Empowerment fund rescues distressed companies

Basic business skills remain the biggest hurdle for BEE businesses. This is what Philisiwe Buthelezi, chief executive of the National Empowerment Fund (NEF), told a parliamentary committee in a recent briefing on its annual results.

The fund was started in 1998 to finance BEE businesses using proceeds from privatisation.
After a long dormant period, the fund has emerged in recent years as a key source of finance for a range of BEE businesses.

Buthelezi said many BEE enterprises are struggling as they have not been exposed to business management skills. Black enterprises do not have the skills required to set up and run bankable businesses, Buthelezi said.

Consequently, financial institutions reject most BEE business plans. To address this problem, the NEF has devised a business plan toolkit to help leverage funds from financial institutions.

The toolkit is a step-bystep guide designed to help entrepreneurs write business plans and draw up financial projections. However, the economic downturn has hit the fund hard.

Andrew Wright, the fund’s chief financial officer, said impairments have steadily increased. Impairments were 19% in 2008 and 24% in 2009. Impairments are the difference in the book value of an asset and the value in use or economic value.

In trying to anticipate the total effect of the economic downturn on overall performance from an impairment perspective, the NEF looked at other internal indicators of BEE companies, namely operational indicators such as loan repayments against instalments.

The impairment provisions are monitored year on year and there was an upward movement of impairments reported in development finance institutions and the private banking sector.

The NEF’s report states that organisational indicators show there are distressed companies in the portfolio. The NEF was taking on various debts to try to mitigate the effects on distressed companies, rescue those organisations in trouble and turn the companies around.

There was an indication that the impairment provision will rise towards the March 2010 reporting period. The rescue process is done through the funds of three sectors the NEF manages, according to the report.

The three funds are:

  • The iMbewu fund, which promotes the creation of new businesses and aims to cultivate a culture of entrepreneurship by offering debt and equity finance of between R250 000 and R20-million;

  • The corporate fund, which facilitates the acquisition of equity interest in established businesses of black entrepreneurs; and

  • The strategic projects fund, which allows black ownership to be considered in strategic projects at the NEF itself.

The report says that the sustainability of existing BEE deals has been hit by the global credit crunch. Cash flow positions of companies have been at their weakest since 2000 and this has had serious implications on issues such as loan repayments and loan write-offs.

The report also says that debt to equity ratios has been at their highest and this affects how companies pay for deals. Consequently, indicators such as loan repayments have been a major contributor to year-end provisions of impairment. Despite such challenges, the NEF has been fairly successful in its work.

According to the report, as of March 2009, the NEF had provided financing to 160 businesses worth R978-million through its investment initiatives and added 5 000 new jobs to the economy. To date the NEF’s disbursements have exceeded R1.5-billion.

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