Institutional investors to consider local VC as asset class

South Africa does not have a capital scarcity problem. In fact, it is home to the continent’s largest pension fund and R4.6 trillion of retirement fund assets. However, the appetite for investing in South African venture capital (VC) seems to be greater among offshore investors than it is among local institutional investors.

This long-standing status quo is something that can and should be challenged and changed through collaborative action between public and private sector players.

Commenting on this important issue is Claudia Manning, principal: SA SME Fund, who explains that the VC arena has produced countless examples of how deploying South African capital back into homegrown businesses is good for both business and society; and by extension, the local economy.

“The task at hand for venture capitalists is presenting the business and impact case for reinvesting in South Africa in a way that manages legitimate fears around potential risks,” she says.

Manning was one of the panellists at the SAVCA 2022 Venture Capital Conference, which brought to light some of the most important topics and trends influencing the development of the South African VC industry.

“There is a need – as well as a significant opportunity – for South African institutional investors to turn their attention to local soil, and to recognise and support the asset class’s potential to reap positive returns for investors, entrepreneurs and society at large.”

Innovation will get us through doldrums

South African entrepreneurs and business leaders continue to prove their unrelenting resilience in the face of uncertainty and hardship. This is according to keynote speaker, Bruce Whitfield, who said that now, in a global environment characterised by geopolitical tensions, widespread economic pressure and mounting social issues, South Africa has yet another opportunity to prove its mettle.

“South Africa has provided a model for the world on how to operate in times of extreme scarcity. Consider for example, that South Africa has remained the second biggest citrus exporter in the world despite major infrastructural challenges in the arena of freight rail and logistics, compounded by the ongoing energy crisis. In examples such as fintech pioneer, Yoco, we see how proficient South African businesspeople are at innovating their way through tough times and uncertainty,” Whitfield explained.

Furthermore, VC has also shown itself to be a sector of impact, with local businesses providing viable solutions to some of the country’s most pressing challenges.

As Vuyo Angoma-Mzini, portfolio manager at Launch Africa Ventures Fund explained, one of the best case studies for this is seen in the arena of tech start-ups, where the scalability of technological solutions have the potential to produce massive monetary returns while also addressing key issues like financial inclusion.

Tapping into SA’s ‘real economy’

This evidence presents a compelling case for local investment and its ability to uplift the ‘real economy’ by yielding excellent returns for investors as well as an economic dividend for South Africa. And yet, limited investment into South Africa by locally-based institutional investors begs the question – “if South Africans don’t invest in their own country, who will?”

Aadil Omar, co-founder of Strat-Tech painted a telling picture of the current state of the industry by asking the audience to reflect on how many returns from JSE-listed companies that land up in the hands of South African pensioners have been venture-funded. A quick consensus revealed that for most conference attendees and delegates, one would be hard pressed to find a single such example.

Omar went on to assert that American venture capital fund, Sequoia Capital has funded as much as 25% of the leading firms on the Nasdaq. For Omar, this is an example of successful asset allocation and the well-balanced management of risk and reward.

Appealing to South African institutional investors to turn their sights inwards, Omar argued that the “custodians of local capital” need to approach the delicate balance between the dimensions of investment in the same way as VC firms do – by leveraging the effectiveness of differentiation.

By stepping outside of the “theoretical blueprint” and away from restrictive criteria, investors will have a better view of the importance of differentiating their deployments in a way that uplifts the real economy, supports local ingenuity and protects the interests of investors.

According to Shainal Sukha, managing director: Sukha and Associates, it’s important to acknowledge that there are indeed risks associated with early-stage investing, especially when it comes from institutional investors such as pension and retirement funds which are governed by Regulation 28.

However, Sukha suggests that these risks can be closely managed within a diversified portfolio allocation, and that the potential impact these investments can have, should serve as motivation for other institutional investors to get on board.

“Job creation is a key factor for our clients, we want to see micro-enterprises turn into small businesses, and small businesses into large companies. We also acknowledge the importance of addressing high social risks, such as our country’s current unemployment rate. We believe that because of the optimism, resilience and scalability of the VC asset class, many of these issues can be addressed.”

Local venture capital investment for local businesses

In his fireside chat with Keet van Zyl, partner and co-founder of Knife Capital, Michael Jordaan,  former CEO of FNB and current CEO of Montegray Capital, took the strong view that the lack of local institutional investment into South African funds is a “socioeconomic indictment.”

“Local institutional investors are missing out, not only because they could have a far greater socioeconomic impact by investing just 1% of their assets in venture capital, but also because the prospect of returns are so much better in the VC asset class than they are in listed equity markets. South Africa has 18 million social grant recipients, but we do not have any entrepreneurial grants currently available for budding entrepreneurs.

“While we acknowledge the importance of bringing relief to the most vulnerable in society, we need to do more to support entrepreneurs and build the creative capacity, which has the potential to bolster the economy and create sustainable jobs.”

Contributing to discussions on the topic was Sakhile Xulu, general managing partner of Seed South who concluded that: “We are in a time in South African history where young people need to take complete ownership of the South African economy.

“VC firms, backed by strong investment need to take up the mantle of decentralising capital in a way that speaks to national imperatives such as diversity and transformation. Empowering South African development begins with empowering South African businesses.”

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