HOW STIMULUS MADE THE LEAP
By Francis Mukuzunga - August 2010
UNLISTED companies wishing to get equity participation from public funds should draw hard lessons from the mismanagement and disappearance of some N$600 million plus, extended by the Government Institutions Pension Fund (GIPF) as loans to mostly BEE companies through the Development Capital Portfolio (DCP) - an issue that has hit the headlines, albeit 12 years down the line.
Of course, the GIPF investors have a right to have companies that did not give returns on investments brought to book and be accountable for their actions. But, according to the Managing Director of Stimulus Private Equity, Monica Kalondo, it is important that a distinction be made between professional fund managers and capital providers who understand managing unlisted investments and individuals who accessed funds directly from the GIPF.
According to Kalondo, many Namibians have become so engrossed with the sensation that they have lost sight of the real story, which is that, approximately N$3 billion will be available to fund entrepreneurs on a non-collateralised basis.
“The opportunity is huge, the potential for real socio-economic development is real yet we are just focused on what happened to DCP. What happened at the DCP is painful. Firstly, it has bolstered a view that black businesspeople are incapable of managing businesses and secondly, many deserving Namibians who could have created value with those funds were denied the opportunity.”
Kalondo manages Namibia’s first private equity fund, Stimulus, and understands the challenges of investing in unlisted investments. “We believe we have pioneered a new investment class as we were the first to focus on investing in unlisted investments on private equity terms. We paid our school fees and new private equity companies will not have to go through the growing pains we did,” she says.
Stimulus is an independent, majority black owned and controlled investment company with the ability to invest for value in many local ventures.
In her view, private equity managers are essentially risk managers as they constantly need to evaluate strategies which can lead to the growth of businesses while simultaneously identifying and actively managing whatever risks that business faces. This appears to be a point that was lost on some of the BEE companies that borrowed funds from the GIPF and went bust.
She quickly brushes aside the common belief among many people that when Stimulus was set up in 2004, it used funds from the GIPF through the now defunct Development Capital Portfolio (DCP) as start-up capital. “Stimulus was established after the DCP so we never received or managed any money from the GIPF,” Kalondo affirms. It is only now that Stimulus has applied for GIPF funding, and from its track record the company believes it is a strong contender for equity investment and remains a shining example of how a BEE company can best utilise borrowed funds.”
She says, “We have been confirmed as one of the many recipients of the new GIPF funds which are to flow and we are currently in the process of finalising our contract. We are allocated the funds on private equity terms meaning we are allocated a set amount of money for a set amount of years with a specified annual return and when the ten years are up, if the required hurdle rate is achieved and assuming we have met the required contractual obligations, 80% of the capital is returned to the funders and the remaining 20% stays with the fund manager.”
Six years ago, Stimulus was set up to provide a solution to capital outflow but also to enter the market as an investor which had the necessary capital to pay market value for shares in businesses which it believed had growth potential. Kalondo explains that they raised this capital by going on an “Investor Road Show” to woo fund managers from other investment companies and potential businesses to inject capital into the fund.
“We currently do not manage any funds on behalf of the GIPF. Our existing investors are the likes of Metropolitan, Allan Gray, Investec, Sanlam Investment Management and others. We raised our capital by listing a preference share on the Namibian Stock Exchange. Since we started investing, our portfolio has grown by approximately 15% which is very strong growth, given a challenging economic environment where many private equity firms are reporting negative growth. We have a proven track record and we look forward to being able to manage funds on behalf of the GIPF in the near future.”
Today, Stimulus boasts an N$115 million portfolio spread out into some high performing companies who are under the control of independent and non-executive directors.
“Convincing investors to provide capital to Stimulus was challenging as we sought to assert ourselves as BEE investors in unlisted investments. Unfortunately for us, both BEE and unlisted investments were generating negative press due to the DCP, Avid and other failures in governance in this field. We had to convince our investors that we had the necessary governance checks and balances and that we were a credible and responsible manager. We then had to convince business owners to part with equity in their business. We never have, and never will, sell political connections.
“Our value proposition is that we understand business, we know how to be of strategic assistance to the growth of a business and we will pay our own way, that is, we will pay cash for our stake in the business and not expect to get shares either for free or fund them through dividend flow. Fortunately for us, the investors were convinced by our story and so were the several businesses we have made investments in, and that is what has provided us with a healthy balance sheet which can make good investments in Namibian businesses. Our hard work is paying off,” she says.
While Stimulus is clearly delivering on its mandate, Kalondo is hesitant to declare it as an outright success as the proof of the pudding is when the portfolio matures in four years. Kalondo revealed that there is approximately N$11 million still available for one more investment in the first portfolio. The second portfolio will have between N$100 – 200 million available for investment into Namibian businesses. A challenge which she is clearly looking forward to. Asked on what the main lessons that Stimulus had learnt, Kalondo had the following to say:
“We started operating after the collapse of the DCP in an environment where we were the only private equity managers. Naturally, the learning curve was high. Two of the main lessons relate to patience and governance. Patience being that one must never be tempted to convert the pressure to invest quickly into bad investments. Rather lose a portion of the management fee and return the capital than make investments that you are not sure of. We have a robust portfolio that has shown strong resilience to the recession because of this philosophy.”
“In relation to governance, we were, and remain, very firmly focused on strong governance credentials. We have a Board of Directors which is equally represented by executive and independent directors and is chaired by one of the independent, non-executive directors. Executive directors don’t sign off investments. We create a clear paper trail for every investment which can be used later to justify how and why certain investments were made and the extent to which we applied our minds to risk - this is the key as at the end of the day, you are dealing with the savings of vulnerable people and you must be responsible. We are so mindful of this responsibility that we use the protection of this money as the guiding principle in every negotiation we undertake.”
