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  • Conducted by Robin Sherbourne

    Commissioned by Business Financial Solutions Supported by GIZ and Bank Windhoek

    Assessing market demand for

    Private Equity and Venture Capital

    initiative for emerging

    Small- and Medium- Sized Enterprises

    in Namibia

  • CONTENTS WHY THE RESEARCH? 4

    WHY THE FOCUS ON THE SME SECTOR? 4

    1. PROLOGUE 5

    2. KEY FINDINGS 6

    3. FUNDAMENTAL CHARACTERISTICS OF PRIVATE EQUITY (PE) AND VENTURE CAPITAL (VC) FUNDS 7

    4. IMPACT OF PE / VC ON THE ECONOMY 7

    5. HISTORY OF PRIVATE EQUITY FINANCE IN NAMIBIA 8

    6. ACTIVE LOCAL PROVIDERS OF PE / VC FINANCE 9

    7. PRIVATE EQUITY FUND MODELS APPLIED IN NAMIBIA 11

    8. NAMIBIAN POLICY ENVIRONMENT FOR PRIVATE EQUITY 14

    9. EXIT OPTIONS 15

    10. PROFILES OF SURVEYED COMPANIES 18

    11. SURVEY FINDINGS 21

    WHERE TO FROM HERE? 30

  • Business Financial Solutions (BFS) is a Namibian Financial Advisory and Asset Management firm with a special focus on the SME sector. BFS product offering comprises Venture Capital Finance, Public and Private Corporate Advisory Services, Investment Facilitation and SME Enabling Services. In servicing the SME market, BFS aims to roll out various financial solutions that meet the needs of high-potential but under-developed SMEs and in so doing becomes the investment partner of choice for investors in alternative asset classes and investees seeking to maximise their growth potential. In its quest to deliver relevant financial solutions, Business Financial Solutions has commissioned the study to assess market demand for Private Equity and Venture Capital finance and establish the market conditions in Namibia.

    True to its catalytic role for supporting Private Sector development, Deutsche Gesellschaft für Internationale Zusammenarbeit (GIZ) on behalf of the Federal Ministry for Economic Cooperation

    and Development undertook to co-finance the study through its Public Private Partnership (PPP) initiative with Namibian Employers Federation (NEF) and the Global Compact Network Namibia.

    Bank Windhoek as a key local financial player committed to contributing to the deepening of financial markets also co-funded the initiative to make this study a reality.

    RESEARCH APPROACH

    The study used both secondary and primary research methods.

    First, a desk review and expert interviews were conducted to investigate the policy and regulatory environment, the current market offering and existing Private Equity and Venture Capital models in Namibia.

    Secondly, a survey in which 100 businesses throughout the country were interviewed was conducted to assess the demand for Private Equity and Venture Capital for SMEs in Namibia.

    WHY THE FOCUS ON THE SME SECTOR? Opinion across the political spectrum in both developed and developing countries, places special emphasis on SMEs as “job creators” and “engines of the economy”.

    While it might look as if there is a huge potential for SME growth in Namibia, the actual growth potential may, in fact, only be limited to a very small number of innovative enterprises.

    It is therefore important for the country to identify appropriate financing models for SMEs to broaden our economic activity base.

    WHY THE RESEARCH?

    4

  • Assessing market demand for Private Equity and Venture Capital for emerging Small- and Medium-Sized Enterprises in Namibia

    1. PROLOGUE Whether it is to start a new business or to expand business activities, business owners have to weigh the optional funding avenues available to finance their business needs. Depending on the sophistication of the financial market, the range of funding options available can be fairly wide or very limiting. Typically, the key original sources of funding,‘friends, fools and family’ (FFF), are an obvious port of call. In well-developed markets, the options of conventional debt instruments, quasi debt, supplier finance, leasing, private equity, venture capital, development capital, business angels, bonds, commercial paper, grant funding for innovative and high risk initiatives fall within the bouquet of offerings available. However, in markets such as Namibia, apart from FFF and conventional debt, other forms of finance are either not available or in the infant stage and therefore not optimally used.

