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Solutions to the funding conundrum

Solutions to the funding conundrum
The proposed fund will target both unlisted firms turning over above R300-million a year, as well as listed small and mid-cap companies. (Image: Adobestock)

Corporate SA, facing sharp revenue contractions and short of cash, is desperate for funding. But options are limited. A fund is being proposed which, if successful, could change the way institutions invest in SA inc.

Asset manager Ninety One is seeking to raise R10-billion in capital for a new fund that will invest in viable South African businesses that require financial support to see them through the Covid-19 crisis and the ensuing economic fallout.

As the devastating economic consequences of the lockdown started to become apparent, the South African government and private sector rallied in support of business. 

Micro-enterprises could obtain funding through the now overdrawn Sukuma Relief Fund and South African Future Trust, while businesses that turn over less than R300-million a year could secure loans via the government’s R200-billion loan guarantee fund.

However, businesses that are bigger than this, and which don’t have strong balance sheets or access to capital markets, are at risk of falling through the cracks.

These are companies, like those in the shipbuilding or specialist manufacturing industries, that are responsible for maintaining what little productive capacity the country has left.

The proposed fund will target both unlisted firms turning over above R300-million a year, as well as listed small and mid-cap companies. 

The idea is unusual in several respects. 

South Africa’s asset management industry doesn’t usually invest in businesses that are going through tough times, it doesn’t usually invest in unlisted businesses, and it does not do so unless the risk is priced at a healthy return. 

This fund turns all of those factors on their heads. It is envisaged as an impact fund, in other words, a fund that would achieve a socially desirable outcome while delivering an acceptable return to investors. It will invest in businesses across the board that are very viable on a three- to five-year view, but whose revenues are considerably diminished in the six- to 18-month horizon. 

“These are the kinds of businesses that could be neglected in the rush for capital,” says Nazmeera Moola, head of SA Investments at Ninety One. 

“Most fund managers take a 12- to 24-month view on earnings. But earnings are likely to be well below 2019 levels for many domestically focused businesses on that time horizon, so if you come to the market looking for equity it’s likely that there will be little investment appetite from your average long-only fund manager.”

This makes innovative fundraising ideas all the more important.

South Africa is heavily indebted and had to face the Covid-19 pandemic head-on, but the country’s lack of fiscal space means it had to do so with one hand tied behind its back.

“The government announced a R500-billion package to stimulate the economy which is good, but is far short of what is needed,” says Moola.

This is important and will support 47% of South Africans employed by SMEs. 

But what about the other 53% of jobs? 

This is the issue that institutional fund managers must grapple with. The local investment universe is already quite small — they need to consider any idea that would contribute to the health of that universe. 

The concept appears to be spreading globally. Just a fortnight ago Anne Richards, CEO of investment manager Fidelity International, called for the UK’s asset management industry to help support businesses suffering in the pandemic through the creation of a new Covid-19 retail investment fund.

The bottom line is that R10-billion is just a fraction of what is needed. South Africa’s regulatory authorities have estimated that SA businesses of the size this fund is looking to address could require a R100-billion capital injection if businesses are to be saved and productive capacity protected.

The idea would be to “put the UK’s collective savings to work” while allowing people to participate in the economic recovery post-coronavirus, according to this article.

In South Africa, retail and institutional investors are looking for ways to take money offshore where returns are better, exactly at the point when the local economy needs the investment. 

“What we need is for people to believe in SA inc,” says Moola. This may seem difficult to do in the middle of a pandemic and a recession which will see growth contract by 10% or more.

“All investors need is tangible evidence that reforms are underway — for instance, a firm timetable for the auction of spectrum, or regulations that enable private sector participation in electricity generation.”

Meanwhile, local institutions are showing tentative interest in the fund, with a few having made firm commitments.

The fund will be able to invest in both debt and equity instruments. 

“We need to be flexible. We are being conservative in our modelling about when revenues could return.”

The expected return is STeFI (a benchmark for money market indexes) plus 5% with equity upside.

Whether an investor views this as good or bad depends on the performance of the equity market — if the market underperforms, the fund will outperform. If the market outperforms, the fund will arguably hold its own because of the equity component that is structured into it, Moola explains.

Ninety One is the first asset manager to propose such a fund — however, it is open to working with potential partners. 

The bottom line is that R10-billion is just a fraction of what is needed. South Africa’s regulatory authorities have estimated that SA businesses of the size this fund is looking to address could require a R100-billion capital injection if businesses are to be saved and productive capacity protected. BM/DM

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