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The case for patient capital


A few weeks ago when we reviewed the top 10 concerns of the banking sector, lack of liquidity and unstable short-term deposits were among the top three challenges.

The former slows down economic growth by limiting the ability of banks to fund the productive sectors while the latter results in the anaemic levels of lending associated with lack of long-term funding.

Together, they yield a prohibitive cost of funds profile, which particularly affects SMEs and smallholder farmers whose financing options are limited. Against such a backdrop, the case for patient capital is compelling.

If we are to appreciate how patient capital can be a solution to the country’s developmental financing needs and help it to achieve the Millennium Development Goals, it is essential to first understand what exactly it is.

According to Wikipedia, patient capital is another name for long-term capital which the investor is willing to invest in a business with no expectation of turning a quick profit.

Essentially, the investor is willing to forego an immediate return in anticipation of more substantial returns in the fullness of time.

According to Thomas L Friedman of the New York Times, “Patient capital has all the discipline of venture capital – demanding a return, and therefore rigour in how it is deployed – but expecting a return that is more in the 5 to 10% range, rather than the 35% that venture capitalists look for, and with a longer payback period.”

Some of the characteristics of patient capital include a long investment time horizon, greater tolerance for ahead of financial ones and the provision of intensive management support in order to help new business models thrive.

Patient capital is also characterised by the flexibility to seek partnership with governments and other corporates through initiatives such as co-financing as seen in the case of the $70 million Zimbabwe Economic and Trade Revival Facility (Zetref) under which Afreximbank provided $50 million while the Zimbabwe government provided $20 million.

Launching the facility in August 2010, Minister of Finance Tendai Biti said, “Zetref is a reasonably priced facility with longer term maturities which is what our industry requires for it to return to full production levels,” and added that it would have “a bias towards small and medium scale enterprises”.

Such characteristics strengthen its credentials as an initiative steeped in the tradition of patient capital.

The $7 million mortgage facility recently concluded between BancABC and Nairobi-based lender Shelter Afrique is another financing initiative with impeccable patient capital credentials.

What with a repayment period of up to 10 years, a reasonable rate of interest and a focus on providing shelter for low and middle-income earners.

Typically, investments in the agriculture sector have long gestation periods.

To illustrate this, the Parliamentary Portfolio Committee on Industry and Commerce recently noted that the period required by the dairy industry for recovery of the depleted dairy herd is about five years.

Clearly, the tenure of financing currently available from most local banks would not go the distance, emphatically arguing the case for patient capital.

The Zimbabwe Agricultural Incomes and Employment Development Programme recently launched the $10 million AgriTrade facility, under which a fund of $5 million is matched dollar for dollar by local financial institutions namely CABS, Trust Bank and Microking in support of agri-businesses.

The facility aims to increase access to credit for agro traders to allow them to purchase produce from rural smallholder farmers.

Though drawdowns under the facility have a fairly short tenure of up to 150 days, the AgriTrade facility qualifies for classification under patient capital because it runs until February 2015, meaning that funds can be accessed on a revolving basis for up to five years subject to applicable limits for the maximum number of times a borrower is allowed to access the fund.

The Zimbabwe Agricultural Development Trust (ZADT) is another programme utilising the patient capital model to support smallholder farmers in market-driven approaches to sustainable agriculture development.

Its goal is to promote agricultural development by making available revolving funds to actors in agricultural value chains for the purpose of strengthening smallholder farmers.

Patient capital can take the form of debt or equity, but inflows into Zimbabwe have tended be more of former than the latter. Zetref is a case in point. So are the AgriTrade, ZADT and Shelter Afrique facilities.

Given such circumstances, what then should be done to ensure that equity assumes a bigger role given the country’s current liquidity challenges which make debt service a veritable burden?

Fixing the country’s risk profile is probably the point of departure. How? By settling the country’s debt question and finalising ownership laws.

Not many investors are likely to contemplate deploying their patient capital in a country where ownership rights are not clearly defined and not guaranteed by unequivocal legislation.

Clearly, patient capital can make all the difference in supporting innovative business models that seek to address poverty.

It is therefore beholden on all key stakeholders to work together in the context of the Medium-Term Plan to create the conditions necessary for patient capital in all its forms to not only flow less timidly but to flourish.

Omen N Muza is a banker and managing director of TFC Capital (Zimbabwe) (Pvt) Ltd who writes in his personal capacity. Weigh in with feedback on:

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