Unveiling the emerald divide: Decoding private equity
By Arney Tjaronda.
In the pursuit of securing funding, the well-known adage, “the grass is always greener on the other side,” takes on new significance. Specifically, when it comes to accessing capital in the private sector, the question of which side of the fence is truly green remains unanswered.
The term ‘green’ in this context refers to monetary resources. The inquiry arises whether only those who launch ventures that endanger crucial economic sectors such as healthcare, transportation, or aviation can attain financial backing, or whether there is room for the average entrepreneur, like Jill or Joe, who wishes to establish a small-scale business such as a tuck-shop.
While some may challenge this perspective, the pursuit of capital in Namibia has taken on an incredibly challenging nature, often resulting in the liquidation of small and medium-sized enterprises (SMEs).
Nevertheless, certain groups of Namibian entrepreneurs have managed to thrive in the market, successfully raising substantial amounts of capital. In the realm of private equity, leveraging industry experience enables thorough research into companies that seemingly possess access to sizable pools of capital. Remarkably, some of these enterprises bear names inspired by clouds, landscapes, and monuments. The ability to secure private capital, be it through debt or equity financing, exceeding N$200 million is a testament to the existence of significant financial resources within the hands of private individuals. At the crux of the matter lies the central phenomenon: the question of who possesses the resources and their capacity to distribute them among others.
Undoubtedly, there are instances where certain sectors prove highly attractive for securing significant capital, namely the farming and agricultural, manufacturing, and renewable energy sectors. Namfisa’s latest report corroborates this, revealing that these industries continue to garner substantial investments, accounting for 18.7%, 16.3%, and 15.9%, respectively, of the overall investments in unlisted ventures. Notably, the report highlights that long-term insurance companies emerged as the primary funding sources, closely followed by private individuals/households.
This raises a thought-provoking question: does the assertion made in my Grade 12 entrepreneurship book hold true, suggesting that the easiest path to finding one’s business lies in seeking support from friends and family? It is truly captivating to explore the various pitfalls that entrepreneurs encounter in their pursuit of funding and discover from which sources they often emerge.
Significantly, it is important to acknowledge the proactive endeavors undertaken by financial intermediaries to facilitate funding access for small and medium enterprises (SMEs) exhibiting robust growth potential. A noteworthy example is the recent initiative taken by the Development Bank of Namibia (DBN) in establishing a Venture Capital Fund as an integral component of the national SME Financing Strategy. This development instills genuine confidence that entrepreneurs are not left to navigate their journey alone. Additionally, notable efforts have been made by banks such as Bank Windhoek, which has disbursed a substantial N$50 million since March 2023 to support the government’s Small and Medium Enterprise (SME) Economic Recovery Loan Scheme, launched in February. These collective actions signify a concerted drive to bolster SMEs and reinforce the notion of collaborative support within the entrepreneurial ecosystem.
Additionally, Private equity firms possess the capability to finance substantial business endeavors due to their utilization of a comprehensive set of 12 metrics. These metrics enable them to generate superior returns compared to ordinary investment managers. My extensive experience in modeling and conducting private equity research within the industry has provided me with valuable insights.
Although these metrics may vary based on the specific investment nature and modeling objectives, I have discovered a set of 12 common metrics. These include internal rate of return (IRR), cash-on-cash multiple (CoC), net present value (NPV), gross multiple of invested capital (MOIC), EBITDA, EBITDA margin, debt/equity ratio (D/E), distribution waterfall (DW), holding period (HP), exit multiple (EM), and return on investment (ROI). Additionally, I have personally developed an additional metric, which I affectionately refer to as the ‘hashaia’ metric, adding a unique and distinctive element to the model—the secret sauce, if you will.
In 2021, I penned an article titled “Private Equity: The Backbone of Entrepreneurial Funding in Namibia,” underscoring the significant contributions made by private equity firms. These entities, often underappreciated, play a pivotal role in enabling the realization of greener pastures on any side of the fence, provided that local entrepreneurs exhibit the necessary tenacity to transcend barriers.
Success in the pursuit of capital hinges on the essential qualities of resilience and the passage of time, defining the journey towards achievement in securing financing.