briefing to the portfolio committee on trade and industry
TRANSCRIPT
BRIEFING TO THE PORTFOLIO COMMITTEE ON TRADE AND INDUSTRY
Presenters: Ms Philisiwe Buthelezi: CEOMr Frencel Gillion: CIOMr Victor Mabuza: Executive – Asset ManagementMr Andrew Wright: COOKhetiwe Tshabalala: Senior Investment Associate
28 February 2007
TABLE OF CONTENTS
1. MISSION, MANDATE AND OBJECTIVES
2. CURRENT STRATEGIC PLAN AND STRUCTURE
3. ASSESSMENT OF THE BEE FUNDING ENVIRONMENT
4. FUND MANAGEMENT DIVISION
5. ASSET MANAGEMENT DIVISION
6. BUDGET
7. CONCLUSION
8. CASE STUDIES
TABLE OF CONTENTS
1. MISSION, MANDATE AND OBJECTIVES
2. CURRENT STRATEGIC PLAN AND STRUCTURE
3. ASSESSMENT OF THE BEE FUNDING ENVIRONMENT
4. FUND MANAGEMENT DIVISION
5. ASSET MANAGEMENT DIVISION
6. BUDGET
7. CONCLUSION
8. CASE STUDIES
ACCELERATED DELIVERY
“The National Empowerment Fund (NEF) is the catalyst of broad-based Black Economic Empowerment in South Africa.
We enable, develop, promote and implement innovative investment and transformation solutions to advance sustainable Black economic participation.”
NEF Mission Statement
Main objective To be a catalyst in facilitating economic equality and transformation
Development focus
Maximise the empowerment dividend
Driven by
- Current market needs- Broad-based empowerment charter- Government policy and other sectoral
charters- Addressing past failures of BEE structures- BB BEE Codes of Good Practice
WHAT DOES NEF DO AND WHY?
TABLE OF CONTENTS
1. MISSION, MANDATE AND OBJECTIVES
2. CURRENT STRATEGIC PLAN AND STRUCTURE
3. ASSESSMENT OF THE BEE FUNDING ENVIRONMENT
4. FUND MANAGEMENT DIVISION
5. ASSET MANAGEMENT DIVISION
6. BUDGET
7. CONCLUSION
8. CASE STUDIES
NEF STRATEGIC FOCUS
Broad Based Black Economic EmpowermentThe Codes of Good Practice
Accelerated & Shared Growth Initiative for SA ASGI - SA
6% GDP Growth 10% Investment Growth 10% Export Growth 2014
Government Aims:1. Access to Finance2. Job creation3. Geographic spread4. Women empowerment5. Integrated manufacturing economy6. Efficient, fast & flexible economy7. Diversity of enterprise8. Skills transfer & development
NEF Act:Objectives
The dti Objectives
Priority
Sectors
Arts & Culture,
Tourism,
Textiles,
Agro Processing
Automotive,
Chemicals,
ICT, Aerospace
Film Industry,
Exports
HISTORIC BUILD UP
PERIOD PLANNING ACHIEVEMENT
Years ending 31 March 2003
Established under National Empowerment Fund Act 105 of 1998
Establishment of NEF Ventures Fund with IDC
Year ending 31 March 2004
Transfer of MTN and Uthingo share set asides
30 May 2004
Strategic Plan approved by Minister and the dti prior to launch
Launched current products
R2 billion allocated by NT for capitalisation - 5 yrs to 2009
Year ending 31 March 2005
Strategic Plan approved by DG and DDG (dti)
Business Plan approved by Acting DG (dti)
First capital drawdown of cash of R150M
First investments disbursed
APPOINTMENT OF CURRENT NEW EXECUTIVE MANAGEMENT AND BOARD OF TRUSTEES
Year ending March 2006
Draft Rolling Strategic Plan Second capital drawdown of cash of R370M
NEF disburses in excess of R200 million
Approval of 1st retail issue
HOW DOES THE NEF DO THIS?
