High-Impact Growth Investments South Africa's B-BBEE codes have opened up a wealth of investment opportunities for black and white businesses alike. Fatima Vawda of 27four Investment Managers unpacks the opportunities for South African SME growth.
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PLAYER: Fatima Vawda
COMPANY: 27four Investment Managers
AFFILIATIONS: On the board of the Association of Savings and Investment South Africa (ASISA), and the reporting working committee of the Financial Sector Charter Council.
South Africa has a unique business environment. Broad-Based Black Economic Empowerment (B-BBEE) has created opportunities for small black businesses that many other small and mid-sized businesses around the world don't have. However, B-BBEE has also added layers of complexity to doing business in South Africa.
Many traditionally white-owned businesses have viewed these changes as stumbling blocks, when in fact, with the right mechanisms and strategic focus, B-BBEE offers opportunities to everyone, black and white alike. The goal is to build and support a rich, diverse economy in which SMEs play a vital role. When the economic foundation of a country is strong and stable, everybody wins.
Fatima Vawda founded 27four Investment Managers in 2007. 27four is an asset management firm that historically only managed money in the listed market, including the JSE, South Africa's bond markets and global markets.
However, Fatima's goal when launching the firm was to spearhead change, not only in the asset management space, but the South African economy as a whole. She wanted to be on the ground floor, impacting the transformation of her industry as well as her country.
Fatima's first focus was on her industry. After 12 years in the asset management industry, Fatima started 27four with no money and no client base — but she knew she'd be a first mover in the market in terms of transformation.
Today, 27four employs 60 staff members, including some highly skilled entrepreneurs, and has incubated 32 black asset managers who have since created 600 jobs.
Just over a decade ago, black-owned asset management firms didn't exist. Today they manage R415,5 billion rand of a R4,9 trillion investment and savings industry. "We still have a long way to go, but we've already seen incredible change.
The main value proposition I brought to market 11 years ago was that the asset management industry was largely untransformed. The entire industry flowed through white asset management firms.
You could count on your fingers the number of black asset management professionals that were actually managing money within those firms, and no independent black asset management firms existed.
Through 27four we established a black asset management incubator programme that looks for asset managers who have experience in the market, but who are also entrepreneurial and can run their own firms."
Through the incubator, 27four places start-up managers, who then become emerging managers, mature managers, and finally graduate and exit the incubator when Fatima's team feels they can compete with the industry's incumbents. Once they exit the incubator, they become a part of 27four's mainstream portfolios.
For example, the first company 27four incubated was Mazi Capital, giving them their first R150 million to invest. "Today, they are a R45 billion asset firm, have won multiple awards and employ more than 50 people. We afford them the same respect as we give to an Old Mutual or Coronation," says Fatima.
"Many institutional pension fund investors don't want to have all their eggs in one basket — this gives them diversified exposure. We essentially create a diversified pool for them." The incubation programme is helping Fatima realise her vision of a transformed asset management industry, but the next step was helping the economy as a whole grow and prosper, while still supporting B-BBEE codes.
THE INVESTMENT PERSPECTIVE
According to Fatima, there are strict criteria governing the funding of black business growth in South Africa. "It should go towards black-owned and controlled businesses, from start-up enterprises all the way to mid-market companies, to support the growth and development of these enterprises," she explains.
"Ultimately however, if we look at funding for black business growth, it all comes down to the fact that we need to support enterprises to create more jobs to fuel the economy. If we're able to create a cycle of positivity, job creation will naturally follow and business confidence will increase.
"When business confidence increases, economic growth improves, the commercial and industrial sectors pay more taxes to the fiscus, and there's more money in the kitty to pay for healthcare, education and service delivery. It's win-win for everyone."
With this view in mind, 27four has launched a Black Business Growth Fund that offers real opportunities for mid-sized businesses to grow, regardless of the current B-BBEE ownership status of the business pre-funding.
27four's Black Business Growth Fund has a clear focus on industrialisation and job creation. "The fund's focus is on mid-market companies looking for capital outside of the formal banking sector.
This is typically a private equity-type capital that allows them to expand and to grow. Through our fund, we can support these businesses, while also introducing a BEE shareholding into them.
