President Cyril Ramaphosa. Picture: GCIS
President Cyril Ramaphosa. Picture: GCIS
Image: GCIS

President Cyril Ramaphosa recently “launched” the SA SME Fund (though it has been around for some months). This is a $1.4bn fund initiated by the CEOs of some of SA’s largest companies, with a mandate to “invest in scalable small and medium enterprises with the best potential for growth and sustainable employment creation in the SA economy”.

This demonstrates recognition by the private sector that revitalising the economy is not just the responsibility of the government and requires something more than just business as usual. It is also — though the founders may not agree — an act of redistribution: taking corporate profits and ploughing them into a mechanism that is intended to put assets in the hands of the historically marginalised. The need for redistribution is a difficult conversation South Africans still need to have, so it’s good to see a willingness to act.

SA SME is a “fund of funds”. According to its website it will not finance enterprises directly but rather “allocate investment capital to accredited fund managers — venture capital or growth-oriented equity funds — that invest directly in scalable small and medium enterprises with the best potential for growth and sustainable employment creation in the SA economy” and has already invested in five such entities.

The question must be asked whether something more creative could be done with this, or indeed other money. The primary purpose of private equity and debt funds is to maximise returns to their investors, and management are incentivised accordingly. The tagline on the website of one of the funds reads: “How to make super returns.” Will the SA SME funding help them earn more super returns? Another notes on its website that it is about to close its fifth fund with R1.2bn capitalisation. Does it really need money from SA SME to do its work?

There is no information on the specific conditions attached to the SA SME funding, but I have spent enough time among even those who call themselves impact investors to know that the commitment to return on investment and to emulating the disciplines of investment banking and private equity is deeply ingrained in the practice and policies and decision-making structures of these entities.

The very existence of SA SME implies that the growth of new businesses requires something that does not yet exist in the market, otherwise why bother? Yet being a fund of funds means building on the capacity that already exists in the market, and it strongly implies that what is needed to tackle poverty and inequality is simply more of the same: more commercially conceived and implemented debt and equity funding. While SA SME may not expect market-related returns, it is investing in institutions that are committed to matching or beating the market. It will be interesting to see what will be different about their use of these funds.

It is testimony to the extent to which the prevailing ideology of finance so controls the discourse that development finance institutions all seem to believe they should emulate commercial investors.

Wouldn’t it be interesting to create a fund that is willing to lose some money, not recklessly or negligently, but through an appetite for risk and a willingness to innovate, and where the benefits of the risk-taking would go to struggling entrepreneurs rather than intermediary fund managers. If we are to overcome the constraints of SA’s highly monopolistic economy and the centuries-long cementing of inequality, then we should be willing to consider truly developmental financing. This might include:

  • debt funding at below-market rates;
  • repayment schedules built around the growth of the business, rather than impeding its growth by requiring payment (or accruing interest) from the beginning;
  • equity-type investments that seek neither ownership control nor equity returns, and which certainly don’t have both eyes on the exit multiple that guarantees bonuses to the fund managers (carried interest);
  • a “spray and pray” fund that makes small amounts of money available on the basis of the business idea and the character of the borrowers, rather than the dreaded business plan that is helpful only to the analysts.

In such a fund the true measure of success would be the success of the companies in which it invests and the reality that these companies genuinely could not have succeeded without this kind of funding.

Such a fund could become a vehicle for genuine redistribution, where losing (giving away) some money to help other businesses grow would be the whole point.

• De Beer spent two decades as a social entrepreneur and impact investor. He now consults privately.