Analyzing Small and Medium Enterprises’ Perception towards Private Equity as an Alternative Source of Finance in Lusaka District

Abstract

As guided by the Capital Structure theory, in order to obtain external financing, SMEs may either select debt type of financing or equity type of financing. Since the typical SME cannot meet the requirements to be listed on the Lusaka Stock Exchange, Private Equity remains an attainable source of finance for SMEs who do not want to be financed with debt. This study aimed to analyse the perceptual preference of private equity as an alternative source of financing for SMEs. To meet this objective, an assessment was conducted on the preference of Private Equity to Debt finance. Further, the perception of SMEs towards private equity was explored and themes that influenced the various perception were investigated. A qualitative study was undertaken to meet the above-mentioned objectives. The study employed a grounded theory approach and interviews were used as the primary data collection tool. Fifty-five (55) SMEs who hold accounts with Zambia Industrial Commercial Bank under the Wholesale and Retail trade industrial sector were interviewed and a purposive sampling method was used. From the interviews conducted, the emerging theme was SMEs preferred private equity finance to debt finance mainly in cases where the SMEs interviewed were faced with economic uncertainty, limited collateral, intended to grow quickly, and required technical assistance. However, loss of control, lack of a legal framework and unavailability of Private Equity firms in Lusaka hindered SMEs from utilizing this type of financing. This finding is derived from SMEs preference to Private Equity over debt finance and a largely positive perception SMEs have towards Private Equity finance. Negative perceptions of Private Equity were also noted. This study, therefore, went further to analyse both the factors that influence positive and negative perceptions. These factors included technical assistance, loss of control, payment mechanisms, and duration of the financing methods. The conclusion drawn from this study is that Private Equity is preferred to debt finance because of the lack of high-interest rates and collateral requirements for Private Equity. This study also concludes that there are mainly positive attributes to private equity, though negative perceptions also exist. Loss of control, decision-making concerns, technical assistance, lack of availability of this type of finance, repayment mechanisms, and non-requirement of collateral were noted as factors that were attributed to the conflicting perceptions of SMEs towards Private Equity. Due to this situation, it is recommended that Financial Services Providers take a keen interest in this mode of financing as there is a potential market in this field. Additionally, it is recommended that researchers may focus on conducting a feasibility study to extend the mandate of firms that have been historically providing debt to also include Private Equity Finance for SMEs. Lastly, it is proposed that studies are carried out to assess the legal landscape of Private Equity in Zambia. KEYWORDS: