Venturing Forth: Private Equity Funds in Namibia By Robin Sherbourne Director of the Institute for Public Policy Research 14 May 2003

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

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”

Private Equity Investment Stages Venture CapitalSeed Capital Start-up and Early Stage Development CapitalExpansion and Development Buy-outManagement Buy-out or Buy-in Replacement Capital Source: SAVCA, 2002

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

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

How have they performed? The US experience (The Economist): More money than deals (undeployed venture capital of US$45 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

How have they performed? “It’s 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.”

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

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

How have they performed? For 2000Total gross IRR since fund inception Realised gross IRR since fund inception Number of funds reporting 1410 IRR below 15%42 IRR between 15% and 40% 41 IRR above 40%67 Source: SAVCA, 2002

What lessons have been learned? Limited but important niche Even in boom venture capital only small slice of total business investment (US$56 billion out of US$1.2 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

What lessons have been learned? Venture capital doesn’t work magic in isolation Macroeconomic stability Labour markets Entrepreneurial culture which embraces the longer term, stock options and is not afraid of failure

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

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 R&D Tax policy Local asset requirements Labour market policies Intellectual property rights Promote entrepreneurship

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?