Venturing Forth: Private Equity Funds in Namibia

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Venturing Forth Private Equity Funds in Namibia

• By Robin Sherbourne
• Director of the Institute for Public Policy
  Research
• 14 May 2003

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Private Equity Funds

• What are they?
• Why do we need them?
• How have they performed elsewhere?
• What lessons have been learned?
• How will Namibia benefit from them?
• How can policy help?
• Key questions

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What are they?

• Provide equity capital to enterprises not quoted
  on public stock exchanges
• Illiquid and long-term investments
• Clear exit strategies
• Captive vs independent funds
• Fees and carry

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Private Equity Investment Stages
Source SAVCA, 2002
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Why do we need them?

• Help transform ideas into businesses
• Banks may be risk averse
• Banks may be myopic
• New businesses may be too small
• Established companies may be hostile to
  innovation
• Entrepreneurs may need expertise as well as money

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How have they performed?

• The US experience (The Economist)
• Recovering from bubble of late 1990s
• As much venture capital raised in 2 years as in
  previous 20
• People with bright ideas garage venture
  capital world beating company
• Everyone wanted to be next Cisco or Amazon
• New economy and stock market boom
• US accounted for three-quarters of global total

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How have they performed?

• The US experience (The Economist)
• More money than deals (undeployed venture capital
  of US45 billion in 2002)
• Venture capital now spending time trying to
  salvage start-ups rather than seeking new targets
• Bad time to exit good time to buy into new
  projects
• In 1999 venture capital funds generated an IRR of
  150
• 22.3 over 5 years 22.7 over 10 years

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How have they performed?

• Its nice to be back in an era when the venture
  capitalists are only nominees for best supporting
  actor instead of best actor. Entrepreneurs should
  be centre stage.

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How have they performed?

• Experience in SA (Source SAVCA)
• Total funds under management R33.1 billion
• Private equity 4.2 of GDP
• Total investment professionals 319
• Captive funds of banks, government and aid
  agencies
• Independents becoming more important

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How have they performed?

• Drop off in third party funds raised but early
  stage funding increased
• Reluctance of insurance companies and pension
  funds to allow investment due to valuation
  problems and lack of liquidity
• High proportion (19) in manufacturing
• Low number and value of exits
• Trade sales rather than IPOs

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How have they performed?
Source SAVCA, 2002
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What lessons have been learned?

• Limited but important niche
• Even in boom venture capital only small slice of
  total business investment (US56 billion out of
  US1.2 trillion)
• Importance of angels (twice as much as
  traditional venture capital funds), endowments
  and charitable foundations
• Long-term returns (5 to 10 years)
• New asset class for fund managers
• Tension between entrepreneurs and funds

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What lessons have been learned?

• Venture capital doesnt work magic in isolation
• Macroeconomic stability
• Labour markets
• Entrepreneurial culture which embraces the longer
  term, stock options and is not afraid of failure

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How will Namibia benefit from them?

• Fills risk finance gap in institutions
• Helps important sector of economy
• Promotes entrepreneurship
• Provides money and expertise
• Stimulates innovation (low level of patents)
• Necessarily limited but potentially significant
  deal flow
• Provides new asset class for asset managers
• Feeds the NSX over the longer term
• Develops skilled venture capital professionals

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How can policy help?

• Create long-term economic environment not quick
  buck economy
• Relationship with Namibia Development Bank
• Links to government start-ups
• Links to RD
• Tax policy
• Local asset requirements
• Labour market policies
• Intellectual property rights
• Promote entrepreneurship

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Key questions

• Is there demand? Entrepreneurs? Deal flow?
• Is there supply? Appetite for risk?
• What will be focus venture capital, buy-outs?
• What will be focus mining, manufacturing,
  services, exports?
• What will be exit strategy? NSX?