A national equity fund as an additional boost for business recovery in the face of COVID-19?
By Martin Inkumbi
The onset of Covid-19, 18 months ago, has led to vulnerability on the part of some enterprises.
The Development Bank of Namibia (DBN) CEO Martin Inkumbi suggests that one solutions 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 6 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.
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 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.
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 says, 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 capitalizing an equity fund, the requirement will be substantial, and suggests pooling of funds in a national vehicle. If such a National Equity Fund is capitalized with borrowed funds, e.g. private sector bonds issued to capitalize 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, is saving Namibian enterprises from collapsing during the current depressed economic cycle, preserving current and future employment and sustaining economic growth.
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. These challenges included stiff competition, lack of demand, unaligned operating costs and price structures and 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.
The second and third category 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.