As part of the national Small to Medium Enterprises (SMEs) Financing Strategy, the country will soon launch its own Venture Capital Fund, that will be exchanging capital for equity in high-growth SMEs.
The Development Bank of Namibia (DBN) announced last week that it is in the process of developing and establishing a Venture Capital Fund.
The Fund will be the third leg of the national SME Financing Strategy, the main leg being the credit guarantee that has been rolled out in partnership with commercial banks.
The DBN said the Fund will act as an equity investor in established SMEs, by providing funding in exchange for equity.
The SMEs, in which the Fund invests, would then use the equity funding for growth needs and operating capital.
The Fund would receive returns through the growth of the value of its investments in SMEs.
The three most common funding for businesses are owner’s equity, debt and equity financing.
The latter is, however, not so common at the SME level, as many hesitate to give ownership in their company or lack an understanding of how equity finance works.
The biggest distinction between debt funding and equity financing is that with equity issuing it carries no repayment obligation and provides extra working capital that can be used to grow a business.
Debt financing on the other hand does not require giving up a portion of ownership but require interest and principal payment every month or year (depending on the agreement) whether a business made profit or not.
The Fund intends to invest in identified SMEs, with strong growth potential, but unable to borrow or acquire additional capital, the bank explained.
DBN Head of Marketing Jerome Mutumba expressed the hope the Fund would lead to catalytic transformation of Namibia’s SME sector.
He said that greater exposure to equity funding would reverse the trend and strengthen the SME sector.
DBN has previously launched the Collateral Guarantee Scheme and has pioneered the National Mentoring and Coaching Programme.
The bank assured that the Fund will adhere to relevant registration processes and requirements, in particular the applicable regulations of the Master of the High Court and the Namibia Financial Institutions Supervisory Authority (Namfisa).
The Fund will be established in the form of a trust under the Trust Moneys Protection Act 34 of 1934 and registered as an independent special purpose vehicle (SPV) in terms of the Regulations to the Pension Funds Act 24 of 1956.
The Fund will be governed by a board of trustees, a majority of whom will be independent. The Fund is expected to begin recruiting trustees in the near future through an independent recruitment consultancy.