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SME Growth Through ‘Patient Capital’ and Blended Finance: Key to South Africa's Economic Recovery

Small and medium enterprises (SMEs) can play a pivotal role in South Africa's economic recovery, however, funding for SMEs should be regarded as ‘patient capital’. There is an opportunity to help unlock these businesses’ well-documented potential and boost SA’s growth, but investors will need to be in it for the long term.

SMEs form the bedrock of many developing economies. The World Bank reports that SMEs contribute over 35% of GDP in many emerging markets. And according to South Africa's National Development Plan, SMEs have extraordinary growth potential. It is projected that by 2030, SMEs will be responsible for 60% to 80% of GDP growth and the creation of 90% of the anticipated 11 million new jobs. However, these smaller ventures encounter multifaceted funding obstacles.

South Africa’s ‘missing middle’ includes SMEs that have depleted their own capital reserves and are struggling to raise capital from traditional financiers. Vukile Themba-Mketo, Portfolio Manager at Sanlam Investments, says a comprehensive blend of financial solutions spanning direct lending and blended finance approaches, with a long-term view, is needed to provide the essential "patient capital" needed for this sector's growth.

"Direct lending, where non-banking lenders extend credit directly to businesses, presents a growing funding opportunity for SMEs. However, an ongoing theme is the need for this capital to be ‘patiently’ provided. We need to offer SMEs longer-term funding that allows them the time and flexibility for sustainable growth and meaningful expansion.”

She says a wider range of funding instruments, with different levels of risk tolerance and combining debt, equity and grant funding, are among the blended funding solutions needed to support the sector.

Themba-Mketo says, "Harnessing the power of blended finance, often a combination of public and private sector capital, holds the potential to significantly advance the United Nations' Sustainable Development Goals (SDGs) while catalysing SME growth."

Partnerships and collaborations with various stakeholders committed to growing the SME sector stands are also critical components to success.

Sanlam Investments, in collaboration with Mettle, has recently committed a R100 million debt facility targeting micro and small fibre contractors. This facility will be channelled through Enable Capital, a provider of working capital to fibre industry contractors. The investment, which was led by Sedick Abrahams of the Sanlam Investments team, is a strong example of such a collaboration.

Access to fibre internet connectivity delivers numerous positive benefits to society and economies, from job creation and small business growth to enhanced education and skills development. This collaboration with Mettle helps Enable Capital to ensure fibre companies have the working capital to continue installations.

Themba-Mketo says the primary impact of this collaboration would be job creation and preservation. “Access to good-quality fibre infrastructure not only generates wealth within communities. It also offers superior quality and lower costs than traditional data services, enhancing accessibility. This transaction will help a number of subcontractors create employment opportunities and foster economic growth.

"Our commitment at Sanlam Investments to driving sustainable economic growth is demonstrated by our support for Enable Capital, which will help to grow a vital element of small business success: access to affordable internet connectivity,” she says.

“By offering finance solutions and support that actually match the needs of small businesses, we can make a meaningful difference in the SME market and ultimately create the jobs that our economy so desperately needs,” Themba-Mketo concludes.

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