‘SA SME Fund set to be among country’s biggest institutional investors by year end’

South Africa’s R1.4-billion SA SME Fund has thus far approved R1-billion for investment in a number of funds that will lend to small businesses and startups, the fund’s CEO, Ketso Gordhan has revealed.

Speaking to Ventureburn last week, a bullish Gordhan (pictured above earlier this year with Spartan SME Finance CEO Kumaran Padayachee) said he expects the fund to be fully invested by the end of this year.

“At the end of this year we can say that we’re one of the biggest institutional investors — all in just 18 months (since Gordhan took over as CEO in mid-2018 — Ed),” he said.

By the end of the year he expects that R1.24-billion of the R1.4-billion that has been made available to invest in funds will be full deployed in a number of funds, including two existing venture capital (VC) funds and five “newish” VC funds.

At the end of this year we can say that we’re one of the biggest institutional investors in SA

The remainder of the figure — R160-million — will be utilised to cover the operating costs of the fund over the next 10 years, said Gordhan.

He however said that it was too early to provide figures on how many businesses had benefited from funds so far or how many jobs had been created by such businesses, despite adding that the fund is monitoring such figures.

But he pointed out that one of the funds that have received capital from the SA SME Fund, Cape Town VC Knife Capital’s KNF Ventures fund, is now fully invested and the VC plans to set up a second one.

In November last year Knife Capital partner Keet van Zyl confirmed that the SA SME Fund had concluded an investment of R20-million in KNF in October that year (see this story).

At the time Van Zyl said there are plans to increase the fund to R150-million to R180-million, in which case the SA SME Fund would put forth an additional R10-million.

Van Zyl said in a tweet subsequent to the initial publication of this story that Knife Capital would be launching KNF Fund II which will be open for investment by qualifying investors “from January 2020”.

“Sars Section12J rules only allow for maximum 20% investor participation, which is why the SA SME Fund’s investment in Knife Capital’s fund I was only R30-million,” he explained in the tweet.

Penalties for not meeting target

Gordhan pointed out that the 50 or so listed companies that have capitalised the fund (see the list below) won’t be able to use such funds to score Black Economic Empowerment (BEE) points with, as the fund itself has to be black-owned in order for the corporate to get the points.

Despite this, he said the SA SME Fund’s investing by year end will result in at least two black-managed funds that the SA SME Fund has invested in.

The SA SME Fund has had to provide the first-time funds it has invested in, with support. Part of the help, said Gordhan, included putting such funds in contact with a licensed financial services provider.

The fund’s objective is to – through its partner fund managers – invest 50% of its capital into Black African owned and managed businesses, with a further 25% being dedicated to Indian and coloured owned and managed businesses, and the remaining 25% being at the discretion of the fund manager.

Funds that received capital from the SA SME Fund can be penalised should they fail to meet the target of investing 50% of capital in black African owned firms.

A penalty clause in the agreement that each fund signs with the SA SME Fund means that funds can lose the 20% carry or carried interest on the profits that a fund makes.

It means that for example if a fund has been given R100-million to invest and generates R100-million profit, but fails to invest R50-million of the initial capital granted in black African owned firms — it will be docked 20% of its profits, or in this case lose R20-million.

Joburg focus

Gordhan said given the wide array of small business support programmes the fund has taken the chance to better understand the startup ecosystem by investing in a number of accelerator and fund development initiatives.

“We have been experimenting and we’ve been needing to understand what the capacity of the ecosystem is,” he said.

The two initiatives that the fund is likely to continue funding, he said, are Knife Capital’s Grindstone accelerator programme and the Southern African Venture Capital Association’s (Savca) fund manager development programme.

Gordhan said the SA SME Fund will likely be focusing on more investments in Johannesburg going forward. But while investments in the city’s tech startup sector are “definitely growing”, he conceded that the city’s tech scene is “not as organised” as that of Cape Town’s. “There’s no equivalent of 4Di (Capital) and Knife (Capital),” he added.

