How Regulation 28 amendments support the growth of the economy and sustainability imperatives in SA
14 Jun, 2023

Shelley Lotz, Head of Policy and Regulation at SAVCA

 

The amendments to Regulation 28 of the Pension Funds Act signalled a welcomed shift for the local private equity (PE) landscape. As of January, this year, investment limits on hedge funds and PE assets have been split, and the allocation limit on PE has been increased from 10 percent to 15 percent. In light of these changes, PE sector players have an unprecedented opportunity to increase their contribution towards the growth of the regional economy and sustainability imperatives.

 

This was one of the key themes that emerged from this year’s Private Equity Conference – an annual event hosted by The Southern African Venture Capital and Private Equity Association (SAVCA). The first panel discussion of the event, facilitated by SAVCA’s Head of Policy and Regulatory Affairs, Shelley Lotz, saw several capital allocators share their perspective on what the most recent amendments to Regulation 28 mean for the future of the sector.

 

More capital. Bigger impact.

 

Whether the higher limit on investments in PE will have a material impact on how capital allocators view unlisted assets remains to be seen. However, SAVCA has stated its intention to not leave this to fate, and has launched a campaign that aims to educate, inform, and shift perceptions on the asset class. For now, at least, the amendments to Regulation 28 have highlighted the potential of PE to produce attractive returns, while simultaneously driving much-needed socio-economic progress.

 

On this point, panelist William Dlanga Nkutha, Deputy Principal Officer of the University of Cape Town Retirement Fund (UCTRF), commented that the latest regulatory developments have compelled allocators to learn more about PE as an asset class. In his opinion, the increased limit has created flexibility for a greater degree of diversification and has piqued the interest of retirement funds to explore their options in unlisted markets.

 

To this end, the UCTRF has committed to strongly considering PE and infrastructure, particularly given the government’s objective to ‘explicitly enable and reference longer-term infrastructure investment’. In line with this objective, the UCTRF has honed its focus on infrastructure equity in the interests of serving a purpose that goes beyond profits and addresses issues such as climate change, unemployment and inequality.

 

As Nkutha explained: “Funds such as ours are now acutely focused on the tangibles – the measurable and visible impact that investments into PE can make on a grassroots level. In the years to follow, we will closely monitor the progress of our allocations and lay the groundwork for future investments, should our plans bear fruit.”

 

Investing in a sustainable future

 

Regulation 28 explicitly states that ‘prudent investing’ should be rooted in all factors that could materially affect an investment, including those related to ESG. With the stipulation of these directives, South Africa became the second country in the world to formally promote the embedding of ESG principles into the decision-making process of institutional investors.

 

For panellist, Suvira Bodha, Head of Alternatives and Portfolio Manager at Sanlam Investments: Multi-Manager, Regulation 28 has steered the trajectory of investments into PE assets which have proven to be significantly impactful over the period they have been investing.

 

As she explained: “It is possible to deliver impact-related goals while placing equal importance on return-related goals. In today’s socio-economic climate, capital allocators are tasked with asking themselves how investments will make a difference in South Africa over time, as well as and develop a sound business case for how investing in unlisted entities can boost much-needed infrastructural development.”

 

In fact, according to Roy Havemann, Chief Executive Officer of Intellidex South Africa, PE is playing a pivotal role in bolstering public sector efforts to rejuvenate the country’s infrastructure. The most recent study, conducted by SAVCA in partnership with Intellidex revealed that last year, 20% of PE investments went into infrastructure-related projects. This in turn enabled a substantial injection of funds into the communities behind these projects.

 

As he asserted: “PE fund managers are agents of social change. And, in light of the recent regulatory developments, if pension funds can unite behind Regulation 28 in a drive to supercharge local investment, there is no reason why South Africa cannot be the first country on the continent to reach developed status.”

 

The opportunity for positive influence

 

Commenting on the role of PE in growing the green economy, Sam Pokroy – CEO of Sanari Capital, highlighted the greater reliance that is being placed on PE funds to make a meaningful impact in climate-related investments.

 

“We have developed a compelling proof case for the fact that fund managers have a much higher degree of influence over their portfolio companies than the boards of listed entities. As industry leaders and decision-makers, we have the chance to position investors as custodians and stewards of a more sustainable world. This kind of thinking is fast becoming mainstream.”

 

Echoing these sentiments was Charles Buchanan, who is part of the Strategy and Transaction Sustainability team at Ernst & Young, explained that within the post-COVID environment, many innovators in African countries have stepped up to the task of developing cleaner infrastructure. Green energy facilities can simultaneously provide solutions to challenges like the energy crisis and issues around accessibility. There is, however, as he says, an enormous funding gap for these ventures. But, as he adds, “PE can be the active steward that can fill this gap.”

 

Investing in the social imperative

 

In South Africa, social ills such as widespread poverty, unemployment and limited access to public services continue to undermine the vision for a more equitable future. The mounting environmental pressures relating to climate change will undoubtedly serve to exacerbate these ills and have a profound impact on the most vulnerable members of society. For this reason, the ‘social’ imperative, as part of the current ESG philosophy, is of particular importance.

 

On this front, capital allocators, fund managers and investors can do much to make a difference and bring about transformation within the sector. As key stakeholders in impact-driven companies, PE leaders can support businesses in embracing a people-first philosophy.

 

“By implementing better labour, recruitment and human resource policies, companies can drive real value internally. In the long run, these improvements can go a long way in boosting operational efficiency and ultimately realising wider margins”, said Buchanan.

 

A story of transformation

 

The important topic of transformation within the industry was further highlighted in a conversation with women fund managers, who reflected on their fundraising journeys since completing SAVCA’s capacity building programmes.

 

Madichaba Nhlumayo, Founder and CEO of Ditiro Capital participated in SAVCA’s Women Empowerment Mentoring and Incubation (WE > MI) Fund Manager Programme. Following this initiative, the Ditiro Fund and I reached our first close with capital commitments of R360 million, raised from local institutional investors.

 

Shedding light on the journey, she shared her conviction that PE investments have the power to be transformative – to uplift communities and contribute towards building the livelihoods of people with whom she has a strong affinity. As an emerging fund manager, who grew up in the villages and towns from which many of the pension fund members are from, there is a deep-seated sense of responsibility in managing other people’s money. “It is therefore an honour to optimise their hard-earned money and instill a culture of accountability as our team makes decisions that will ultimately uplift and empower real people on the ground,” she concluded.

 

 

ENDS

 

 

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@Shelley Lotz
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