KEY OBJECTIVES OF THE NEF:
• Promote and support business ventures pioneered and run by black people;
• Promote the understanding of equity ownership among black people;
• Provide black people with direct and indirect opportunities to acquire share interests in State Owned and private business enterprises;
• Encourage and promote investments, savings and meaningful economic participation among black people.
THE REVISED STRATEGIC PLAN
• To create a prudently and effectively managed fund with a time horizon of at least 10 years;
• To ensure broad-based and sustainable empowerment;• To act as a catalyst to stimulating BB BEE and hence economic
growth;• To avoid duplicating existing offerings by other operating DFIs;• To work in partnership with both public and private sectors;• To maximise the empowerment dividend in lieu of the financial
dividend;• To protect the capital base of the NEF and provide a real return.
NEF’S PERFORMANCE CRITERIA – “The Empowerment Dividend”
• Broad Based Black Economic EmpowermentOwnership, management control, employment equity, skills etc
• Black Women Empowerment
• Job Creation
• Growth Sectors
• Geographic Spread
• Investment Return
The assessment of impact is not driven only by financial returns but by measurement in terms of “The Empowerment Dividend” made up as follows:
TABLE OF CONTENTS
1. MISSION, MANDATE AND OBJECTIVES
2. CURRENT STRATEGIC PLAN AND STRUCTURE
3. ASSESSMENT OF THE BEE FUNDING ENVIRONMENT
4. FUND MANAGEMENT DIVISION
5. ASSET MANAGEMENT DIVISION
6. BUDGET
7. CONCLUSION
8. CASE STUDIES
BEE MARKET CHALLENGES
BEE market challenges include
• major funding gaps – R772 billion to R2 trillion
• lack of collateral by BEE groups
• limited specific industry knowledge / management experience
• Lack of bankable business plans
• limited or no equity contribution
• limited knowledge of financial market, financing structures and financial investments
2
Banks faces similar challenges as NEF when financing BEE
Banks ringfence higher risk products
Cross subsidise product offerings
Major focus on large leveraged transactions
Financial Sector Charter (FSC) points
0
20,000
40,000
60,000
80,000
100,000
120,000
Rand Merchant Bank ABSA Corporate andMerchant Bank
Nedbank Capital Standard Bank Investec Bank
R B
n
0
500
1,000
1,500
2,000
2,500
3,000
3,500
4,000
4,500
R B
n
Value of transaction (2005) in Rm Average Deal Size in Rm
Bank Number of transactions (2005)
Value of transaction (2005) in Rm
Average Deal Size in Rm
Rand Merchant Bank 25 99,823 3,993
ABSA Corporate and Merchant Bank 20 69,058 3,453
Nedbank Capital 33 60,746 1,841
Standard Bank 28 35,672 1,274
Investec Bank 39 21,709 557
THE BEE COMPETITIVE ENVIRONMENT
4
Bank Startup Finance Contract Finance Franchise Finance Guarantees Asset Finance Partnerships/Joint Funds Trusts/Broad-based Schemes/BEE Partners
Business Partners/Khula Start-Up Fund
Khula Guarantee Fund BP/UYF Franchise Fund
DBSA All of funding Products No dedicated product N/A N/A Depends on nature of funded project
Progress Fund Financing through BEE Consortiums
Matching Scheme
Partnership Scheme
Product Development Scheme
N/A
N/A
UYFUYF/FNB Progress Fund General Fund N/A UYF/Buisness Partners Fund N/A N/A
UYF/Business Partners Franchise Fund UYF FNB Progress Fund UYF Voucher Programme
BP/Khula Start-Up Fund
Business Partners No dedicated product Business Partners/Umsobomvu Franchise Fund
N/A
N/AN/AIsibaya Fund(Fund of Funds and Private Equity Fund)
PIC
Tourism Fund
IDC N/A Yes Yes-through the dedicated unit
N/A
Financing through BEE Consortiums
N/A
N/A IDC Partnership for Transport
N/A
Yes
Tourism Fund
THE BEE COMPETITIVE ENVIRONMENT (Cont.)
5
THE BEE COMPETITIVE ENVIRONMENT (Cont.)
