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A simple Reg 28 amendment could fuel SA’s economic recovery

Considerably more investment could be directed towards SMEs.
Image: Supplied

Covid-19 and the ensuing national lockdown has had a dramatic effect on all spheres of South African society, but small and medium-sized enterprises (SMEs) – especially those in the service sector – have been particularly hard hit. These SMEs, however, are also the fastest creators of new jobs, and could underpin the country’s much-needed economic recovery.

A recent McKinsey report reveals that South African SMEs represent more than 98% of businesses, employ between 50% and 60% of the country’s workforce across all sectors and are responsible for a quarter of private sector job growth. Stimulus of SMEs is therefore the most effective mechanism to drive a recovery of the estimated two million jobs that have been lost through the Covid-19 crisis thus far.

More specifically, however, a simple amendment to Regulation 28 – a regulation in terms of the Pension Funds Act that specifies ceilings for exposures to different asset classes – could support this recovery by enabling considerably more investment to be directed towards SMEs.

Private equity and venture capital are major sources of funding for SMEs, but the sector is currently unable to mobilise the level of investment required and, as a result, 763 companies and close corporations were liquidated in the first six months of 2020.

This is because the asset class is consolidated in the same bucket of alternative investments as hedge funds, which is capped at 15% of compliant funds’ assets under management. Within that, private equity is capped at 10% and any one fund to a maximum of 2.5%.

As the private equity sector has grown over time, and investor awareness has increased, this consolidation no longer makes sense. The ‘alternative investments’ category was introduced into Regulation 28 in 2011 after pressure from institutional investors for more diversification options. Subsequently, however, investors have built up capacity to engage with the asset class and today model the risk/return characteristics of hedge funds and private equity quite differently.

While the Covid-19 crisis has highlighted the need to amend this regulation, it does not need to be overhauled. This is a relatively simple measure that can be quick to implement. As we saw in 2011, Regulation 28 can be easily amended, and the quicker this is done, the sooner the economy will start feeling the benefits.

The Southern African Venture Capital and Private Equity Association (Savca) has prepared a positioning paper which outlines two proposed amendments to Regulation 28:

  1. Separate hedge funds and private equity into independent asset classes, each with their own caps. This would enable investment decision-makers to model the asset classes independently in their portfolio construction process, so as to properly accommodate the risk/return characteristics of each, thereby evaluating risk-adjusted real returns.
  2. Gradually increase the private equity cap from 10% to 15%. This step can be phased, allowing the industry and investors to scale up capacity in tandem, possibly by one percentage point each year. A gradual approach is also low-risk as unintended consequences can come to light before full implementation.

Increasing the private equity cap would effectively allow a pension fund to take a larger exposure to the entire asset class, enabling a higher degree of diversification. This offers positive public benefits by improving the overall financial security of pension fund savers in the long run.

We believe that the private equity cap should be raised by expanding exposure at a gradual rate, as pension funds will need to develop the skills to analyse the asset class and the supply side may need to increase capacity.

Such amendments to Regulation 28 would also allow for much-needed economic stimulus following the low rate of loan approvals from the government’s R500-billion bank loan guarantee scheme. While this initiative was aimed at providing relief to businesses affected by Covid-19, companies’ balance sheets are under immense pressure and businesses are therefore looking to de-risk rather than take on more debt.

This is where equity and smart capital can play a fundamental role in supporting economic recovery and growth. Amendments to Regulation 28 could see much-needed capital being invested to where it is needed.

More details are contained in the positioning paper which can be accessed here.

Tanya van Lill is CEO of Savca

COMMENTS   22

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Clutching at sticks as the house comes tumbling down.

All I can do is shake my head while I eat my popcorn.

Seems like same old same old silver bullet.

How to get the pensions of the poor and middle class to perform miracles and fix everything while the people that got us in this economic mess roam around freely and live in mansions.

Some even have mansions in Dubai too. Smart financial planning on their side too, their money is spread amongst friends and family bank accounts.

The SARS super computer did not pickup those transactions. Maybe it was sleeping.

For the ANC nothing is simple. They will first set-up a task team to investigate your statements…

I want my pension fund to invest in strong offhore economies like the USA. I am not interested in small SME’s in South Africa.

If you are not investing in Tech + EV in USA, your returns in S.A will be better (than USA)

Shill. Go back to Lootfreely House and tell them you’ve exposed yourself as a paid regime praise singer. Ask them to redeploy you.

Why travel so far. You can get overseas returns locally.

Local fund managers such as Ninety One, Perpetua, Sanlam have global equity funds that protect value and deliver returns.

