Raising Capital Through A Black Economic Empowerment Transaction
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Alex Memela, Corporate Finance Transactor, and Francois Otto, Head of Corporate Finance at Sasfin Capital give advice on the BEE transaction as a long-term capital strategy.
Since the advent of democracy in South Africa a number of Black Economic Empowerment (“BEE”) transactions have been concluded. This trend accelerated significantly from around 2003 after the promulgation of the Broad-Based Black Economic Empowerment Act and publication of various industry specific BEE charters.
A company’s BEE rating is determined by a variety of factors, also known as pillars, of which equity ownership is a meaningful component.
Therefore, in most cases, BEE transactions are implemented at an ownership level whereby companies would issue shares to qualifying investors, as defined in the BEE codes.
South African companies, both those that are empowerment sensitive and those that are less empowerment sensitive, should be aware of the current landscape for BEE transactions in South Africa.
Empowerment remains a daily part of the lives of a number of South African companies; this is not set to change. Historically, empowerment transactions were often characterised by being fully vendor financed (i.e. where companies had to fully fund BEE investors to invest into the company’s business). Sometimes, but not always, all these parties had to offer was being “politically connected”.
This often led to transaction where companies, and their shareholders, gave up equity without obtaining the benefits as promised.
Benefiting from successful empowerment transactions
Fortunately for businesses seeking to raise equity or requiring empowerment credentials, through a process of natural selection, a significant number of BEE investors have proven their mettle and ability to add value to their investee companies. Furthermore, a number of these firms have accumulated significant equity during the past two decades of successful empowerment transactions.
In particular, to the benefit of companies seeking empowerment (or simply equity capital), these investors compete among themselves for quality assets and, through a rigorous selection process; businesses are spoiled for choice in selecting BEE investors who will bring capital, expertise, opportunities and networks to their investee companies.
Companies consequently have the ability to obtain better pricing than what was historically the case with the added bonus of picking partners where there is good chemistry and where the partners can add value to the company’s business.
A number of these strategic BEE investors we deal with are long-term investors, with many BEE transactions having average “lock-in” periods of five to seven years and, in some cases, these BEE investors even retaining their shareholdings at the end of these lock-in periods.
This ensures long-term sustainability and assists companies in reaching their long-term growth strategies without having to conclude follow-on empowerment transactions.
A BEE transaction should not be seen merely as a way to improve a company’s BEE score, but rather it should viewed as a long-term strategic capital raising exercise with a view of finding a like-minded partner for your business.