5
• DFI’s• Transaction sizes vary greatly• Only IDC offers a Contract Finance Product• Khula and UYF partners with BP and Banks to rollout its
products• BP offers most comprehensive post investment support products• BP leaders in SME financing
Private Equity Fund
• Comprise captive and independent Fund Managers
• BEE is a key driver of deal flow (R3 billion in 2005)
• Preference for later stage, buy-out funding
• Limited “subsidised” funding to BEE groups
6
THE BEE COMPETITIVE ENVIRONMENT (Cont.)
NEF APPROVED & DISBURSED DEALS BY NUMBER
31ST DECEMBER 2006
0
20
40
60
80
100
120
Accumulative No. of Deals Approved Accumulative No. of Deals Disbursed
99
79
Launch of funding products
Additional R151m capital
allocation
Appointment of CEO
Appointment of new Board of
Trustees
NEF APPROVED & DISBURSED DEALS BY VALUE
31ST DECEMBER 2006
0
100,000,000
200,000,000
300,000,000
400,000,000
500,000,000
600,000,000
700,000,000
Accumulative Value of Deals Approved Accumulative Value of Deals Disbursed
R632m
R433m
Launch of funding products
Appointment of CEO
Additional R151m capital
allocation
Appointment of new Board of
Trustees
NEF work in progress: 185 of R1,409 bn
ENQUIRIES
APPLICATIONSNEW DEALS
ACCEPTEDDUE DILIGENCE
APPROVED DISBURSED
(Including
Undrawn Capital)
Approx
22,593 4,534
41
worth
R313m
45
worth
R461m
20
worth
R202m
79
worth
R433m
FUND MANAGEMENT PIPELINE
17
FUND MANAGEMENT STRATEGY – DIVISIONAL OVERVIEW
Strategy is aimed addressing the following issues:
Internal External
• Clarify focus areas and broad investment criteria
• Enhance risk management, thereby driving down impairments
• Facilitate greater efficiency and turnaround times
• Facilitate the deepening of skills / product specialisation in the two funds
•Accelerate delivery on NEF mandate
• Address issues of access to finance
• Position NEF as the pre-eminent provider of BEE financing solutions
• Position NEF as a catalyst for leveraging commercial banks and other DFI funding for BEE
8
TABLE OF CONTENTS
1. MISSION, MANDATE AND OBJECTIVES
2. CURRENT STRATEGIC PLAN AND STRUCTURE
3. ASSESSMENT OF THE BEE FUNDING ENVIRONMENT
4. FUND MANAGEMENT DIVISION
5. ASSET MANAGEMENT DIVISION
6. BUDGET
7. CONCLUSION
8. CASE STUDIES
FUND MANAGEMENT DIVISION
As a facilitator of the Codes of Good Practice of the Broad-Based Black Economic Empowerment Act (the Codes), to support the pillars of black enterprise by providing finance and financial solutions through the Fund Management Division across a range of sectors and stages of business;
PRODUCTS TO FACILITATE BUSINESS GROWTH
Start-UpStart-Up
CC & (Pty) LtdCC & (Pty) Ltd Acquire assetsAcquire assets Working capitalWorking capital Bridging financeBridging finance Debt and EquityDebt and Equity Black >75%Black >75% Max. 7yearsMax. 7years
ExpansionExpansion
CC & (Pty) LtdCC & (Pty) Ltd Debt & EquityDebt & Equity Black >51%Black >51% Max. 7yearsMax. 7years
TransformerTransformer
MBOs & LeveragedMBOs & Leveraged financefinance Management buy-insManagement buy-ins ESTEST Unlisted entitiesUnlisted entities Debt & EquityDebt & Equity Black >26%Black >26% Max 7yearsMax 7years
Liquidity & WarehousingLiquidity & Warehousing
Create sustainable BEE Create sustainable BEE ownershipownership
Refinancing existing BEERefinancing existing BEE structuresstructures
Max. 3yearsMax. 3years
