the years ahead particularly 2011, the Trust Fund will focus on expansion in its

commodity value chain activities. Emphasis will be placed on new initiatives such as

yellow maize financing to support the poultry and livestock industry. In future,

Vegetable sector will receive priority intervention in agro-ecological regions with more

comparative advantages.

Discussion is on-going with key players in the agricultural sector including Ministry of

Food & Agriculture (MoFA), Commodity Brokers including National Food Buffer Stock

Company (NAFCO) for possible collaboration in moving commodity value chain

development financing as an anchor for agro-processing industry sector in Ghana.

The Trust Fund will work closely with the National Food Buffer Stock Company (NAFCO)

to leverage technical resources as well as market opportunities to augment the existing

market outlets. We will focus more on production and post harvest financing whereas

NAFCO will provide assured market.


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Indicator

Total Credit Disbursed (GHS) GHS4.07 Million

Number of Farmers Reached 8000

Agricultural Goods Produced (MT) 12,600 MT

Sales Through Industrial Outlet (MT) 6,600 MT

Gross Income to Farmers (GHS) GHS 7.4 Million

Employment Creation (FTE) 1,402

Value of Import Substituted (US$) US$3.3 Million

Tax-Local Councils (GHS) GHS45,423

Technical Assistance/EMCB

In pursuit of our mandate to develop and promote a thriving venture capital industry in

Ghana, we provide training Programs, Seminars, Workshops and Conferences both local

and overseas to develop various capacities and skill sets needed to drive the venture

capital industry. This core function is facilitated through our Technical Assistance (TA)

Program and is supported by the Economic Management Capacity Building (EMCB)

Project under the Financial Sector Reform.

In 2010, the Trust Fund liaised with EMCB Secretariat to achieve the following results:

Conducted a training program for investee companies. Over 30 employees

and Owner/Managers were trained

Organized an In-house-Training course on valuation for industry

professionals. More than 25 venture capital industry professionals were

trained

Public Awareness Programs

During 2010, VCTF embarked on a series of public awareness campaigns to increase

visibility for the venture financing options available from the various VCFCs. These

campaigns included radio, TV, and print advertising and a countrywide Road show

across all the ten regions of Ghana.

To sustain this public education, production of a documentary is underway to educate

the public on the activities of the Trust Fund.


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Information & Communication Technology (ICT)

The Trust Fund’s ICT systems were also upgraded with new hardware and software.

Servers and computers were also furnished with Microsoft updates, security patches

and antivirus programs to protect them from all forms of malware. The network was

monitored to ensure that no intrusions were made.

Discussion is on-going to purchase and install an ERP system to take care of the needs

of the Trust Fund.

Human Resource (HR) & General Office Matters

In 2010, a new recruitment process was initiated to recruit professionals with expertise

in private equity and venture capital investments, to buttress the existing staff for a

more robust operating performance in 2011.

Specifically, five (5) new staff joined the services of the Trust Fund to take it to the next

height.

Outlook for 2011

Resources continue to be our main challenge. We seek both financial and human

resources which are the critical factors to drive the Venture Capital industry to a

sustainable level where opportunities for equity and quasi equity funding become easily

available to our SME sub-sector.

Sustainable Funding

In the coming year, the Trust Fund will leverage its new capital injection from the

Government with funds from both foreign investors and local financial institutions to

establish a new fund. We will continue to work closely with Government to secure a

permanent source of funding for the Trust Fund.

VCTF recognizes the need to compliment Government’s efforts toward supporting SMEs

and will continue to secure additional funding through our flagship PPP model. Our

objective is to increase the total pool of funds available for SME investments to exceed

US$100 million.

An “Investor Learning Journey” to attract both foreign and local strategic investors will

be organized during the coming year as support for our fund raising efforts. The Trust

Fund will also launch its Angel Investor Fund aimed at attracting high net-worth

individuals as “Business Angels” to invest in SME sub-sector.


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Venture Capital Finance Companies

Fund Managers and portfolio companies will continue to be supported through capacity

building and TA programs. Monitoring efforts will also be intensified to ensure high

performance from Fund Managers and portfolio companies. Additionally, the Trust

Fund shall conduct a thorough review of all portfolio companies to assess the impact of

investments and also identify areas that require further support.

Industry Programs

In line with achieving its mandate, VCTF will establish and deepen relations with various

professional bodies such as the Ghana Banker’s Association, Association of Ghanaian

Industries, Ghana Bar Association, and Private Enterprise Foundation as stakeholders

and third-party service providers in the development of the Venture Capital industry.

Additionally, the Trust Fund will establish Venture Capital SME round tables in all

regions to enable portfolio companies and potential entrepreneurs network and

exchange ideas. These networks will also serve as a market linkage platform where

entrepreneurs can also explore business development and marketing opportunities.

To further develop into large businesses, Fund Managers will be encouraged and

supported to explore opportunities to raise public capital through listing on public

markets or on alternative markets that may be created to cater to SMEs.

The Trust Fund, in 2011, will also intensify its public awareness campaign to educate

SMEs on the benefits of equity investments and to attract more funds from local

financial institutions.

I am very grateful to the Board of Trustees, Management colleagues, Staff and all

stakeholders for performing at a higher level to enable the Trust Fund achieve a greater

percentage of its targets for the year ended December 31, 2010.

Thank you.


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FINANCIAL STATEMENTS

FOR THE YEAR ENDED 31ST DECEMBER 2010

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