The case for a collaborative long-term investment model in Botswana

03 Sep 2020
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Botswana is ripe for a 'new' way of thinking. A 'new' approach to the real economy and how it can be nurtured and developed. A model that promotes long-term thinking (really long-term) and investment ideologies that will generate returns to be enjoyed by the future generation of citizens far into the future and hopefully beyond our lifetimes. A model that speaks to both capitalism and patriotism like no other. I describe this model as new but the concept has existed in other economies and countries for a while now but is yet to be embraced here, or at least intentionally and effectively.

This article is inspired by a book authored by Ashby Monk, Rajiv Sharma and Duncan Sinclair called Reframing Finance: New Models of Long-Term Investment Management, in which they argue for a collaborative model of financing economic development by institutional investors, mostly pension funds and endowments. The model they propose speaks to long-term investors allocating funds to large-scale and innovative projects in areas such as green energy, agriculture and infrastructure, closing the financing gap that government is yet or 'struggles' to close. The model is suitable for a longer-term investment horizon and presents a higher probability of investment success relative to the old and common endowment model that allocates capital to external fund managers, who are usually short-term minded (and individualistic) and fail to reach their portfolio objectives (at the same time failing to create long-term value for society as a whole). Instead, the collaborative model involves creating partnership-based vehicles in private markets as well as utilizing co-investment platforms to create value for society and the wider economy.

Make no mistake - institutional investors in Botswana have created value through their investments on behalf of their beneficiaries, and have seeded some of the most influential businesses in the country. But, without putting much emphasis on statistics, most of the funds are still invested in offshore market vehicles with local allocations mostly made to publicly listed securities on the Botswana Stock Exchange. This is well and good, especially for the development of our capital markets, but even in that realm illiquidity is prevalent; the investment universe remains small, and returns are limited. This is because the financial economy is only as strong as the real economy, of which ours remains...currently unsuccessful.

Botswana's economy is now at a point where more can be done in terms of the development of key economic infrastructure assets, seeding of new technologies and the integration of value chains in key sectors such as mining, manufacturing and agriculture. The latter two are the sectors that have historically contributed less to Gross Domestic Product, providing an opportunity for entry, growth and returns for investors with a more long-term outlook and an active execution.

By partnering with specialists in these key sectors, institutional investors can realize the long-term value in the form of investment returns, and social value in the form of building economic capacity, human capital, and key infrastructure that benefit the wider economy. They will be able to access the sought after alpha due to their long-term direct and active approach while also influencing proper qualitative traits within projects they invest in by demanding higher standards of governance and execution. To do this, investors have to consider building in-house expertise that allows them to invest directly and/or collaboratively with pioneers in the real economy, not just through fund managers, consultants and funds-of-funds. And guess what, by doing so, the ripple effects are enormous and positive as most of these private investments can be eventually exited through public markets for equity stakes or debt refinanced through the bond market, further deepening the capital markets and creating a larger and more liquid investment environment.

Other benefits accrue of course such as employment creation etc. but what creates the best value is the resulting decrease in government spending and involvement in both economic and social infrastructure projects, creating more efficiency and enhancing the quality of delivery in key social infrastructures such as education and healthcare. If this happens, a positive feedback loop is reinforced wherein innovation is heightened and new industries created while existing ones are disrupted. Only then will Botswana shine and evolve from being commodity-led to a knowledge-based economy that she so desires (and deserves) to be. We can get there if the development of the real economy is led by long-term investors and industry experts and not through government development budgets and public/private equity mandates that fail to take us into the future.

With a lot of professionals coming from different fields such as agro-processing, mining/chemical engineering, healthcare systems and biotechnology to name a few, and actual practitioners in these fields, institutional investors could do best by investing directly and collaboratively to create value. Yes, risk/return trade-off is important, but some risks arise because of inaction (or conventional thinking) and some returns are beyond being quantifiable. What really matters, is the execution and the desire for a future created by Batswana, in Botswana and for Botswana. Think about it.

By Tshiamo T., Product Specialist, Botswana Stock Exchange