Capital MarketsCapital Markets
Facilitate new Facilitate new entrants into JSEentrants into JSE & Alt& Altxx
Black >26%Black >26%
Max. 2yearsMax. 2years
Start-Up Expansion Maturity/Decline
High Risk Low Risk
Preferential Procurement
Preferential Preferential ProcurementProcurement
CC & (Pty) LtdCC & (Pty) Ltd Acquire assetsAcquire assets Working capitalWorking capital Bridging financeBridging finance Debt Debt Black >75%Black >75% Max. 7yearsMax. 7years
NEF FUND MANAGEMENT STRUCTURED INTO FOCUSED FUNDS
Chief Investment Officer
iMBEWU FUND•Entrepreneur support•Rural & Community•Proc. Contracts
CORPORATE FUND•Entrepreneur support•Capital Markets•Liquidity & Warehousing
Legal ServicesPre-Investment
ManagementPost-Investment
Management
NEF iMBEWU FUND•Entrepreneur support
(<R3m)•Rural & Community•Proc. Contracts
NEF CORPORATE FUND•Entrepreneur support
(>R3m)•Capital Markets•Liquidity & Warehousing
NEF STRUCTURED INTO FOCUSED FUNDS
The NEF iMbewu Fund • provides debt finance from R250 000 to R3 million (in
exceptional cases up to R20 million for Procurement Contracts and Rural & Community Development) for start-up, expansion and equity transformation products
The NEF Corporate Fund • provides complex investment debt and equity solutions from
R3m to R50m for all products
(R) Value%
By Number%
By Value By Number
Transformer R 180m 41.6% 10 12.7%
Capital Market R 74m 17.0% 4 5.1%
Start-Up R 61m 14.1% 39 49.4%
Liquidity & Warehousing R 60m 13.8% 3 3.8%
Expansion R 38m 8.8% 17 21.5%
Contracts R 19m 4.3% 5 6.3%
Rural & Community R 1m 0.3% 1 1.3%
R 433m 100% 79 100%
INVESTED PORTFOLIO BY PRODUCT: 31 Dec 2006
11
INVESTED PORTFOLIO BY REGION: 31 Dec 2006
(R) Value %
By ValueBy Number %
By Number
Gauteng R 222 m 51.3% 46 58.2%
Western Cape R95 m 22.0% 14 17.7%
Eastern Cape R78 m 18.0% 7 8.9%
Kwa Zulu Natal R 34 m 7.8% 7 8.9%
Limpopo R3 m 0.7% 3 3.8%
Mpumalanga R 0.4 m 0.1% 1 1.3%
Free State R 0.25 m 0.1% 1 1.3%
Northern Cape 0 0.0% 0 0.0%
North West 0 0.0% 0 0.0%
R433 m 100% 79 100%
INVESTED PORTFOLIO BY SECTOR: 31 Dec 2006
12
INVESTED PORTFOLIO BY SECTOR: 31 Dec 2006
SECTOR (R) Value%
By ValueBy
Number%
By Number
Construction R 85 m 19.5% 9 11.4%
ICT & Media R 74 m 17.0% 10 12.7%
Food & Agri Processing R 51 m 11.9% 15 19.0%
Tourism & Entertainment R 47 m 10.8% 4 5.1%
Mining Services R 45 m 10.5% 2 2.5%
Manufacturing R 45 m 10.4% 6 7.6%
Printing Services R 14 m 3.3% 5 6.3%
Wood & Paper Industry R 13 m 2.9% 4 5.1%
Textile Industry R 11 m 2.6% 3 3.8%
Motor Industry R 11 m 2.5% 3 3.8%
Engineering R 10 m 2.2% 4 5.1%
Note: Only main invested sectors above 2% by value are reflected above
(R’m) Value % By Value By Number % By Number
Associate Investment (Loan & Equity)
309 71% 22 28%
Loan 112 26% 54 68%
Equity 13 3% 3 4%
433 100% 79 100%
INVESTED PORTFOLIO BY INVESTMENT STRUCTURE
NEF INVESTED PORTFOLIO BY FINANCIAL INSTRUMENT BY VALUE
31ST DECEMBER 2006
Loan
26% Equity
3%
Loan & Equity
71%
13
Total Invested(R’m)
Total Impairment(R’m)
%
Start-up 61 36 50%
Expansion 38 23 61%
Transformer 180 2.5 0%
Contracts 19 5.5 29
Rural & Community 1 1 100%
Capital Market 74 1 0%
Liquidity & Warehousing 60 30 50%
433 98 23%
IMPAIRMENTS BY STAGE OF INVESTMENT:31 Dec 2006
16
Total FMDiMbewu
FundCorporate
Fund
R’m R’m R’m
2006/2007 Allocation 459 205 254
Projected 2006/2007 performance 352 94 258
