Limited investment options available on Zimbabwe’s capital market have seen investors watch helplessly as their portfolio positions deteriorate along with the general economic trajectory. Capital market players have traditionally looked to listed equities, bonds and the money market for investible asset classes.
As expected, traditional asset classes were not immune to the general economic decline. They suffered the same economic fate as many other investment avenues in the country.
The equities market shed close to $,2 billion in 2015 alone as the Index lost 30 percent in 2015 alone. Over the last three years, yields on fixed income instruments have also dropped by close to 30 percent while money market rates declined by almost 50 percent since July 2015.
Return on a portfolio of traditional asset classes comprising common stock, bonds and money market instruments, over the last three years averages a negative 28 percent.
The Zimbabwean economy has gone through some tempestuous times and businesses were forced to adapt or face extinction.
From hyperinflation to the liquidity squeeze and through to the massive exodus of many from industry, only those who managed to evolve with the times remained standing.
The economic turn of events has given birth to low hanging fruit in the private equity market in the form of distressed equity investments.
In the absence of capital market diversity in the form of alternative investment options, capital market players will continue to watch defencelessly as their investments lose value.
In more developed capital markets, the spectrum of investment asset classes is broad and diverse in terms of risk and return profiles and suitable investor types.
The diversity of available investment options offers the comfort and benefits of a well-diversified portfolio.
Alternative asset classes apart from the traditional listed equities and bonds are becoming viable options for investors seeking to avoid plummeting prices on traditional asset classes.
Alternative investment classes by the broadest of definitions, are those which are not part of traditional asset classes such as cash, stocks, or bonds that retail investors are most familiar with.
Such a definition would encompass investing in mainstream assets such as real estate or commodities or luxury goods such as art or wine.
However, for this article we will focus on a particular class of alternative investments which is distressed private equity investments.
Distressed private equity investments are equity investments into financially distressed private companies in desperate need of funds to revive operations.
A lot of companies that failed to evolve to the dynamic and volatile Zimbabwean business jungle now find themselves struggling to stay afloat despite having bankable business models and an under-served market.
Most companies that failed to realign their cost structures, regularise capital structures to eliminate or rationalise short-term expensive debt and streamline operations to achieve optimum operating levels now find it difficult to survive the competitive landscape.
Before labour law changes that allowed companies to adjust their staffing levels without crippling financial implications, many companies accumulated huge salary obligations that did not mirror productivity.
Failure to manage credit models and consequently the whole working capital cycle eventually led to huge debts being owed to suppliers of inputs and capital.
Inevitably, most companies that faced predicaments of this nature were either forced into judicial management or voluntarily applied for judicial management reprieve.
The advent of judicial management creates massive opportunities for capitalist who are able to breathe life into the ailing companies.
Most companies under judicial management or in ailing state have bankable business models which if funded, will yield good return on investment.
The underlying circumstances for most companies in ailing state or in judicial management across Zimbabwe’s private equity market are primarily:
Insolvency, diminishing market share and confidence due to failure to meet demand, huge debts mainly from suppliers of materials and lack of working capital to support longer working capital cycles.
Investors in distressed equity often buy the entire stake in an entity or significant equity at heavily discounted prices, in some cases companies have been bought for as little as $1 by investors who then took over the debt of the target company.
The interests of all parties, particularly creditors, are better served if the company is acquired by an investor who can revive operations and create debt repayment capacity than if the company is liquidated, in which case, creditors are likely to realise only an insignificant fraction of the amount owed, if they salvage anything at all.
Some creditors have ended up taking over indebted companies near liquidation in the interest of protecting their investment. Sometime back, a consortium of commercial banks took over bread manufacturer Lobel’s in a debt conversion deal that led to the revival of the company.
There exists a good number of private companies needing capital investment ranging from as little as $50 000 to as much as $5 million with bankable business models, ready markets and a working implementation plan.
The complexity of private equity investments and the lack of information regarding the private equity market space, coupled with limited market structures for such investments, has limited the amount of capital flowing to private equity investments.
In other markets, alternative investment classes particularly private equity, are attracting more investments than the traditional stock, bonds and money market investments, the global alternative investments industry is estimated to have well over $7 trillion in assets.
Capital market custodians like the Securities Exchange Commission of Zimbabwe and the Zimbabwe Stock Exchange should extend and develop capital market infrastructure to accommodate and promote investment into alternative investments.
Evolution in Zimbabwe’s capital markets demands the provision of enabling frameworks and infrastructure that educate investors and cultivate interest to participate.
The major role of capital markets is to facilitate the movement of capital from areas of surplus to areas in deficit hence the need to put in place capital market infrastructure that promotes investment into all faculties of the Zimbabwean economy where capital is needed.
Alternative investments like private equity offer a distinct set of attributes that are not commonly found in mainstream traditional investments such as common stock, corporate or government bonds.
There is a lot of potential in Zimbabwe’s alternative investment space and investors can realise huge returns in a time when traditional investments have been losing value.
Investment into such alternatives will also aid in economic revival and growth which our nation desperately needs.
Albert Norumedzo is an Investment Analyst at Homelink. Feedback [email protected]