Asset Manager Incubation – Is it still a thing?

Mark Davids, Investment Strategist – MOTSWEDI

Asset manager incubation programmes have over time developed a bad reputation, mainly because of the evolution of the management of these programmes. They have sadly evolved into a reason to retain Black asset managers as non-mainstream parts of investment strategies. We have seen instances in the past where medium to large sized Black asset managers, with assets under management (AUM) of greater than R10 Billion being allocated “Incubation” sized mandates, whereas medium to large sized White asset management businesses being allocated “Mainstream” sized mandates.

The insult of the practice has led to the process of asset manager incubation largely being side-lined in recent years by many institutional investors.

Starting with the end in mind

Let us clearly define what incubation is, this will allow us to clarify which businesses incubation aims to support and uplift and what the end goal is. At its core, the aim of incubation is to provide support to emerging asset managers over a specified period of time, allowing them to grow, develop and to ultimately reach a point of graduation where they will be regarded as mainstream.

Incubation creates opportunities for emerging asset managers to build track records, accumulate scale in AUM and to grow into credible competitive financial institutions. Given South Africa’s history, incubation has traditionally been targeted at majority Black owned emerging asset managers. The higher purpose has always been to grow the percentage of total assets managed by organically grown Black asset managers in the long-term savings and investment industry.

A simple look at the pool of total assets available for private asset managers (excluding the Public Investment Corporation) to manage which stands at approximately R6 Trillion, we see that less than 8% of this pool is managed by organically grown Black asset managers. Indicating that much work must still be done. We refer to organically grown black asset managers, as opposed to Level 1 BBBEE asset managers that reached this BBEE status through selling stakes to wealthy Black individuals.

Defining incubation

Incubation has many different definitions, Motswedi prefers the alignment of incubation to the Financial Sector Codes (FSC) for Broad Based Black Economic Empowerment (B-BBEE) which refers to Exempt Micro Enterprises (EME) and Qualifying Small Enterprises (QSE). The table below categorises the key characteristics of both.

The way BBBEE scorecards are calculated was changed in 2015 and saw Enterprise and Supplier Development (ESD) become the most significant element, but is only one of three priority elements on the BBBEE Scorecard. Asset managers regarded as EME and QSE qualify as ESD beneficiaries and as such, are regarded as beneficiaries of ESD spend which allows Measured Entities to gain BEE points.

What does incubation entail

We believe that innovative thinking is required to find the next generation of excellence in asset management and investment performance. Whereas most incubation programmes simply entail an allocation of an incubation sized mandate to an incubation asset manager to manage. Motswedi believe that the practicality of implementing a successful incubation programme is about allocating fair incubation sized mandates to assets managers to manage along with a package of financial and non-financial support which will underpin the development and growth of the business of the asset manager – through ESD.

This dual support mechanism allows emerging asset managers to build their track records through managing the fair incubation sized mandate, but also to hire the required human resources, to invest in systems and IT development ultimately improving their value proposition making them more compelling to investors and asset allocators.

By combining a fair incubation sized mandate with a well-run and managed complimentary Enterprise & Supplier Development (ESD) programme asset allocators will give their Incubation Programme asset managers the highest possible chance of achieving success – graduation into the mainstream. For the asset allocators, they gain significantly more value by positively impacting growth of organically grown black asset managers, improving their own Scorecards and the benefit of extra BEE points.

Conclusion

Motswedi believes that incubation has a clear place in the landscape of the long-term savings and investment industry. We believe that starting with the end in mind will see the success of many more incubation programmes.

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ENDS