/ 5 May 2017

No place in the sun for BEE funds

(John McCann)
(John McCann)

Most people buy into the idea that a more inclusive economy is one that is stable, better geared for growth and yields more wealth. But when did you last consider black economic empowerment (BEE) when making decisions about where to invest? The answer might well be never.

Twenty-three years into democracy, black-owned asset managers control a rather small share of the investment pie. A recent survey by Alexander Forbes found that 42 out of 130 asset managers were black-owned — or about one out of three — but these companies control a much smaller proportion of assets overall.

Black asset managers handle less than 5% of the industry’s assets, according to Alexander Forbes. Not a single black-owned company featured in the top 10 asset managers in the country (in terms of assets managed).

And the industry is highly concentrated: five asset managers handle 52% of the assets.

It seems inadequate support for black-owned investment firms might begin at governmental level.

Taquanta Asset Managers is the country’s largest black-owned asset manager, with R123-billion in assets under management and 68% black ownership. Despite having a “strong and proven track record”, said chief executive Justin Kretzschmar, “we manage what we believe to be an unnaturally small share of investment funds from government-related entities.

“It is rather difficult for us to pinpoint the exact reasons for our limited share of the government’s asset management wallet, especially where Taquanta has specialist skills with a compelling track record,” he said. “In many instances, we are not even invited to pitch for this business. This we find very disconcerting. Nevertheless, we try to track upcoming tenders and submit proposals regardless.”

Asief Mohamed, chief executive of Aeon Investment Management, a black-owned asset management firm with R5.4-billion under management, said the gatekeepers in the
private sector are the biggest culprits.

“The big problem is that the private sector refuses to come to the party,” he said. “There are these old boys networks. The asset consultants [who appoint asset managers] favour the big, well-established brands. But it’s also the multi-managers. They treat you like third-class citizens. They’ll send their new junior analyst to come look at you, if you’re even lucky. The senior analysts get sent to the big investment houses.”

Underscoring Mohamed’s comment is the view that the black-owned asset management industry is fairly young. Research compiled by Investment Solutions in June last year shows that 28 black asset managers handle R5-billion or less (and are therefore considered “startups”), 12 handle between R5-billion and R50-billion (considered “emerging”) and only two black asset managers in the survey (Taquanta and Aluwani) handle more than R50-billion and are therefore considered “established”.

And when it comes to deciding where to park their money, decision-makers overwhelmingly favour well-established brands. “One of the challenges faced by our business — relative to larger investment houses with longer histories — is in name recognition,” said Kretzschmar. “Investment committees, board trustees and procurement committees may select investment managers based on their personal familiarity and comfort with the investment manager’s well-known brand.

“As a black asset manager, there can be a higher burden of proof of our capabilities and track record to a potential investor with limited knowledge,” he said. “Relative to managers with longer histories, there could be an unintended or subconscious perception of a black asset manager’s capabilities, which requires higher effort levels to demonstrate.”

Mohamed agreed. “People have this confidence in the brand where they worry a smaller company might lose or steal the money,” he said.

And the average consumers simply don’t factor BEE ratings into a decision about where to invest their cash. “You as an individual belong to a retirement fund,” said Mohamed. “You wouldn’t ask: What is the asset manager’s BEE level?”

Another issue is that smaller, independent asset managers find it difficult to match the economies of scale of their competitors. For black asset managers to grow to the size and scope of the large firms, “they would require support in terms of being allocated significant mandates”, said Kretzschmar.

“True economic transformation will be achieved through a holistic approach that encompasses the ownership of economic means as well as economic empowerment of black individuals … government could play a key role in identifying managers with potential and supporting their growth opportunities.”

But, said Mohamed, black-owned asset managers need to recognise that “being black” is not enough to convince people to trust them with their money. “We as a firm don’t sell ourselves as being black. You need to be competitive,” said Mohamed. “You’ve got to be successful, have a proven track record and then just, by the way, you also have a level-one BEE rating.”

Firm plans to create  ‘permanent’  black wealth

BayHill Capital is an investment firm that seeks to build a counternarrative to “white monopoly capital”, with a plan to grow “permanent black capital” with so-called transformation portfolios.

The newly established firm has designed a way to attract a pool of black investors who can take equity in companies looking for black ownership. The solution, they say, will help firms to meet their broad-based black economic empowerment (BEE) requirements while addressing some of the flaws in the BEE ownership model and creating sustainable black wealth.

“We believe there is already sufficient black wealth — approximately R700‑billion worth of investable assets — in South Africa to be mobilised to further drive transformation in the country, as well as earn attractive returns for those investors,” said managing director Geoff Blount.

“The transformation funds we are launching are targeting qualified [black] investors to invest equity into the portfolios. We are raising capital from black investors and then deploying it into appropriate investments,” said Blount.

In so doing, BayHill aims to address the high level of indebtedness that often accompanies BEE ownership transactions. “Because the company will be raising equity capital, we will not need to borrow money to make these underlying investments,” said Blount. BEE investors can purchase shares at a discount to their market value.

The company aims to become a “port of call” for corporates seeking significant BEE investors. It will also invest directly in black industrialists. The firm is “not seeking to fund black individuals to purchase shares in other firms, but rather to fund black business owners”.

Blount said BayHill will steer away from box-ticking to meet BEE compliance requirements. “Our transformation funds may exit investments where the economic rationale deteriorates … There must be an investment case to be made, not just an empowerment argument. We are not only trying to transform the economy but also to create more black wealth for our clients.”