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As the growth of the venture capital industry continues on an upward trajectory, a number of deals are moving towards an intersection of commercial and impact objectives. The businesses receiving VC funding are providing strong financial returns as well as contributing to societal challenges such as poverty alleviation, inclusive growth and job creation.
This was the prevailing sentiment conveyed by the panellists at the SAVCA 2022 Venture Capital Conference, which recently took place at Hazendal Wine Estate in Stellenbosch.
In attendance were a range of fund managers, institutional investors and industry experts who collectively form the make-up of the venture capital ecosystem in Southern Africa.
As Sybil Kekana, co-founder and managing partner of Midzi Growth Fund explains, the definition of success in the VC space is being broadened to include both financial returns and impact. “While commercial viability will always be front and centre, the industry shares a keen interest in how the businesses we help build can solve socioeconomic challenges faced by people on the ground.”
Institutional investors hone in on impact
Regulation 28 of the Pension Funds Act provides a clear roadmap for institutional investors. As outlined in the Act’s preamble, funds have a fiduciary duty to adopt a “responsible investment approach” to deploying capital in a way that earns risk adjusted returns.
Furthermore, “prudent investing” must give consideration to the sustainable performance of a fund’s assets in terms of factors of an ESG nature.
For Shainal Sukha, managing director of Sukha and Associates, this mandate for institutional investors necessitates strategic proficiency at striking a balance between internal rate of return (IRR) and ESG aspects such as broad-based black economic empowerment, transformation and the just energy transition.
While this balance between “risk, return” and “impact” presents investors with a significant challenge, to get it right could be exponentially beneficial to the country’s development.
As he elaborates: “if pension funds united behind Regulation 28 in a drive to supercharge local investment and allocate funds effectively, there is no reason why South Africa cannot be the first country on the continent to reach a ‘developed’ status.”
Venture capital enables positive change
Within the South African context, the “social” dimension of ESG is critical, given the country’s record-high unemployment rate, the urgent need to transform, widespread poverty and the call to reach under-resourced communities in outlying areas.
As keynote speaker, Bruce Whitfield asserted, “For driven entrepreneurs, social ills present powerful opportunities for innovation,” and as research continues to suggest, there are few financial compromises that accompany impact investing.”
In fact, according to Justin James, co-founder and investment partner at Fireball Capital, VC is the most impactful asset class globally, with 90% of capital going towards sustainable job creation. ‘Furthermore, advancements in the ICT sector which have given birth to innovations like fintech, edtech and healthtech are contributing to the fostering of an environment where the unbanked and under-served can gain access to the realms of finance, healthcare and educational solutions.
“For hyper commercial investors who are on the hunt for alpha, VC remains the best way to make money while also building a more inclusive society – which has significant advantages in terms of expanding the fiscal base and boosting GDP.”
Problem-solving and profitability
This “double impact” is shaping the face of the VC industry, according to Claudia Manning, principal at the SA SME Fund. As she expands: “If we look at the portfolio of funds in a room today, we see that a large part of what VCs are investing in involves solving key South African problems such as low access to healthcare, the high cost of education, as well as transport and mobility issues.”
Echoing these sentiments was Alison Collier, managing director of Endeavor South Africa who believes that the industry’s investment into solving problems has reaped positive rewards on a number of fronts.
“The average growth rate of the businesses we have invested in over the last year has been between 50% and 60%, which has reflected in huge revenue. Currently, thousands of jobs are being created by businesses that are backed by private capital.”
Profitability of purpose-driven investments
The Conference was concluded with a fireside chat between Michael Jordaan, CEO of Montegray Capital, and Keet van Zyl, partner and co-founder of Knife Capital.
For Jordaan, although many investors view the commercial viability of a deal as the main priority, ESG is quickly becoming a welcomed and necessary by-product. “Macroeconomic studies continue to show that entrepreneurship is a crucial cornerstone of progression in developing markets.”
Wrapping up the conversation with thoughts on the future of the industry, van Zyl asserted that the return potential of the asset class should not be overlooked.
“VC can produce far better returns than investments into listed entities. The fact that ESG has become so pervasive in the way that VCs fund and influence the growth of South African businesses, is testament to the fact that purpose-driven investments can be extremely profitable.
“Institutions that don’t make a concerted effort to invest in VC deals are and will continue to miss out on great return prospects, and the chance to build the subdued South African economy.”