Transcript Private Equity Funds in Namibia: Venturing Forth

Venturing Forth: Private Equity
Funds in Namibia
By Robin Sherbourne
Director of the Institute for Public
Policy Research
14 May 2003
Private Equity Funds
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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 Capital
Seed Capital
Start-up and Early Stage
Development Capital
Expansion and
Development
Buy-out
Management Buy-out or
Buy-in
Replacement Capital
Source: SAVCA, 2002
Why do we need them?
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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 2000
Number of
funds reporting
IRR below 15%
IRR between
15% and 40%
IRR above 40%
Total gross IRR Realised gross
since fund
IRR since fund
inception
inception
14
10
4
4
2
1
6
7
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?
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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, buyouts?
• What will be focus – mining,
manufacturing, services, exports?
• What will be exit strategy? NSX?