Investment Clubs: The Alternative Funding Source for SMEs

By Uganda Investment Authority

An investment club is a group of less than 100 people who pool their money to invest in ventures they deem profitable. Usually, investment clubs are organized as partnerships and, after the members study different investments, the group decides to buy or sell based on a majority vote of the members.  Investment clubs a great networking opportunities, which provide members a platform to learn more about markets, running a business etc. The club meetings and working with people who have similar interests fosters the development of group relationships and member’s personal and social skills.

With the unequal distribution of wealth and income in Africa, investment groups are increasingly providing equal opportunities to financial freedom through collective schemes. The creation of rural investment clubs can offer communities a safe and supportive environment to learn the basics of investing and financial literacy. It also enables them to invest in agro supplies and products as a community and take advantage of economies of scale brought about by bulk buying.

Ugandans are very entrepreneurial people. Last year (2015), Uganda was named as the most entrepreneurial country in the world in a report by B2B Marketplace Approved Index. This was the second time running! In 2003, the Global Entrepreneurship Monitor, sponsored by the World Bank, published a study that ranked Uganda the most entrepreneurial country in the world. However their startups find it quite difficult to take off and be sustainable due to the high cost of capital which in turn leads to high cost of doing business. Investment clubs therefore provide an alternative and cheap source of domestic funding for projects compared to commercial banks and other sources of finance. It is important to note that some investment opportunities are presented in the form of social enterprises, which not only help to impact and build a better Uganda but also give the clubs a good return on investment at the same time.

Considering the high cost of capital, it’s imperative to explore alternative sources of finance. Although private equity is a relatively new investment financial model in East Africa (Uganda emerging as the second most active country after Kenya), it presents a lease of life to the SME sector. The investment clubs can be a good source of investment funds to established SMEs that want to expand through capitalization. The clubs can offer short, medium to long term financing to SMEs with growth potential, and seek high returns on their capital then exit after achieving their required return. Most of the investment clubs would not only provide capital but would also act as a partner to provide strategic and operational support due to their diverse background.

Investment clubs can bring in customers using their vast network and contacts, assist in advising on a management framework which can improve marketing and human resource management, improve new product development and provide technology support which is generally sorely missing in any SME due to inaccessibility.

The Investment Club Association of Uganda (ICAU) is one such club that meets to discuss challenges, opportunities and share any investment prospect which encourages cooperation amongst members to invest in sound and meaningful investments that directly contribute to employment. There is no minimum cap on investment and SMEs can get as low as $10,000 for their business unlike most private equity and  venture capital firms which have a 1 million dollar minimum cap for investment.

It is important for SMEs to be prepared to give up part of their shareholdings in the company and present a technological, creative and competitive advantage to the investment clubs with a strong financial record to support their pitch. The SMEs should have a trained and knowledgeable team to run the business with defined targets and should operate in a growing sector.

Investment clubs are a sociable way to do your investing, they are a great way to brainstorm ideas and share knowledge, and they can also be good for your wallet. However,  as with any enterprise that mixes friends and money,  it’s important that everyone understands the ground rules before you start. That means making sure members are in it for the same reason, that they agree on the investing strategy and objectives, that there are no personality clashes and that you have a competent treasurer to manage the accounts and produce statements.

If you get these elements right, your club has every chance of thriving as a unit.

Peter Mulira Jr

pmulira@ugandainvest.go.ug