    Opinion in both developed and developing countries places special significance on the SME sector, considering SMEs pivotal to economies, driving innovation, creating jobs and contributing to the socio-economic well-being of economies.

    With the 2008 global financial crisis and the subsequent challenge of the European economies to recover, the role of the SME sector in both the developed and the developing world is even better highlighted. In Namibia, the SME sector is still to take up a more relevant stake towards economic contribution to improve its current contribution of 12% of GDP.

    For SMEs to generate the required growth, the question of access to finance needs to be addressed as a crucial factor (among others) to their growth. Recognising that enterprises require different kinds of funding at different stages of their development, the appropriateness of conventional debt finance for young enterprises prompted the study to investigate the need for private equity/venture capital for young enterprises.

    It is, however, important to recognise that it is not small businesses per se that are key to generating such growth, but rather a smaller subgroup of innovative startups which have high growth potential. The challenge for any private equity fund is to seek out these “SME needles in the SME haystack”, and for policy makers it is to come up with ways that allow entrepreneurs with ideas to easily start companies.

    The research findings documented below suggest that there are good grounds for assuming that a demand for such finance exists.

    Size is not the key.

    GROWTH POTENTIAL

    is.

    5

  • 2. KEY FINDINGS

    ACRONYMS BFS Business Financial Solutions

    BEE Black Economic Empowerment

    DFI Development Finance Institutions

    EFFCO Enterprise Fedha Finance Company

    GDP Gross Domestic Product

    GIZ Deutsche Gesellschaft für Internationale Zusammenarbeit

    IDC Industrial Development Cooperation of South Africa

    Most SMEs are optimistic about their growth prospects.

    A significant number of businesses achieved average annual returns in excess of 20%.

    Private Equity / Venture Capital is likely to bring the greatest results during the first 3 years of an enterprise’s existence.

    Access to and the cost of finance are significant challenges for small- and medium- sized businesses, hence the existence of an openness towards new shareholders who bring funding and skills.

    There is potential for and interest in private equity finance and venture capital.

    The amounts of capital required by medium-sized businesses are relatively small with the majority of businesses requiring N$10 million or less to finance their growth strategies.

    IFRS International Financial Reporting Standards

    IPO Initial Public Offering

    JSE Johannesburg Stock Exchange

    KCPIF Königstein Capital Property Investment Fund

    NEF Namibian Employment Federation

    NFSS Namibia Financial Sector Strategy

    NSX Namibian Stock Exchange

    PE Private Equity

    PPP Public Private Partnership

    PTY Proprietary

    VC Venture Capital

    SMEs Small and Medium Enterprises

    NSX Namibia Stock Exchange

    SOE State Owned Enterprise

    SPV Special Purpose Vehicle

    VPB Venture Partners Botswana

    6

  • Assessing market demand for Private Equity and Venture Capital for emerging Small- and Medium-Sized Enterprises in Namibia

    3. FUNDAMENTAL CHARACTERISTICS OF PRIVATE EQUITY (PE) AND VENTURE CAPITAL (VC) FUNDS Private equity and venture capital have achieved maturity as industries in only a small number of countries and have the following fundamental principles:

    • investing for long-term capital gains, not for short-term returns • back growth-oriented entrepreneurs • active investors • taking significant risk, investing on a “risk-adjusted” basis • depending for its success on “exits”, and • not a wholesale financial activity.

    4. IMPACT OF PE / VC ON THE ECONOMY There is immeasurable value in the demonstration effect which private equity- and venture capital-backed companies can provide in an economy, such as employment creation and promoting innovation. Indeed, almost by definition, successful venture capital-backed companies have the following attributes:

    They - • operate with a high degree of transparency • demonstrate the financial benefits of operating formally and transparently • operate according to high international standards of business practice • raise the standards of other businesses with which they deal by exhibiting high standards of

    business practice

    • occupy prominent places in their industries, and • encourage other potential entrepreneurs to undertake business creation or expansion.

    In addition to the powerful, positive demonstration effect produced by the behaviour of individual private equity- and venture capital-backed enterprises, a functioning private equity and venture c