RYK VAN NIEKERK: Asset management company Ninety One has launched a R10 billion fund to assist large businesses to survive the economic impact of the lockdown and the Covid-19 virus. The fund is called the Ninety One SA Recovery Fund. Ethos Private Equity is also a partner and a process is already underway to source the funding from institutional investors. John Green is the chief commercial officer at Ninety One. John, thank you so much for joining me. What are the major objectives of the fund?
JOHN GREEN: Ryk, thank you for inviting me to join you today. Yes, I think the baseline thinking around this fund is that all pools of capital have a role to play in helping the economy find its way through the Covid-19 situation.
And the whole purpose of this fund is to take the long-term savings capital pool and create the balance between what stakeholders need, which is a sensible return, and what the economy needs at this point in time, which is innovative financial solutions for companies that are facing significant challenges.
RYK VAN NIEKERK: We’ve seen the launch of several initiatives to assist businesses ranging from micro-businesses, tourism businesses, medium-sized businesses. We’ve seen the significant government loan guarantee scheme, but this fund is different. It aims to assist businesses with a turnover in excess of R300 million, so it is your larger businesses. What is the need within that sector for such funding?
JOHN GREEN: Yes, Ryk. We think that there is potentially a bit of a gap that exists between businesses that are turning over more than R300 million and therefore don’t qualify for the guarantee scheme, and large-cap businesses, which have very easy and capable access to the capital markets. And so in that space, we think that there is going to be a very significant and growing need. In [the] listed market context, we’d describe it as the smaller and mid-cap space in the listed markets.
And I think that what we plan to do here is to focus in on those businesses that were good businesses, strong businesses with good management, good management teams, good propositions coming into Covid-19, who are now struggling because of this very unique situation that we all face.
And we want to be innovative in how we present financial solutions to the situation they’re dealing with.
RYK VAN NIEKERK: Your partner in this venture is Ethos Private Equity. Will the fund take the form of a private equity-type of investment, hence a combination of loan funding, as well as taking up equity in companies?
JOHN GREEN: I think, Ryk, the point that we see here is that [there is a] need for the fund to be flexible in the way that it structures a solution for a company. You know, there are going to be companies that we deal with and invest in through this fund that are listed companies [or] private companies. We don’t want to be exclusive about it. There are going to be situations where we invest using debt instruments. There may be situations where we invest using equity instruments. We want to find the most sensible way to create that balance as I said. And so flexibility is important and then also skill sets are important. So we at Ninety One have very strong skill sets in the listed equity space, in the credit space across listed and private credit, but we felt we needed to boost the capacity and capability of this team in the private equity skill set arena. And so, Ethos being one of the most highly regarded private equity businesses in the country, came into view. And we are delighted with that partnership and … with the way that these teams are already working together to find the opportunities and to craft sensible solutions for companies.
RYK VAN NIEKERK: Are there any specific sectors you will target?
JOHN GREEN: So, Ryk. I mean, again, we don’t want to be exclusive, but clearly there are certain sectors that have been more affected by Covid-19 than others. It’s not obvious, for example, that the communications and media sectors have been affected, but it is obvious that the hospitality and construction sectors have been affected. So I think by its natural course, and by the fact that we are looking for businesses to invest in that were good businesses, in strong positions coming into Covid-19, and were significantly affected by the pandemic that we’re all experiencing, it means that we will probably centre in around those sectors that have been more affected by the pandemic.
RYK VAN NIEKERK: The fund size is R10 billion and you are sourcing contributions from institutional investors. What has been the interest of those institutional investors?
JOHN GREEN: We’ve set the target size at R10 billion, we think that that is an ambitious target size, but we think it’s important in terms of being able to have a meaningful impact for the size of business that we’re targeting. You know, that kind of fund size will give us the opportunity to make probably somewhere between 30 and 40 investments, depending on specific needs. And we think that that level of impact will certainly help the economy. And [what] I think important to stress in this concept, Ryk, is that this whole idea of ensuring that we maintain and preserve our productive capacity is really a central theme.
It centres around that point, that good companies that were a part of the productive economy have been massively affected by the pandemic, and that the risk that we run as an economy and as the South African society is that, as a consequence, we lose that entire infrastructure.
We lose that capability, never to be rebuilt again. And so preserving their productive capacity is a really important objective of the fund. So that sort of size allows us to do that – meaningfully. We think we have been engaging actively with institutional asset owners across the country, and the response has been very positive. I think all asset owners and their representatives in the long-term savings ecosystem are saying ‘Yes, we do have to play a role. Yes, we do have to find a way to balance the needs of the economy right now, and the needs of our stakeholders. And we think you’ve come up with a very interesting way of proposing and doing that’. So we see a lot of interest. Obviously, all of those organisations need to step through their governance processes carefully and sensibly. And so that takes a little bit of time. We’re getting early-stage commitments which we’re really pleased with. And so right now we’re fairly confident that we’re going to be able to reach that target and, as a result, we think, make a meaningful impact on preserving the kind of capacity that we need to in the situation that we’re now in.
