Since obtaining independence in 1990, Namibia has experienced extensive capital outflows to more traditional and sophisticated markets, in particular South Africa. Such outflows can be attributed to the strong economic ties between Namibia and South Africa through, among other things, joint participation in the Southern African Customs Union, currency linkages through the Common Monetary Area, historical connections, inactivity of the Namibian Stock Exchange (NSX), and the proximity of large and more developed financial markets in South Africa. In order to attempt to reduce the capital outflows and to stimulate economic growth in Namibia, its government introduced legislation to impose measures promoting investment and growth in local markets and industries.
In 2013, the minister of finance issued regulations under the Pension Fund Act 24 of 1956,1 increasing the minimum domestic asset requirements for pension funds and insurance companies in Namibia. The regulations prescribe that pension funds and insurance companies must invest between 1.7 and 3.5 percent of the market value of their respective investments in unlisted investments in Namibia.
The regulations further set out the manner in which pension funds can invest in the unlisted sector, and specifically provide that all unlisted investments must be made through separate special purpose vehicles (SPVs), for which extensive criteria are provided, and which may be managed only by duly registered fund managers. The Namibia Financial Institutions Regulatory Authority regulates the registration and conduct of both SPVs (being the funds) and fund managers.
Through the implementation of the regulations, the Namibian government adopted a broad-based approach to developing the private equity market in Namibia, by way of providing development capital to unlisted entities, in particular small and medium enterprises. The importance of the private equity industry to finance companies with growth potential has become more evident. Private equity entails both risk and reward, by allowing investors to invest capital in projects with an expectation of significant returns for the investment risk involved. For this reason – the illiquidity of investments and the high minimum investment commitment – private equity investments are generally out of reach of average individual investors, especially in a developing country such as Namibia. The regulations further attempt to decrease the financial gap faced by small- and medium-scale enterprises and individual investors.
In this regard, the Namibian Government is motivated to ensure and see the emergence of a full-blown private equity market in Namibia, to achieve sustainable economic growth, long-term economic development, and domestic resource mobilization in Namibia.
In its role as the largest pension fund in Namibia, the Government Institutions Pension Fund (GIPF) has become a pioneer of the private equity market in Namibia. Through its unlisted investment policy, the GIPF has been fundamental in the establishment of at least 20 private equity funds managed by various fund managers, and has committed more than NAD5 billion (US$340 million) to these funds since 2010, in order to fulfill its required minimum domestic asset investment requirements. The mandates of the various funds include procurement debt, property financing, small and medium enterprises development, property development, infrastructure development, bulk municipality services, transport and logistics, information and communications technology, health, renewable energy, education, private equity and venture capital.
During July 2018, the GIPF further announced its intention to introduce economic infrastructure financing, and that it has identified six fund managers to manage a NAD3 billion (US$200 million) capital commitment.
Some of the benefits allied with the processes followed by the GIPF through the establishment of the various funds are the introduction of alternative financing capital to various sectors of the local economy, employment creation, skills improvement in the financial management sector (i.e. fund managers), creation of public-private partnership opportunities, and the possibility of financing various national projects.
The funds further create co-investment opportunities for foreign financial institutions, and other potential investors, to invest in Namibia. In this regard, comfort can be provided to foreign investors to invest with the GIPF, through established structures, in projects in various sectors throughout Namibia.
A possible long-term benefit of the private equity market would be an increase in activity of the NSX. As fund managers look to exit various investments, a possible exit strategy would be to list such investments on the NSX, which could encourage further investments on the NSX, creating confidence and, ultimately, curbing further capital outflows from Namibia.
The emergence of the private equity market in Namibia has played a vital role in the Namibian government’s efforts to curb the outflow of capital, provide alternative financing options to entities forming part of the small and medium enterprises sector (which would not have qualified for traditional financial assistance), and providing access to capital for domestic investment opportunities. In turn, these factors should, in the long term, stimulate economic growth and provide a platform for the influx of foreign capital.
By Peter Johns, Director, and Rauna Ndilula, Associate, Ellis Shilengudwa Inc (ESI), DLA Piper Africa member firm in Namibia.
1 Which regulations were recently amended and replaced by Government Notice 211 of 2018 (Government Gazette 6697)
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