Discovery's Adrian Gore and Bidvest's Brian Joffe were put in charge of the entrepreneur fund workstream, charged with raising R1,5 billion to be invested in high-growth potential SMEs. In May my colleagues Geordin Hill-Lewis (Trade and Industry shadow minister) and Michael Cardo (Economic Development shadow minister) met with Gore, Joffe and Lisa Klein, the fund's interim CEO, to find out more about it and get a progress report. In preparation for the meeting I sent them a briefing note which I reproduce below.
In the intervening months the Fund has created a website and appointed Dicks as CEO. Importantly, it has not received the R1,5 billion matching funding promised by government when the fund was announced. There was no mention of it in the budget tabled last month, and I have sent a written question to Minister Gordhan asking why not.
Ironically, not having government's money is a blessing in disguise for the Fund as it would place it squarely in the political arena and significantly influence its investment mandate.
I gave Dicks a copy of the briefing note which he appeared to engage seriously, though he was unable to answer any of the questions it poses. I expect it will take another few months for him to firm up his plan and go public with it. He is well qualified for the job, with a background in investment management and private equity.
The day before I met him, news broke of a R100 billion fund to support black business, contained in the proposed new banking charter. This would be a game changer, and make the CEO's SME Fund look puny by comparison.
The question all these fund managers must ask is, how will throwing money at SMEs and emerging black businesses do more than simply transfer assets from one group of people to another and put some people out of work while creating a few new jobs? Because without growing the economy, this will be the net impact of these funds. With economic growth of 1% and population growing at 1,5% we are going backwards.
Unless measures are put in place to achieve economic growth of 3-5% we haven't a hope of raising the living standards of the poorest in society. This can only be achieved with a combination of investment in infrastructure and industries which soak up unskilled labour, a relentless focus on value-added exports to strengthen our balance of payments, policy certainty and elimination of corruption in the public service.
DA Submission to the Government-Business Task Team on forming an entrepreneur fund
6th May 2016
The DA supports the formation of the Government-Business task teams charged with recommending actions to avoid a ratings downgrade, boost investment and establish an entrepreneur fund.
The DA advocated the formation of a national venture capital fund in its 2014 election manifesto. We have been vocal on the matter in the Trade and Industry Portfolio Committee and in our alternative 2015/16 budget. See:
The DA has expanded on how access to funding is one of the priorities for small business development but that it has to be backed up with supply-chain integration, non-financial support and regulatory reforms to be effective. We recommend collaboration between government and business to give scale and reach. See:
In our view, development of the small business sector requires an intense focus on supply chain inclusion with the goal of improving competitiveness. Enterprise/supplier development initiatives have tended to be compliance rather than competitiveness focused and involve non-core activities, thus lessening their impact. http://www.bdlive.co.za/opinion/2016/02/10/synergy-holds-the-keys-to-growth
We have also drawn attention to the contradictions within the ruling alliance ideology and economic policy, its outdated notion of the “developmental state” and the need for creating the conditions for the economy to grow as a pre-requisite for job creation. See:
For an overview of the DA’s plan to kick-start the economy see http://www.da.org.za/wp-content/uploads/2015/08/The-DAs-5-Point-Jobs-Plan.pdf
On reading the presentation Adrian Gore gave to Minister Gordhan and the Fund Task Team on April 26th, we raise the following discussion points:
1. Is the task team calling for regulatory reforms as a trade-off for businesses committing to the fund? If not, why not? It is generally accepted in business support circles that unless regulatory reform is addressed, pumping money into small businesses will have limited impact and could even have a negative distortionary effect. The presentation is silent on this matter, thus the critical opportunity to trigger real solutions by getting government to revisit destructive policies and regulations is ignored. Specific reforms we advocate include:
a. Amend the definition of “big employer” to businesses with over 250 employees
b. Exempt small businesses from most of the provisions of the Labour Relations Act.
c. Cut red tape at all levels of government through the passing of the DA’s Private Members Red Tape Impact Assessment Bill which was gazetted in April.
2. How will companies justify their contributions to the fund to shareholders?
3. What is the ownership structure for the fund?
4. How does the task team compare the mandate of the new fund to development funding institutions (DFIs) operating in this space such as NEF, IDC, SEFA and provincial economic development agencies?
5. To what extent does the task team regard the fund as distributional rather than growth focused? Is the fund profit or development/poverty alleviation driven, or a mix of both? How will its performance be measured?
6. The corporate contributions could be interpreted as a new form of “prescribed asset”. How does the task team justify this in terms of returns to shareholders compared to other asset/investment classes, or using the money to re-invest in their own businesses?
7. Does the task team regard business support, including mentorship, as a sine qua non for the fund to be successful? If so, where does it expect the mentors to be sourced, will they be remunerated for their work, will tax incentives be provided to them as individuals and/or to the companies in whose time they are performing this task?
8. Will the fund specifically target black-owned businesses (e.g. beneficiaries of the DTI’s Black Industrialists Programme and DSBD’s National Gazelles Programme) or will it be open to all-comers irrespective of race?
9. The R1,6 billion contribution from business is a tiny fraction of the estimated R25 billion annual spend on enterprise and supplier development generated through B-BBEE. Could the fund therefore not be interpreted just as another sop to government rather than an intervention that begins to address some of the structural defects in our economy, including the over-concentration of a few dominant players in each sector and the inaccessibility of corporate supply chains to small businesses?
10. Does the task team regard the tax incentives under Section 12J of the Income Tax Act attractive enough to draw in investors at sufficient scale to have meaningful impact? If not what does it recommend to achieve this?
11. Some analysts regard the paucity of activity in this space as due to market failure while others put it down to the market signalling an unacceptably high risk/reward ratio. Which of the two does the task team agree with, and how does the fund strategy and operational model adapt to this view?
12. What steps will the fund take to track best practice, outcomes and the impact of its investments? Has the task team spoken with Catalysts for Growth, which is specifically examining this crucial element of the entrepreneurial ecosystem?
13. The list of organisations the task team consulted includes mainly those providing financial support for small businesses but very few business incubators/accelerators focusing on non-financial support. Was this intended or was a shortage of time a factor?
14. Is the distribution model envisaged for the fund restricted to specialist fund managers and corporates or will it extend to retail banks and possibly Post Bank to achieve reach and scale? Past funds have had limited impact because they have no ‘retail’ distribution infrastructure. How does this fund plan to be different?
15. How will the fund managers address the problem of the limited pipeline of fundable businesses in South Africa?
16. How does the fund define “high-growth” businesses and will it be restricted to such businesses?
17. Will the fund be a combination of equity/debt/grant funding? Please expand on the spread of financing instruments the fund will use, including such instruments as factoring.
18. Why does the fund set a 1:1 ratio limit for government/business funding? This will limit the fund’s ability to scale as the government is fiscally constrained. Is there not scope for expanding the private sector/institutional/donor finance contribution and using government funding to underwrite first loss? For example, Atlantic Asset Management manages a small business fund on a 1:7 ratio with the Jobs Fund.
19. If the objective is to create jobs, how many net jobs are to be created? How much must be “spent”, calculated by return on capital versus market returns, per job created? What benchmarks is the fund using to assess performance on this metric?
20. SA has tremendous institutional capacity within big businesses. There is also a great deal of institutional capacity across supply chains. Supply chain institutional capacity and market linkages need to be expanded. A fund like this should be a subset of expanding and exploiting supply chains to drive inclusion and competitiveness. What is the task team’s view on this?
21. When is the fund expected to be constituted, what is the investment timescale for the fund and when can investors expect a return?