Disbursed up to 31/12/2006 156 26 130
Projected disbursements (4th Quarter) 196 68 128
Undrawn Surplus 107 111 (4)
2007/2008 Budget allocation 450 150 300
Total available capital 557 261 296
Less: Approved / potential transactions in current pipeline to be invested in 2007/2008
(214) (120) (94)
Available for other deals in 2007/2008 332 136 195
FUND MANAGEMENT RESERVES - 2007/2008
18
TABLE OF CONTENTS
1. MISSION, MANDATE AND OBJECTIVES
2. CURRENT STRATEGIC PLAN AND STRUCTURE
3. ASSESSMENT OF THE BEE FUNDING ENVIRONMENT
4. FUND MANAGEMENT DIVISION
5. ASSET MANAGEMENT DIVISION
6. BUDGET
7. CONCLUSION
8. CASE STUDIES
ASSET MANAGEMENT DIVISION
By structuring accessible retail savings products for black people through the Asset Management Division, which is a custodian of certain equity allocations in State Allocated Investments (SAIs), the NEF aims to foster a culture of savings and investment amongst its beneficiaries.
•
The South African consumer challenges
Intimidating locations
Complex products
Non conducive markets
EnvironmentUse of accessible channels and
Media
Access to retail brokers
Timeous announcements
Distribution and access Distrust formal institutions
No financial planning
Prefer holding cash e.g. storing money
under the bed
Culture
Very little education and financial
Intimidated by financial jargon
EducationMedical costs eats up disposable
income
Reduces pool of targeted
investors
Disillusioned and disgruntled
Nation, that do not see a need
to save,
HIV/AIDSAffordability,
Minimum subscription
Diversity
Costs
2006 Survey of Financial usage
2005 & 2006 people with bank accounts increased by 1,5 m to 15.9m
2% invest in a savings or investment policies
Savings & investment knowledge is limited
67% do not understand how interest rates work
38%
Emergency
29%
Funeral
Costs
28%
Food
2006 Survey of Financial usage
Overall people prefer having safe investment and Earning a low return
On average, whites invest more and use formal investment structures
Blacks are twice as likely to belong to a Stokvel than a retirement or annuity fund
Gaps Identified
Over subscription in the case studies demonstrates growing appetite for non-conventional retail financial products
Savings and investment diversification invites for more products targeted at the individual consumer
There is an increasing need for inflation beating products by all segments
Information irregularity between consumers & product providers, the underlying problem is financial illiteracy
Distribution of financial services and products is a key problem
The backlog and gaps in broad based empowerment dictates that more focused retail offers be made to Black people
•
Interventions to be explored
Continuous Education - Providing focused higher quality information
Accessible institutions and access to brokers, service providers - Monitor distribution channels more effectively at a high level - Distributors encouraged to take a closer look at the information they receive from product providers
Customer focused solutions & less complex products - Designing products that are client focused
Channeling increasing consumer expenditure towards savings and investment
Acceleration of Broad Based Empowerment
Designing innovative products
Undertake better post-sale analysis of the performance of products
•
Designated State Allocated Investments