But he said he will be going back to the SA SME Fund’s investors to request another capital injection, but he conceded that it won’t be easy. The economy is in even worse trouble, he pointed out than when the CEO Initiative set up the SA SME Fund in 2015.

How it works

The SA SME Fund, which was officially launched in March, was born out of the CEO Initiative, a partnership set up in 2015 between the government and CEOs to stimulate the economy and create jobs.

The SA SME Fund is capitalised presently by over 50 JSE-listed firms and the Public Investment Corporation (PIC), which manages government employees’ pension funds.

The fund is structured as a Fund of Funds, and is mandated to allocate R1.24 billion of investable capital to accredited fund managers – venture capital or growth oriented equity or debt funds – that invest directly in scalable small and medium enterprises.

As of October 2019, the SA SME Fund has invested in 11 Funds:

• 4Di Capital is an independent and specialist seed, early and growth stage technology venture capital (VC) fund manager with a strong track record of identifying and investing in scalable South African and African technology opportunities. The 4Di Capital Fund III is the firm’s third fund, which launched in 2019 with the SA SME Fund as anchor LP. Fund III’s mandate includes early and growth-stage investments in startups in fintech, insurtech, healthtech, edutech, agritech and other tech verticals. The SA SME Fund has committed R125-million in a R130-million fund launched in June (see this story).
• Knife Capital is a Cape Town based venture capital (VC) fund. In November last year Knife Capital partner Keet van Zyl, whose VC oversees the R100-million KNF Ventures fund, confirmed that the SA SME Fund had concluded an investment of R20-million in KNF on 23 October that year (see this story). At the time Van Zyl said there are plans to increase the fund to R150-million to R180-million, in which case the SA SME Fund would put forth an additional R10-million (KNF is run as a Section 12J Fund under the Income Tax Act and Section 12J rules don’t permit any one shareholder to have a stake higher than 20% in a Section 12J fund). KNF has so far concluded two deals that the SA SME Fund has taken part in. Both deals, which were signed in November last year, saw KNF invest in 5nines Technologies to grow its pharmaceutical temperature monitoring solution PharmaScout (see this story) as well as in an undisclosed investment in beverage startup Pura (see here).
• A2Pay provide advanced vending solutions to empower and grow small to medium retailers. It uses future-forward mobile and fixed wireless retail tech to deliver products and services in a user-friendly, cost effective platform. A2Pay is already installed in over 1500 Spaza Shops and its goal is to be in over 10 000 shops at completion. The SA SME Fund lent R20-million last month to A2Pay, following R5-million it lent the company as part of a pilot earlier this year. Gordhan said the results of the pilot showed that several spaza shops were able to grow their revenue or build new distribution centres to bring down their costs.
• Digital Ventures Africa bridges the gap between early stage and seed investment in South Africa. Its mandate is to fund young black entrepreneurs and visionaries in the tech space. It is the first black woman managed venture capital fund in South Africa and is attached to business incubator AfricArena.
• Masisizane Fund invests in black-owned fuel station dealerships. The fund’s aim is to create long-term wealth and economic opportunities for black entrepreneurs, spark much needed economic stimulation in townships, rural and peri-urban areas, and help oil companies accelerate their transformation commitments and goals. Last month the SA SME Fund announced it had invested R50-million in a R70-million fund to lend to black-owned fuel station dealerships. The Masisizane Fund contributed the remaining R20-million.
• OneBio: OneBio’s vision is to stimulate biotech innovation and economic growth in Africa. Its mission is to build businesses that are innovative and world changing. It provides investment capital, access to lab facilities, mentorship, networks and business support to take early stage startups from lab bench to sustainable businesses. The SA SME Fund, together with the Technology Innovation Agency (TIA) has invested R83.5-million in the fund (see this story)
• PAPE Fund Managers is an established, black-owned boutique private equity manager that invests in Southern Africa with the principal office domiciled in South Africa. As active managers of long-term equity risk capital across multiple funds, PAPE Fund Managers aspires to improve the lives of all South Africans through enhancing the Southern African Development Community’s agendas such as job creation, a broader tax base and sustained economic growth.
• Savant Capital is a Cape Town based hardware tech incubator. In February the incubator announced that the SA SME Fund had committed R110-million to Cape Town based hardware tech incubator Savant, with 50% of this amount earmarked for black African owned firms. The idea is that R100-million of the R110-million from SA SME Fund, will be committed towards the first close of a R100-million Savant venture fund that will invest in hardware tech businesses with products that are ready for market (see this story). Last month TIA invested an additional R1.5-million in Savant Capital (see this story).
• Spartan SME Finance is a debt financing house for SMEs. The SA SME Fund, Spartan and Black Umbrellas, an incubation organisation aimed at black small businesses, have entered into an agreement that will enable Spartan to provide funding to entrepreneurs who graduate from the Black Umbrellas incubators. In February, Spartan announced that it had secured a R100-million investment from The SA SME Fund to anchor its R600-million debt financing fund, with half of the investment or R50-million, to be channelled to black African owned businesses (see this story). The debt fund is expected to finance at least 100 small and medium-sized enterprises every year.
• SummerPlace: SummerPlace is a first time woman owned and managed private equity fund. Its focus is on investing in credible, established SME’s with high growth potential.
• University Technology Fund (UTF): The fund was announced last month and has not been launched as yet. It is intended to commercialise technology out of SA universities, starting with UCT and Stellenbosch University, and with the support of TIA’s Technology Innovation Fund. The fund will provide investment capital to seed early stage startup companies. It will help to develop the country’s emerging biotech ecosystem and place South Africa at the front of this new age where we will see engineered biology disrupt many of the globe’s traditional industries. TIA and the SA SME Fund will invest R152.5-million in the new fund (see this story).