"Because BEE legislation says that if you are a black private equity enterprise, you can transfer your BEE ownership to the underlying enterprise, as 27four we are able to provide debt and equity solutions to the businesses we invest in, while transferring our BEE ownership to them.
"For example, if we find a fantastic white business that's innovative but struggling to gain access to market because they don't have the necessary BEE points, we can assist them. In our experience, most of these businesses want to transform, but find it very difficult to do that as a white owner.
"We've also found that there are thousands of really, really good family-owned businesses that have been successfully operating for many years, but are now suddenly kicked out of the cycle because they don't have the necessary empowerment credentials.
"They want those credentials, they're wanting to transform and create jobs, they're committed to the South African economy, but the avenues do not exist to allow them to be able to transform. When our managers invest in these businesses they prefer to take black equity ownership in them.
"This gives them the BEE credentials they need and also ensures that we're committed to their success because we have skin in the game. Once our managers have invested in a business they have regular meetings and engagements to ensure all management accounts are up to date, establish what the deal pipeline looks like, and so on.
"These businesses have first-hand access to a very skilled team and their expertise to ensure the business is strategically heading in the right direction."
This is a mid-market fund, which means 27four is typically looking for businesses in the R100 million plus turnover range that are looking for growth opportunities. "The type of investors in the Black Business Growth Fund are pension funds.
"These are investors who want to earn an investment return, but also ensure their return is generated from doing good, contributing towards job creation, industrialisation, environmental and social changes.
"In addition, many institutional investors have so much money on the JSE, this value proposition provides them with an opportunity for investment returns uncorrelated to the listed market. They're basically taking some of their allocated funds and putting them towards investments that are uncorrelated with global markets. If there's a stock market crash, these returns will not be affected by it in the same way as listed returns will be."
THE LESSON: Investment teams are always looking for deal pipeline. Throughout the private equity industry, deal makers and transactional people are looking for opportunities, and many of these come from word-of-mouth referrals.
"We're always talking to experts within the field, from SAVCA (the South African Venture Capital Association) to communities associated with SAVCA, business organisations and other experts in our network." The lesson is simple.
If you're looking for investment, or you know that in the near future you will be, it's important to start building a network that knows you, your business and what your growth goals are.
"Find people in those spaces to network with. Talk to them and find a fund that suits you. Often, it's the fund that finds you because you're having the right conversations with the right people."
The second key point to consider when it comes to investments is what the investor's due diligence will entail. "Due diligence is about identifying if this is a sound investment opportunity," explains Fatima.
"At this level we are looking for investment growth, because we need to deliver a return to the investors coming into the fund, and we're looking for stable, good management in those businesses that will result in growth.
"This includes good free cash flow, sustainability in terms of their underlying client base and long-term contracts as well as looking at any motes that they may have: What are the barriers to entry in their market, what is their differentiator and so on."
WHAT INVESTORS LOOK FOR
Everyone wants to access funding, but not all business owners know how to do so, or who to approach. 27four Investment Managers' Head of Unlisted Investments, Rory Ord unpacks what you should be putting in place to become investment-ready.
1. Become investable. There's a lot a company can do to make themselves investable, and most of it starts with becoming more organised and more formalised. This is where many SMEs — particularly family-owned businesses that have been operating for many years in the same way — fall short.
Often, their practices aren't as good as they should be. For example, their accounting systems no longer fit with the size of the business.
2. Invest in your own growth. SMEs interested in growth should have a robust system in place that incorporates everything. You need to invest in your own growth before you can expect someone else to do so. The more organised a business looks, and the clearer the path for the private equity firm to see where they are going, the more they can believe in the management story.
The more they can see that management has actually thought out where they are going and put the right systems and processes and governance in place, the easier it is for that investment to happen.
3. Lower risks result in higher prices. The better the processes and systems in place, the more information is readily available on the business. This means the company will get a better price for the stake that the PE fund will take. If those things are not in place, it doesn't necessarily mean the PE firm won't invest, but the investment will look less attractive.
A lack of information causes uncertainty, which means the PE firm is prepared to pay less to get into the business, knowing that they will probably have to overhaul the systems, and the earnings are unclear once this has happened.