Abdu-Rahman Abrahams | Co-Head | Hybrid Equity | Old Mutual Alternative Investments (OMAI) | mail me |
With the right investments by state finance institutions supported by private investors, SA could achieve more meaningful and scalable impact. In a recent interview I was asked what my view is on economic transformation within the context of empowerment financing or investment in Broad-Based Black Economic Empowerment (B-BBEE) transactions and companies.
To put my sentiments into perspective, the B-BBEE Commission in its last published National Status and Trends on B-BBEE report in 2020, noted a 4% increase in overall black ownership in JSE-listed companies from 25% in 2018 to 29% in 2019. It recorded black management control at 39% overall and JSE listed entities board control at 43.6 %.
Only 3.3% of entities listed on the JSE were 100% black owned, from 1.2% in 2018 and 1% in 2017.
A significant decline in major B-BBEE transactions
The commission recently also noted a significant decline in major B-BBEE transactions among JSE-listed companies from 171 in 2017/18 to 44 in 2020/21 and 34 for 2021/22 – an approximate drop of 80% over the period.
It must be noted that the B-BBEE Commission mainly measures listed companies on the JSE, which is probably less than 1% of overall private companies trading. The reported statistics is therefore not a true reflection of how much economic transformation activity there is in the actual private market outside of the listed sector.
We know that large public companies do not undertake empowerment deals every year, as deals generally have lock-ins of 5 to 10 years. The unlisted sector therefore represents the largest opportunity for empowerment transactions and subsequently the best vehicle to achieve black ownership of the economy.
Barring the extraneous factors that the South African economy has succumbed to over more than a decade, such as the Global Financial Crisis and the COVID-19 pandemic, an interpretation of the B-BBEE Commission statistics above may suggest that government’s B-BBEE policy, as one of the measures intended to address the racialised inequality, and in this context, black ownership in the economy, has not had the desired outcome.
Lack of capital for transformation
While B-BBEE implementation certainly has structural challenges to deal with, one perception that pervades is that there is a lack of will to transform on the part of corporate South Africa. The economics of funding transformation, however, is more complex.
While we do note a lack of capital for transformation exists, substantial equity capital for empowerment transactions has been deployed predominantly by state institutions such as the Industrial Development Corporation for example and supported by other large private sector players. However, this has done little to change the structure of the economy and patterns of wealth accumulation.
One of the reasons that this model has not had the desired impact in terms of fundamentally shifting the dial on black ownership in the economy is the reality of market forces. Where the number of empowerment transaction stalls is that we continue to experience gaps in the structuring of the deals; value filtering down to the right transactions; as well as taking into account capital’s aversion to risk.
With this in mind, the current state of transformation is therefore not necessarily down to a lack of appetite for empowerment investments in the market, but rather a question of how transactions should be structured to best unlock value for all stakeholders, as well as mitigate risk.
While traditional funding mechanisms are available from banks and state institutions, a scarcity of empowered equity capital exists, particularly for the riskiest finance portion – that which the empowerment entity’s equity cannot, or traditional funders will not cover. It is exactly for this ‘gap’ financing that Hybrid Equity (HE) was established within our Alternative Investments portfolio.
The need for alternative investments
In response to the need for alternative investments, innovative funding models such as hybrid equity therefore can play a significant role in accelerating economic transformation by funding the risk elements that traditional mechanisms cannot. In addition, it also addresses the issue of risk management that drives the market’s aversion to funding B-BBEE transactions.
HE does much of its business with unlisted companies and with more capital injection from the likes of state-run institutions and other private investors can successfully finance equity of funding-ready black empowered businesses. Successful economic empowerment funding is a case of finding the right financial partner and the right funding instrument.
In this space B-BBEE transactions have generally been substantially impacted by a disconnect between empowered entities and traditional funders rather than the magnitude of funding opportunities in the form of loans, equity, grants, and incentives. There are also many examples therefore of empowerment transactions gone wrong where the interests of the various stakeholders involved in the transaction were not aligned from the outset.
Elements of debt and equity
In light thereof, HE has honed its investment model to attract quality investment and provides investors with a flexible alternative to the traditional fixed income and private equity investment models that can still achieve good rates of return.
The nature of the risk sits between private equity and traditional debt because instruments are structured in a way that includes elements of both debt and equity. In addition, our thorough due diligence and years of experience mitigates risk for funders and companies seeking empowerment partners.
Having a direct interest in the equity stake means that we are active investors committed to helping the entity succeed through growth, profitability and ultimately return on investment.
Getting to this point has taken years of deal origination, execution and exit experience since the HE team has successfully sourced, structured, invested, managed and exited transactions across multiple sectors and capital structures. The HE fund’s investments have primarily been in the B-BBEE funding space and aligns directly to the United Nations Sustainable Development Goals as well as environmental and social governance benchmarks.
For example, in June 2021 HE invested into a black empowerment entity, within a very tight timeline, with a well-structured funding solution. The funding allowed the entity to increase its shareholding in telecoms group MetroFibre Networks, expanding the company’s empowerment credentials.
The transaction facilitated MetroFibre’s ZAR3 Billion capital expansion plan, which would contribute to increased access to affordable quality internet; economic growth and direct social impact.
This deal was followed up in August 2021, when HE concluded a black empowerment deal to assist in funding the acquisition of a minority shareholding in the unlisted company Imperial Logistics South Africa (ILSA) by black women-owned and managed investment holding company Afropulse Group. The overall size of the transaction was significant, and the missing piece of preference share funding provided by HE effectively got the deal over the line for Afropulse.
In conclusion
Such deals epitomise effective ways of enabling transformation, and in particular significant black ownership in large businesses.
We must take a holistic view of South Africa’s economic transformation challenges – real transformation is a social and business imperative through which we help build a society that is just and equitable.
The focus must therefore always be on nation-building with wholehearted public and private participation, motivating and enabling change. Amidst continuing inequality and poverty, alternative investment models and funds committed to addressing socio-economic challenges can help achieve real empowerment and transformation that can drive a new wave of inclusive economic growth and prosperity.
