Baobab Capital’s Jerome Kisting worked in impact investing in Canada for six years before returning to Namibia and setting up the Baobab Growth Fund in 2014. The results of fund already demonstrate the tremendous social and economic value of impact-investment in emerging African markets. Traditionally underserved markets offer the potential for tremendous returns. Building on initial success in Namibia, Baobab is now attracting new partners and investors as it expands across the SADC region armed with a solid track record and an ability to change the communities it invests in. Exciting times lie ahead, as Mr Kisting explains in conversation with AfricaLive.
Africa Live: Let’s start by looking at Baobab Capital. What role are you playing in the Namibian and Southern African investment space at present?
Mr Kisting: This initiative started with the Baobab Growth Fund, which kicked off in 2016. We invested in eight portfolio companies, including; Fintech – payments processing; and manufacturing, from agro-processing to construction materials and pharmaceuticals. The five industrial ones are particularly interesting because Namibia is largely a consumption economy, like many of the economies in Southern Africa. In consumption economies such as ours, investing in manufacturing can yield very high returns. These companies are industrial and agro-processing start-ups that have the potential to create jobs and contribute to food security.
Our fund, therefore, tries to increase employment and, by growing early-stage businesses contribute to GDP growth. Our ultimate goal is to localise or regionalise the supply chain and create a prosperous regional economic ecosystem. A localised/regionalised supply chain would see us sourcing from local/regional suppliers and open up regional and global value chains by fostering greater regional economic integration. We expect to have two hundred and fifty to three hundred people employed by our portfolio companies by the end of 2020. This, we expect, would positively impact a population that is still scarred by structural unemployment which is a legacy of apartheid and has not been adequately addressed since independence.
We launched fundraising for Baobab Growth Fund II in July 2019. The fund will focus on the entire Southern Africa region because we have seen the potential that regional economic integration can have in supporting regional supplier linkages and value chains.
Africa Live: With your focus being on the SADC region, how are you building partnerships, and what do you look for in partners?
Mr Kisting: The SADC community has sixteen member states which are very different in their makeup. It would, therefore, be a mistake for us to approach each of these countries in the same way. We must have strong partners in each of these countries to help us have that local feel and reach. There are a lot of risks involved in venturing into new territories. We, therefore, have a hands-on approach regarding partnerships. We have embraced a value addition partnership model that we plan to implement in each of the SADC countries in which we invest. Our fund is also quite particular on the kind of investors we want in the fund. The holding period for private equity investors in emerging markets is usually five years. Our holding period will probably average 7 years. We therefore target investors that have experience in the region and the relevant expertise in the jurisdictions we target.
Africa Live: How many portfolio companies would you like to have under your wing in the next five years?
Mr Kisting: We currently have eight portfolio companies in Fund I and we plan to grow them over the next five years into regional champions. All the manufacturing companies are already developing relationships in South Africa and Europe for distributing their products in those markets. This is huge for our country because traditionally Namibia imports products from South Africa. Our portfolio companies have seen to it that value added goods start moving the other way. This creates confidence amongst local businesses that their products can compete outside Namibia with the best the region has to offer.
Forty-four African countries have Economic Partnership Agreements with the European Union. If our portfolio companies can secure off-takers in the EU we will see tremendous growth that will have incredible supply and value chain impacts across the region. The need to strengthen our portfolio companies goes further than just business expansion and profit. A strong regional supply chain will protect us from external shocks as well. For example, a recent foot and mouth disease outbreak in South Africa made it difficult for Namibia to import sufficient dairy products from South Africa. Within 4-5 days shelves in shops started going empty as stock ran out. Investing in local manufacturing in each of our target countries and creating regional supplier networks reduces the vulnerability of countries in the region to external shocks.
Africa Live: How do you talk to investors about the risks involved in some of the ventures you undertake?
Mr Kisting: Our approach is always to make investors understand that there will be challenges and surprises because we invest all along the venture capital funding cycle – from Seed to Series C. A significant portion of the risk is mitigated due to our active management approach which sees us involved in every aspect of the business at inception. This includes operations, finance, governance and HR. For example, because we stage our investments in the portfolio companies we sign off on all expenditure at the bank account. This ensures that the business plan is implemented according to the milestones set and that we stay on budget and on time.
In Southern Africa many start-ups fail because there is very little risk capital available. Namibian start-ups have historically tried to get off the ground using debt capital. This model of funding sets them up for failure. When start-ups have loans to pay back there is pressure on cash flow and therefore management from the start. The blended finance model of financing start-ups has worked much better. Here start-ups are financed using a combination of grants and equity or debt financing. One of our portfolio companies is a successful collaboration with the Finnish government to invest in an animal feed business. The Finns provided grant funding to UNIDO (United Nations Industrial Development Organisation) to produce a bankable feasibility study. When the viability of the project was validated the Baobab Growth Fund invested USD1m to procure the production plant. We plan to go into production during Quarter 1 2020.
Africa Live: What steps need to be taken for more capital inflows into Namibia to be realised?
Mr Kisting: The most important thing is creating an enabling environment for investors. Investors want certainty that if they invest in Namibia (or any other African country for that matter), they won’t have to deal with visa and work permit challenges; they want to know that their investment is safe from government interference or nationalisation; they want to know that the country is politically stable; they want certainty around the regulatory environment; and they want to know that they can exit the investment and retrieve their money from the country quite easily. Countries like Mauritius and Rwanda have created environments where investors have greater certainty. An enabling environment is created by putting in place the legal and regulatory frameworks that provide all investors with certainty. The only difference between foreign and local investors in a given country is the perception of risk.
Africa Live: What will have to happen in the next ten years for you to consider Baobab capital a success under your leadership?
Mr Kisting: My experiences working for a Canadian impact investing fund exposed me to what is possible if we combine capital and enterprise development support to underserved communities. Success to me would mean successfully growing start-ups that produce great financial returns while moving the needle on some of the more intractable social and developmental challenges we face in the region. If we (the Baobab Team) are able to look back ten years from now and say that our fund changed people’s lives for the better, then I will be happy.
Africa Live: You are quite busy as an organisation working on several projects. If you were to work to focus on only one for a day that’s close to your heart, what would it be?
Mr Kisting: I am very fortunate to be involved in something that speaks to my passions. I wouldn’t single out any project for special attention. I would do pretty much what I do every day. I would work with my team to get to know how we are impacting society with our projects. Our next step as an organisation is to figure out how to manage the scaling up of our organisation this includes: growing the portfolio companies; increasing our impact; and launching new funds. Our vision is to leave a lasting economic and developmental impact in every country in which we invest.