New investment trend: Putting your money where your values lie
A new investment trend is sweeping the country, through which South Africans can invest in the real economy and make money by backing projects that create jobs and do some good.
“Inequality and unemployment have become synonymous with SA,” said Elias Masilela, director of DNA Economics and a part-time commissioner on the National Planning Commission.
“Whatever we [the private and public sector] have been doing has been delayed and has proven inadequate. It has now come down to individuals and the power of their retirement savings to get the ball rolling and they need to get it moving urgently.”
The World Bank defines impact investing as “investments made into companies, organisations, vehicles and funds with the intent to contribute to measurable positive social, economic and environmental impact alongside financial returns.”
While impact investing is a relatively new idea to most, the Covid-19 pandemic has brought more attention to a need for socially and environmentally conscious partnerships around the globe.
For some people that means putting their savings into instruments that follow international norms and principles designed to address environmental, social and governance (ESG) risks. For others, it means avoiding industry vehicles that they see as causing harm — for example, tobacco and gambling.
Impact products aim to go one step further by using the power of large-scale funds to invest in products that will socially uplift society and make it financially lucrative to do so for the members of those funds.
Though social impact investment has not technically been stagnant in SA, it has not grown to a significant size to get the momentum going and provide significant impact.
However, financial services heavyweight RisCura announced last week the launch of SA’s first impact fund of funds aimed at retirement funds and other institutional investors. The funds will underwrite three distinct asset classes — unlisted debt, unlisted equity and unlisted property.
“There is a great need for impact capital and part of our intention in developing this series of funds is to help to support and grow the impact investment industry in this country,” said RisCura MD Malcolm Fair.
In February, local Impact Capital Africa reported on the excellent +Impact SDG Investment Grading results (AA+, 82%) of the Mdluli Safari Lodge in the Kruger National Park. The lodge is a partnership between impact investors and the rural Mdluli community which, after being forcibly removed in the 1960s and gained freehold title of their land in 1998, agreed with private investors to develop a luxury tented safari lodge in the Kruger Park.
But why go the unlisted route?
Investment managers say it is the flexibility to move in and out of markets that allows them to allocate across several equity subclasses and strategies: large caps, mid-caps, small caps, emerging markets, and long/short or market neutral strategies. The allocations are gradually shifting now to private and unlisted companies.
Masilela says the impact investing movement is mindful that governments around the world have failed to make meaningful progress around their social development goals commitments. This is particularly the case with the National Development Plan (NDP) in SA, he says.
The result is that significant investment opportunities are opening up for investors.
On Thursday, RisCura informed the Kisby SME Fund that it has completed its investment due diligence on its offering, and that Kisby has been approved for inclusion and will be presented to the portfolio management committee of the newly launched RisCura Impact Fund of Funds investment series. The Kisby Fund is a partnership between 4AX Debt Services, credit provider Rainfin, and Arena Holdings which owns TimesLIVE, to provide funding to SMEs with revenues of between R10m and R1bn through an online loan platform underpinned by 4AX Debt Services.
Kisby tailors a mixture of equity and debt instruments to offer appropriate and affordable funding for a specific business, which doesn’t have to be tied to the current overvalued listed securities markets. Where average lending rates are prime plus 17.75% to 32.75%, Kisby offers prime plus 12.5%.
RisCura did not want to reveal the identity of any of its other potential participants, without guarantees in place.
“Impact capital is the missing piece of the puzzle that is required to balance the risk-return equation for SMEs”, says Mark Barnes, chairman of the Kisby fund. “We’re delighted to be included in this RisCura initiative.”
“The cash flow risk profiles of companies operating in the young, real, growing economy are not capable of being financed entirely by secured bank loans. Impact capital comes to the party in solving this risk-return mix in the overall funding solution. Kisby has the Right mix of expertise and technology required to put this capital to work in the SME space — that’s where the jobs will be created, and the time is now.”
Small to medium enterprises (SMEs) and the informal sector in SA play a significant role in economic activity, job creation and growth. A study conducted by the Small Enterprise Development Agency suggests that the SME contribution to economywide employment stands at 66% and Stats SA pegs the SME contribution to total turnover in the country at approximately 39%. This business sector therefore represents an important example of an investee perspective that would benefit from impact investing.
“There are now over 70 unlisted investment products in SA that RisCura follows,” Fair said.
Said Masilela: “Never before have we seen this much collaboration between government and the private sector; it is the first time since 1994 that a meaningful social compact is becoming a reality.”
However, the high-level partnerships mentioned by business and government will fail without buy-in from labour.
“SA’s old abnormal, which is littered with race-based inequality, poverty and unemployment, must be addressed,” said Jan Mahlangu, retirement fund co-ordinator, principal officer and trustee at Cosatu.
He added that the Covid-19 pandemic had exposed the triple fault lines that define the present socio-economic reality.
Given that self-regulation has failed, if impact investing is to succeed then there should be mandatory regulation to govern this, Mahlangu added.
At the end of February 2021, the National Treasury published the draft amendments to regulation 28 of the Pension Funds Act for public say. This follows the 2021 budget and 2020 medium term budget policy statement announcements that government is in the process of reviewing regulation 28 to make it easier for retirement funds to invest in infrastructure.
The proposed review to regulation 28 is informed by a number of calls for increased investment in infrastructure, given the current low economic growth climate. The current regulation does not define “infrastructure” as a specific category, which is currently spread across a number of asset classes like equity, bonds, loans and private equity. Consequently, current data from retirement funds does not record the exact investment in infrastructure. The proposed amendment would introduce a more precise definition of infrastructure to enable much better data and measurement.
“There were quite a number of requests for increases in the level of investment by retirement funds in the infrastructure space. One of the requests was for prescribed assets. So, we decided to amend the legislation,” Basil Maseko, National Treasury director of savings, told Citywire SA in an interview.
“It is not that retirements funds do not invest in infrastructure. They do. But the infrastructure part of the investment is not visible to us when the pension funds report. We want to be able to identify how much is spent on infrastructure.”