SA SME FUND – A GAME CHANGER FOR PRIVATE EQUITY
We (**Andrea Jekkels (A) and Unathi Mbele (U) associates at leading African law firm Bowmans) sat down with Claudia Manning (CM), an investment principal at SA SME Fund, a unique South African fund making waves in both the private equity and venture capital (VC) space.
The Bowmans Private Equity team had the opportunity to assist SA SME Fund with the formation of its fund (along with assisting on various other projects related to SA SME Fund’s investments), and watch it evolve into a unique model that is changing the narrative around private equity in an innovative way. We wanted to find out what distinguishes SA SME from other funds operating in South Africa, and the gap it is filling by providing SMEs with the necessary funding and essential tools needed to harvest growth and longevity in the market.
Claudia has several years’ experience in the investment and SME sectors, stemming back from the early 90s as part of the ANC’s Department of Economic Policy Advisory team developing strategies for supporting the growth of small business in the newly democratic South Africa.
This work culminated in the Department of Trade and Industry’s White Paper on small business. She later completed her PhD on small businesses and ways of enhancing market access for small producers.
Her passion for SMEs, their growth potential, and impact on economies is clear from her ongoing work and contribution towards the SME sector.
A&U: What type of private equity fund is SA SME is and why did you decide to go with that unique model?
CM: We are a fund of funds (FoF), meaning that we work through intermediaries and do not invest directly into businesses.
The rationale behind adopting this strategy is that it is a much more cost-effective way of allocating capital to small business, allowing us to reach many more entrepreneurs in a shorter space of time than if we funded them directly. If we invested all of our ZAR 1.4 billion fund directly into small businesses we would have to set up a big infrastructure capable of making many small investments, which would be extremely costly and time consuming.
A&U: How have you allocated the money to ensure that it reaches the SMEs?
CM: We have allocated half of our funds into fund managers, who are working with small businesses to help them grow. The other half has been allocated to VC funds, who invest in businesses that are in their earlier stages, which have a completely different risk profile as well as a different return profile.
So effectively, our capital has been allocated across the spectrum of business stages, from early stage to growth.
We specifically allocated a substantial portion of our fund to VC as we think that this is a particularly under-developed asset class, compared to say, the banking and private equity industry in South Africa
A&U: What was your criteria for selecting the fund managers you decided to work with?
CM: We’ve supported a number of experienced fund managers in the growth and VC sectors, but we also deliberately support first time managers as it is much more difficult for them to raise funds, even if the key individuals have the requisite experience.
It’s a total chicken and egg situation - in order to become an experienced manager you need to initially be a first time manager, which you cannot do without capital. Mark Shuttleworth took a risk on Knife Capital years ago, which has done really well and became South Africa’s most experienced VC fund manager.
We are going to take an educated bet on a few more fund managers and do what we need to do to mitigate the risks associated with new fund managers including ensuring that they have the right investment committee etc.
A&U: Who are some of these first-time fund managers you decided to collaborate with?
CM: SummerPlace: is a first-time private equity fund manager. We have incubated them - provided them with office space, back office support, which is effectively a subsidy. They use us as a sounding board for particular transactions and for leads to help their portfolio companies to grow and so forth. It is a very intimate relationship, because we know that if they are a successful fund manager and actually make a few good investments, they will be more likely to raise a second larger fund as a more experienced fund manager.
Digital Africa: We came up with the idea (of establishing Digital Africa), as we found it appalling that there are almost no black VC fund managers in South Africa in 2020 who have successfully raised capital. We decided to do what it takes to form the first black female VC fund manager. We found two individuals we thought have the right core experience, who, while they do not have experience as fund managers, exhibit the right characteristics to invest a small fund. We took a bet on them and will work with them closely and get more experienced fund managers to incubate them. The kind of support they get from us is similar to the relationship that SummerPlace has with us. Over the last few months we have put together the team, given them their first capital, signed all legal documents so that they are able to do their first deals in the second quarter of 2020.
OneBio: It is a new venture capital fund manager we have put money into, and it is Africa’s only biotech fund. We have invested ZAR 75 million and the Technology Innovation Agency (a government owned agency), has invested ZAR 8.5 million. OneBio will invest in six to eight biotech companies, and we believe that the two-person team - one scientist and one investment professional - has the right combination of skills to identify the best opportunities in the biotech space and structure the deals appropriately. They are currently actively fund raising, and a few LPs are at advanced stages of due diligence on them. We assist in a number of ways, such as helping them identify good investment committee members, occupying an advisory role on their board, helping them with deal flow, and offering advice whenever needed.
A&U: Tell us about your decision to invest in commercialising university intellectual property (IP) and technology; why was this important for SA SME Fund?
CM: South Africa spends a substantial amount of money on R&D every year, much of this is focused towards our universities. Unfortunately, very little of this gets commercialised, and so there is little return on this public investment.
We have committed and invested into SA’s very first and Africa’s only university tech fund, which is a
ZAR 150 million fund to invest in university spin outs.
We started with the University of Cape Town and Stellenbosch University who are also putting in capital themselves, and we are hoping that other universities will come on board as well.
The fund will be able to invest in tech or IP from participating universities. It has the potential to be ground-breaking and we are talking to a few of our fund shareholders and hoping they co-invest into the LP as well. It is something that could change the landscape entirely by providing professors who have great ideas with the right partners to commercialise these technologies, namely providers of capital as well as entrepreneurs who can lead the drive to commercialise the opportunity.
A&U: We know that SA SME fund is raising a successor fund. How much capital do you intend to raise, and how will you raise it?
CM: We are looking to raise ZAR 1 billion for the new fund. Our current fund has made the first commitment of ZAR 50 million which we will provide as a first loss to other investors. In addition, we will not charge investors any fees, as our current fund will absorb the costs of running the new fund.
As part of our fund-raising, we will approach a wide range of potential investors, including some of our current shareholders, international and local finance institutions, local and international family offices, and foundations. We are in discussion with Government to come in on first loss capacity alongside us.
We will speak to all potential LPs to test appetite, as we believe that we need many players to come on board if we’re going to accelerate the growth of VC in South Africa and drive innovation and economic growth.
We intend to deploy the new fund into some existing fund managers as well as a few new fund managers. South Africa does not currently have a Series B fund that is capable of writing larger cheques and we intend to support the first Series B fund.
The reason we are continuing with the FoFs approach is because we believe it is a more efficient vehicle to deploy capital to deepen and widen the industry. Our FoFs model is also attractive to partners who are looking to mitigate their risks, which is something you would not be able to achieve if you were to invest directly in one fund manager. Investors in our new fund can diversify their VC exposure to multiple sectors, stage of investment, fund manager, and benefit from not paying us any fees to deploy their capital.
**Andrea Jekkels (A) is an associate in the Private Equity Practice at Bowmans with experience in both M&A and private equity transactions. She has a passion for buying local products and supporting township entrepreneurs.
Unathi Mbele (U) is an associate in the M&A Practice at Bowmans with experience in private equity transactions and in both public and private mergers and acquisitions. She has a passion for renewable energy technologies and black female owned businesses.