RYK VAN NIEKERK: Private equity funding is seen as being expensive from a company’s perspective, probably opposed to debt funding from banks, or even raising capital from the JSE or other capital markets. What would be the main advantage for a company to consider this fund, as opposed to other traditional ways of acquiring funding?
JOHN GREEN: I think in this instance Ryk we can safely say that every pool of capital needs to participate and that companies obviously have access to banking capital, they have access clearly to listed market capital. And we’ve seen the bigger companies already come to market in terms of placing debt issuances, but there are many companies out there that just don’t have the access to that kind of opportunity, even though they are larger than R300 million in revenue. And so what this fund does is that it plans to work closely with company management, to craft a sensible and relevant financing solution for the situation they face. That’s the differentiator, we think.
The differentiator is [that] as the banking system and as the capital market system in other places is tied up with some of the very big needs, we think that in this space there will be a really meaningful need for the kinds of solutions that we plan to develop.
And I think responsiveness, knowledge of the businesses, knowledge of the situation that they face and investing for the long term as opposed to lending for the short term are the three things that we will be offering the companies that we approach and that approach us.
RYK VAN NIEKERK: The fund was launched around a week ago. Has there been interest from companies in distress?
JOHN GREEN: Yes, I mean we’re talking to companies every day. I think that, obviously, as the pandemic and as the economic situation perpetuates from one month to the next, so the visibility of companies around their financial needs begins to crystallise and we’re seeing a really significant tick-up in the recognition of management teams around the need to begin to craft 12-, 18-, 36-month type financing solutions right now. I think it’s still reasonably early in that programme, but given the severity of the contraction in economic activity, these are things that can develop incredibly quickly. And so the need to start conversations early and to get to know and develop an understanding of the situation, and then to be able to be positioned to be responsive, we think is very important. So we’re very happy with the way in which those conversations are going. We only hope that we’re able to secure the kind of commitment and support that we need soon enough to be able to be ready when … the need on the ground arises.
You know, it’s amazing to me that when the shutdown first started, I think the original GDP contraction forecasts were of the order of somewhere between 5% and 6%. That very quickly went to a contraction of 8%. I think we’re now at a consensus level of a contraction for this year of somewhere between 10% and 12%. And what fascinates me is that that’s a doubling of the contraction estimate, which is already significant in a period of not more than six weeks. And so I think that what that shows us is that this is a situation that is developing very quickly.
And so the participants who are there that need to find financing solutions for our productive capacity, you need to be ready and need to be able to act quickly – and that’s what we’re planning to do.
RYK VAN NIEKERK: And that is under the assumption that we will stay in Level 3 [lockdown]. And with the spread of the virus, we may well see certain parts of the country move back to Level 4 or even Level 5. And that will change the prospects of the contraction even more.
JOHN GREEN: Indeed. And obviously what’s happened in the thinking through how to balance these needs is … a recognition that the effect of the kind of levels of contraction that we are now estimating is enormous. I don’t think any of us in our lifetimes have come close to seeing something like this. And so thinking about how to be ready for it, thinking about how to have the financing solutions in place to rapidly respond, is really important.
RYK VAN NIEKERK: Earlier you said that you may look at around 40 investments – is [that] a lot? Is it only a few? Are you going to be very, very selective?
JOHN GREEN: So Ryk, I was saying, you know, if we get to a R10 billion fund, clearly that gives us the capacity, depending on the size of the sorts of investments we need to make, to do up to somewhere between 30 and 40. If you think about 30 companies operating in our economy of that size, i.e. above R300 million in revenue, that is a meaningful impact. I think if we get north of 30 investments in this, and not that I think we will be short of opportunities, but, you know, we’ll be short of time and we’ll be short of the resources to be able to do the kind of work that we need to do to get there. But if we get north of 25 investments here, I will be very pleased. And I know that 25 investments in the kinds of businesses that we’re thinking about here, for the size of those businesses that we’re targeting, will have a really meaningful impact on the overall productive capacity of the economy and therefore putting and leaving in place and creating the capacity for future employment, for future tax revenue, et cetera, et cetera.
RYK VAN NIEKERK: Very interesting fund, indeed. It is the Ninety One SA Recovery Fund. It aims to raise R10 billion to support businesses with turnovers north of R300 million. John, thank you so much for your time and good luck. I think this is a very valuable initiative, and hopefully it can contribute positively to keep these businesses in these difficult times in business. That was John Green – he’s the chief commercial officer at asset management company Ninety One.
Brought to you by Ninety One.