About the credibility of some of the companies that Stimulus has entrusted with financial backing, Kalondo says it is important for the company to employ a thorough scrutiny exercise not only on the operations of the business, but also on individuals who run that business.
“We have long held the view that we do not invest into businesses, we invest into people so your question is critical. We do an in-depth due diligence into the business as well as the individuals who run it. As a due diligence requires us to spend lots of time interviewing the business owners and their key staff members, you quickly get a good feel of the credibility of the business as well as the individuals who run it.
“There are many reasons why certain investments don’t happen but a reason for some of the investments we have not concluded was because we walked away due to uneasiness on some or other issue. . In retrospect, many of those transactions where we had reservations have either already collapsed or are in the process of collapsing so we have protected the portfolio by not engaging persons or businesses where fundamental governance issues are questionable,” says Kalondo.
On how well the Namibian market understands financial products, Kalondo says, financial markets are not very deep and because of the limited products, “the market’s understanding of many complex financial instruments is also limited. When we started Stimulus, we spent about a year basically just explaining what private equity is and how it differs from bank funding. As our financial markets deepen, people’s knowledge of the different products on the market will also increase.”
She is modest about the future of Stimulus, “We currently enjoy the privilege of being the largest, active private equity fund in Namibia with the most equity transactions concluded on private equity terms. We are starting a second portfolio so our focus is remaining Namibia’s de facto private equity fund by making the right investments in the right people.”
The Stimulus Investments Limited board consists of Peter Koep who is an independent and non-executive chairman, while the other non-executive members are Angela Katjimune and Stuart Moir. Due to being a shareholder, Sisa Namandje is a non-executive director but is not independent. Kalondo and Van Veen are Executive Directors and together with Namandje, have no voting rights on investments decisions.
The company’s shareholding includes the Mukwamhalanga Tukondjeni Trust, a charity whose Patron is the First Lady which focuses on the empowerment of rural women, the Vita Thom Scholarship Fund for children from the Kunene Region, the Disability Benefit Trust aimed at promoting health, treatment and rehabilitation for physically challenged people and the Stimulus Trust whose mandate is to look at supporting orphans, small business development, education and HIV/Aids related issues. PF
GOING into, and establishing Namibia’s first private equity firm could only be a pipedream for a novice in financial matters, something that could only be expected from money market gurus and those who have a flair for six digit figures.
In financial jargon, private equity is an asset class consisting of equity securities in operating companies that are not publicly traded on a stock exchange.
Investments in private equity most often involve either an investment of capital into an operating company or the acquisition of an operating company. Capital for private equity is raised primarily from institutional investors. The most common investment strategies in private equity include management buyouts, venture capital, growth capital and others.
Therefore, one would need to have taken up business or economics at a higher level to be able to understand how such instruments can operate in Namibia.
But no, that was not for Monica Kalondo, MD of Stimulus –whose initial credentials are from the legal fraternity but heavily buoyed by experience at the Namibian Stock Exchange and similar operations in other countries. However, it was her tough upbringing that taught her to go for the impossibilities and face the challenging world with equal, if not, exertive pressure in a gender imbalanced world.
Born on 15 November 1976 in Okaku in the North and raised by her grandmother in Ohakweenyaga village during the first years of her life, she later moved to be with her parents in Oranjemund where she attended primary school. Years later, she moved to Windhoek for secondary education at Centaurus High School. Monica studied law at the University of Namibia, and worked fulltime to finance her studies. She workedat the Centre for Applied Social Sciences, served in the office of the Government Attorney, and then found a position at the Namibian Stock Exchange (NSX). Even while working fulltime, she managed to complete a Bjuris and LLB in the prescribed duration of five years.
It was during her position at the NSX that she was inspired to move away from law and enter the world of finance – which she embraced greatly. As soon as she graduated, she was promoted from Listings Assistant to Listings Manager and was responsible for all compliance related issues at the NSX. She received several job offers from other companies, many of which were double her salary and some even triple but she realised she had a lot to learn and needed to spend as much time at the NSX learning as much as possible rather than chasing the highest dollar.
After four years at the Namibian Stock Exchange, Monica took a strategic decision to accept a job at an Investment Bank where she was responsible for Corporate Finance as this experience would complement the expertise she had picked up at the NSX. While at the Investment Bank, she became a shareholder in Stimulus Private Equity and after two years at the Investment Bank, she decided to assume a full-time position with Stimulus as the concept was brilliant but in the absence of a full-time driver, it would remain just a brilliant concept.
She has been the Managing Director of Stimulus Private Equity since 2005. Her key role is to manage Stimulus and provide strategic input to the various businesses in which Stimulus is invested. This role has provided Monica with extensive deal-making expertise and first-hand knowledge on how different businesses in varied sectors operate. As part of her position she sits on the Boards of all the businesses in which Stimulus is invested in. She is also an Executive of Pointbreak Namibia which has a shareholding relationship with Stimulus. Monica owns equity in both Stimulus and Pointbreak.
She continues to be closely involved in the work of the Stock Exchange due to her position as a member of the NSX Listings Technical Committee. Due to her financial sector experience, she is on the Namibian Financial Sector Charter Steering Committee and played a leading role in the formulation and drafting of the Transformation Charter for the Financial Sector. She is also a co-opted member of the Namibian Chamber of Commerce (NCCI) National Council which is the ultimate decision-making body and is involved in other initiatives aimed at guiding national policy formulation
Monica was inducted as a Laureate of the Namibian Business Hall of Fame in February this year and in April, was confirmed as a member of the internationally acclaimed Crans Montana Forum. She is mother to two young children, a son and a daughter.PF