Asset Shareholding % Status
• MTN Group 1.5 received by NEF• Telkom 5 not yet received• SAA 5 not yet received• ACSA 10 not yet received• Connex Travel 10 not yet received• Viamax 10 not yet received• Syncat 10 not yet received• Transwerk Perway 10 not yet received• Sentech 10 not yet received• Uthingo 5 received by NEF• SAFCOL 10 not yet received
BEE RETAIL PRODUCTS
• Current BEE Retail Product Initiatives
TABLE OF CONTENTS
1. MISSION, MANDATE AND OBJECTIVES
2. CURRENT STRATEGIC PLAN AND STRUCTURE
3. ASSESSMENT OF THE BEE FUNDING ENVIRONMENT
4. FUND MANAGEMENT DIVISION
5. ASSET MANAGEMENT DIVISION
6. BUDGET
7. CONCLUSION
8. CASE STUDIES
‘millions Fund Management Operations TOTAL
2003/4 R35 R25 R60
2004/5 R150 R15 R165
2005/6 R371 R40 R411
2006/7 R495 R66 R561
TOTAL R1 051 R146 R1 197
R1 035
INVESTED:COMMITTED:
R635
R400
BUDGET:
2007/8 R646 R143 R789
2008/9 R965 R107 R1 072
2009/10 R978 R116 R1 094
TOTAL MTEF R2 589 R366 R2 955
MTEF YTD R3 640 R512 R4 152
OVERVIEW OF CAPITALISATION
R151 m
R380 m
Budget v MTEF: Operating Costs
Budget Budget MTEF Budget MTEF Budget MTEF
R'm R'm R'm R'm R'm R'm
COSTS
Personnel Costs 43 71 67 76 72 82 78 Professional fees 5 14 10 15 11 17 12 Marketing Costs 6 16 7 17 8 18 8 Building Costs 3 6 3 6 4 7 4 Administration Costs 9 19 14 20 14 22 15 Total Operating Costs 66 125 102 134 109 145 117
Capex 1 18 6 - - - -
Total costs 67 143 108 134 109 145 117
2007/8 2008/9 2009/10 Budget v/s MTEF
2006/7
2006/7 2007/8 2008/9 2009/10
Budget Budget MTEF Budget MTEF Budget MTEF
R'm R'm R'm R'm R'm R'm
Operating budget
66
125
102
134
109
145
117
Capex
1
18
6
-
-
-
-
Operating budget
67
143
108
134
109
145
117
Investment capital
Imbewu Fund investment budget
200
150
244
250
355
350
368
Corporate Fund investment budget
247
300
357
365
430
475
430
Post Investment Support
-
8
-
8
-
9
-
Strategic Projects
36
73
120
250
150
211
150
BEE Retail
45
115
40
-
30
-
30
Total Capital
528
646
761
873
965 1,045
978
TOTAL FUNDING REQUIREMENTS
595
789
869
1,007
1,074
1,190
1,094
Budget v MTEF: Operating Costs and Investment Capital
TABLE OF CONTENTS
1. MISSION, MANDATE AND OBJECTIVES
2. CURRENT STRATEGIC PLAN AND STRUCTURE
3. ASSESSMENT OF THE BEE FUNDING ENVIRONMENT
4. FUND MANAGEMENT DIVISION
5. ASSET MANAGEMENT DIVISION
6. BUDGET
7. CONCLUSION
8. CASE STUDIES
CONCLUSION
• The board of trustees and management are clear on and committed to the mandate of the NEF;
• The NEF has an important mandate which is to drive the transformation of the South African economy through the implementation and funding of government BB BEE policy;
• The new board of trustees and management team has successfully advanced the NEF to a positive position in terms of track record, delivery and obtaining overall stakeholder support from the dti, National Treasury and business in general;
• Having achieved all of this, management and the board of trustees continue to drive the NEF to become a most credible and strategic DFI in South Africa, an example and an authority in the effective implementation of transformation policy, beyond the Republic of South Africa.
TABLE OF CONTENTS
1. MISSION, MANDATE AND OBJECTIVES
2. CURRENT STRATEGIC PLAN AND STRUCTURE
3. ASSESSMENT OF THE BEE FUNDING ENVIRONMENT
4. FUND MANAGEMENT DIVISION
5. ASSET MANAGEMENT DIVISION
6. BUDGET
7. CONCLUSION
8. CASE STUDIES