How Private Equity Investments Can Boost Job Growth

Research shows that only a fraction of SMEs really have the potential to create substantial growth, and therefore jobs. But partner such businesses with the right skills from private investors, and you create an engine for growth.

- Tanya Van Lill

Job creation is the mantra in South Africa currently. Moody’s is the most recent international observer to single out unemployment as a key challenge, stemming from slow growth, particularly among young people. The ratings agency warned again that deep inequalities contribute to tensions that feed into political risk and hamper the progress of reforms that would unlock economic potential.

The World Bank, in a working paper by Ruchira Kumar, singles out small and medium-sized enterprises (SMEs) as the flywheel inside the engine of job creation in developing markets such as South Africa. The challenge, however, is that the SME sector is heterogeneous. A large percentage of SMEs is small, and comprises of tiny workshops, service providers and craftsman enterprises. These small enterprises are essentially reluctant entrepreneurs who do not have access to wage income and are often in survival mode.

Only a small fraction of SMEs – about 5% to 10% – have the potential to grow and become more productive if their constraints are eased, according to the World Bank. However, these “high-growth” or “transformational” SMEs or gazelles account for a significant percentage of job creation in developing countries; as much as 25% of SME employment, and 40% to 45% of new employment, according to a 2015 report by the International Labour Organization.

A five-year study by Global Entrepreneurship Monitor found that while high-growth SMEs only accounted for 4% of jobs, they generated 38% of all jobs. The questions for SA is: How do we identify the high growth gazelles and support them with the funding appropriate to their sector, business model and stage of development while unblocking constraints to growth (be it access to new markets or technological barriers)?