The SA SME Fund’s board is chaired by Adrian Gore and is made up of Judy Dlamini, Jabu Mabuza, Dolly Mokgatle, Nigel Payne and Lisa Klein (who is an alternate director).

An independent investment committee evaluates potential investments. The chair of the investment committee is former FNB CEO Michael Jordaan, Ethos Capital founder Andre Roux, Royal Bafokeng CEO Albertinah Kekana and former Business Partners CEO Nazeem Martin.

Read more: SA SME Fund, TIA commit R237.5m in new money to biotech, university, tech fund
Read more: Half of R130m 4Di Capital, SA SME Fund to go to startups with black founders
Read more: Here are the eight funds that the SA SME Fund will invest in
Read more: Spartan SME Finance secures R100m from SA SME Fund for R600m fund
Read more: SA SME Fund commits R110m to hardware tech incubator Savant
Read more: It’s official: Cape Town healthtech startup is SA SME Fund’s first investment
Read more: SA SME Fund in new mandate to invest over R1bn in black small firms, startups
Read more: Former PPC Cement head announced as new SA SME Fund CEO [Updated]
Read more: SA SME Fund CEO’s stepping down was ‘amicable’ says fund official
Read more: Over a year on, when will big companies’ SA SME Fund get going? [Opinion]
Read more: SA SME Fund will commence with due diligence in July says CEO
Read more: SA SME Fund is not aimed at venture capital sector, says CEO
Read more: Exclusive: ‘Government won’t match private sector in R1.5bn SME fund’

Editor’s note (23 October 2019): Knife Capital’s Keet van Zyl said in a tweet subsequent to the initial publication of this story that Knife Capital would be launching KNF Fund II which will be open for investment by qualifying investors “from January 2020”.

“Sars Section12J rules only allow for maximum 20% investor participation, which is why the SA SME Fund’s investment in Knife Capital’s fund I was only R30-million,” he explained in the tweet.

We have amended the story accordingly.

Featured image: SA SME Fund CEO Ketso Gordhan and Spartan SME Finance CEO Kumaran Padayachee pictured during the signing of the deal agreement (Supplied)