Private equity investment is set to reshape the landscape of Namibian business over the next five to ten years. Private equity is a broad term which commonly refers to any type of non-public ownership of equity or securities that are not listed on a public exchange. Since they are not listed on a public exchange, any investor wishing to sell private equity must find a buyer in the absence of a public market place.
Private equity funds raise money from investors, both institutional and private, and use it to buy equity in private companies. They focus on creating value within these companies over a three to seven-year period, after which they sell their stake in the company and return the profits to investors. Private equity firms generally receive a return on their investment through one of four ways: an initial public offering (IPO) on a stock exchange, the sale or merger of the company they control, a re-capitalisation or by selling it directly to investors. Private equity firms have the potential to outperform traditional asset classes over the long term and offer diversification for investors through their low correlation with other asset classes.
The environment is now right for us to see the emergence of full-blown private equity investment in Namibia, as was the case for conventional asset management towards the end of the 90’s. Namfisa, Namibia’s non-banking financial services regulator, has approved and licensed more than ten unlisted investment managers and the same number of special purpose vehicles over the last few months. Many of these special purpose vehicles have been set up as private equity funds and are busy fundraising. With the requirement for all Namibian retirement funds and insurers to comply with Regulation 28 and Regulation 29 by the end of September 2015, more than N$4 billion is expected to be allocated for unlisted investments, a portion of which will be allocated to the private equity funds.
Small and medium size companies, including family owned businesses, which are finding it difficult to access capital will be relieved with the arrival of private equity as more financing will be available.
The latest Riscura Private Equity Performance Survey for the first quarter of 2015 gives good reason for more pension fund trustees to take note of the asset class regardless of the regulations. South African private equity yielded a 10-year return of 20.5 percent to March 2015, outperforming the JSE-All Share Index. The private equity and venture capital industry in South Africa now represents more than N$170 billion in assets under management, having expanded over 11 percent since 1990.
Private equity firms have pioneered efficiency-enhancing innovations that are now standard business practice: a focus on cash flow; the better use of debt; and incentive bonuses as a way of offering incentives to managers to act more in the interest of shareholders and deliver quality services to customers. They often seem to provide better corporate governance than is generally found at many public businesses whose shareholders usually own too small a stake to keep management in line. They also have the potential to help badly run businesses – public and private – taking neglected non-core businesses off their hands, polishing them and finding more suitable owners.
Private equity deal-making will thus be transformational, assuming funds are allocated to managers with the necessary skill and capacity. Bankers and economists often refer to private equity as a ‘lubricant’ and catalyst for the local economy. The efficiency gains for the Namibian economy could be huge. These firms have the potential of spreading cutting-edge business practice to nascent and fledgling economies and businesses. A new industry is about to borne for Namibian investors.
- Johannes !Gawaxab is the Executive Chairman of Namibia’s Eos Capital.