The onset of Covid-19, about 18 months ago, has led to vulnerability on the part of some enterprises. Now, Development Bank of Namibia (DBN) CEO Martin Inkumbi suggests that one solution can be found in equity finance through a national equity fund for qualifying enterprises currently experiencing headwinds but with potential for future growth prospects.
Advancing additional loans to borrowers – even as temporary relief measures – is not always a solution that works for all struggling businesses impacted by Covid-19. The financial sector has deployed a raft of measures to reduce enterprise vulnerability due to Covid-19. These include, among others, repayment holidays, grace periods, additional finance for operational costs and extension of repayment periods to offset the monthly cost of interest to the enterprise.
These measures are only effective when the depressed economic cycle lasted for a short period of six to 12 months. In the case of a protracted depressed economic cycle that we are seeing now, these measures are proving ineffective, if not detrimental to the long-term sustainability of enterprises.
Inkumbi feels a national equity fund would add to the financing toolkit, provided the equity investments or debt to equity conversions are made on pure business and economic merit, and on the potential viability and recovery of an enterprise. This requirement is paramount.
Ideally, this equity finance vehicle, said Inkumbi, should not be taking a permanent shareholding but should enable the original shareholders to repurchase their shareholding as the enterprise recovers and grows, or to onboard new shareholders depending on the preferences of the existing shareholders.
Inkumbi added that the arrangement should allow the national equity fund to intervene or recommend managerial and/or operational methods to strengthen governance and improve business growth. However, he stated, the ideal will be to allow existing enterprise shareholders the independence to manage their business and turn it around through their own business acumen, learnings and experience.
On the topic of capitalising an equity fund, Inkumbi said the requirement will be substantial, and suggests the pooling of funds in a national vehicle. He continued that if such a National Equity Fund is capitalised with borrowed funds, e.g. private sector bonds issued to capitalise the fund, and repaid by taxpayers over time, this will be in exchange for equity in Namibian companies that will continue to grow in value over time.
The important and imminent benefit of a national equity fund intervention, however, Imkumbi explained, is saving Namibian enterprises from collapsing during the current depressed economic cycle, preserving current and future employment and sustaining economic growth.
Inkumbi added that over the last 18 months, four broad categories of borrowers are notable in the DBN portfolio.
The first category consists of borrowers who experienced headwinds prior to the onset of Covid-19 due to the economic slowdowns. These borrowers had their challenges compounded by the onset of Covid-19.
The challenges included stiff competition, lack of demand, unaligned operating costs and price structures as well as poor business management. These borrowers have generally been facing a downhill and imminent foreclosure, and it is normal and acceptable that an unviable business will close down. Only good business is good for development.
The second category consists of borrowers who were similarly challenged but were able to service their debts, albeit remaining persistently in arrears on their repayments.
The third category consists of borrowers who were successful and were able to service their debts, but were challenged by the onset of Covid-19 lockdowns, which hampered business activities and revenues.
The final category consists of those enterprises who benefit from inelastic, constant demand and turnover despite Covid-19. These enterprises typically benefit from contracts and/or tenders.
Inkumbi points to the second and third categories of enterprises as being the most likely beneficiaries of a national equity fund.
“The recovery will not be instant but that in the medium to long-term, Namibia and its enterprises can emerge into a period of growth, provided that their economic capacity is preserved. The medium-term vision of equity finance will potentially accelerate the outcome… Although the economic waters are choppy, with all hands on deck, the vessel can make progress with equity finance,” Inkumbi concluded.