For example:
http://www.perpetuaim.co.za/wp-content/uploads/2020/10/Global-UCITS-MDD-September-2020.pdf

Perpetual underperformer. The ZA equity fund of this particular fund manager is extremely poor. How does one attract assets when performance is so poor? Do your homework before investing.

PERPETUA GLOBAL EQUITY UCITS FUND
PERFORMANCE SUMMARY
Fund performance (Net) Fund (%) Benchmark (%)
30 September 2020 -2.8 -3.2
Year to date -19.7 1.4
1 Year -10.1 10.4
Since Inception (annualized) -5.5 11.0

PERFORMANCE SUMMARY
Source: Perpetua Investment Managers (Pty) Ltd
Fund performance (Net) Fund (%) Benchmark (%)
30 September 2020 -2.8 -3.2
Year to date -19.7
1 Year -10.1
Since Inception (annualized) only had negative returns!!

Actually, just let me choose whatever I want.

Idiocracy! A better solution is the following:

1) Government gets its house in order, get control over crime and corruption and make SA a business friendly environment (Unlikely).
2) Attract FDI (Foreign Direct Investment) to create jobs and fund SME’s (Unlikely)

If foreigners are not willing to invest in local businesses, why should pension funds?
It’s sad, but the tipping point for the failing SA economy happened during the previous president’s widescale looting extravaganza.

How long will it take before the change gets implemented
All the while the so-called smart money managers “managing” the SA Pension Pot are hugging Naspers and the like and we wonder where thee Investment in SA is

This idea will be value-destructive for pension fund members and increase their risk-profile to be on par with that of entrepreneurs. Entrepreneurs are risk-takers while pensioners are supposed to select a safer risk/reward profile.

The state chose to implement lockdown. The state is responsible for the job losses and the financial ruin of small companies and entrepreneurs. The state also depends on these institutions to create social stability, employment and to generate income for the state through the profit motive that is the source of all taxes. The government has to resuscitate the profit motive after the government killed it with the lethal combination of lockdown and socialism.

Leave the pension funds alone. That money belongs to people who have worked for it. Take the money from those people who did not work for it. Give a tax break to small enterprises, drop the minimum wage re1uirements and labour laws. Stop the redistributive municipal rates and taxes. Stop all BEE requirements and burn the Mining Charter. Hand the mineral rights back to the rightful owners. Respect property rights.

This will grow the economy. Any shenanigans with pension savings will simply regurgitate old money that is in the system already. It will not create new wealth. We need less of the stupid greed of socialism and more of the pragmatic ideas of the free market. This government is its own biggest enemy as it destroys the profit objective through a myriad of penalties called taxes.

Pearls before swine, Sensei.

Freedom fighters, communists and trade unionists have in common: they don’t know math. They don’t understand bookkeeping.

No matter who you are and where you live, when all is said and done, someone has to write a cheque. It’s a Law of Nature. There are no exceptions.

That a McKinsey Report is relied on immediately made me skeptical. Glanced at the author’s provenance. Skimmed the rest and reached the same conclusion as most commentators.

“Private equity and venture capital are major sources of funding for SMEs”

If this is really the case, why are the S12J companies so top-heavy with property investments ? If heavily tax-subsidised funds still don’t find sufficient risk/reward payoff in SMEs, why would they be a good option for retirement funds ?

This is just the VC/PE industry talking its book.

Gosh… pension funds could not handle simple equities and bonds and now want to do SME financing. All in the name of ESG and responsible investing.

Lets just pray.

MW did not quite like what my opinion about the “report writer” and friends is.

I think everybody else will know what I mean. Hahaa. These guys!! They infiltrate everything.

Remember Trillian the Guptas etc.??? The R 1.6 billion??

The money someone had to pay back????

Yet these are the “report writers” we are now reading about as though they are some sort of experts you need to trust???

Come on man!!!!

How about a simple amendment to the labour legislation??

If you can’t fire don’t hire – Q.E.D.

So it will do 2 things:

(i) fuel the economy, as the writer states,
(ii) and it will impoverish pensioners!

And the “fuel the economy” part…this assumes that SME’s/economy is well managed with efficiency / high skills / freer labour laws / law & order returned / little corruption / investor confidence / less government interference, etc.

The eventual scoreboard may read:

TEAM Pensions (0) TEAM Dark Bottomless PIT (1)

Take it easy folk.

This is an article from Savca – apparently the local venture capital association. They don’t really mean it but are simply punting their book!

One won’t expect them to talk about money market funds or offshore investments.

Unless Savca can convince us that their staff savings have been financing SME businesses?

End of comments.

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