Impact Investing & BEE

Impact Investing is becoming an ever more hot topic globally as well as in South Africa, with more and more focus on both creating impact through investing as well as getting returns from impact. These are elements of the new economy since traditional development impact was mostly driven by non-profits while investing was generally the purview of the profit-driven business world. In this new paradigm, many parties are realising that returns and impact do not need to be mutually exclusive, but that new models and ways of doing business may be needed to really ensure success.

In South Africa, involvement in development by for-profit companies is partly driven by the BEE legislation which now more than ever has set serious targets across the 5 elements of the Amended Codes of Good Practice.  Since some of these targets are quite high, companies are trying to not only find the most cost effective ways of scoring points but also focus on impact which is more important than ever as some outcomes are now inexorably linked to each other (such as supplier development and procurement, for example).

Recently, we were asked to speak at a closed session for Impact Investors at the 2016 SEED Symposium in Pretoria.  We focused our content on leveraging BEE legislation in South Africa for Impact Investing and found there was much interest in this area.

Many of the local impact investors have to date harnessed mainly Enterprise Development funding to use for investments in small black businesses – however, we have seen that in some cases chasing returns on these investments has led to disproportionate investment in more developed businesses, while in South Africa the real need is at the very early and start-up stage. Since the latter is a very high-risk area for investment, however, not many players are providing funding at this stage. Conversely, many large ED funds are also struggling to find sufficient deals at the more developed stage also for this reason – the pipeline is not sufficiently being developed.

The interesting part for us at Simanye is that, to date, only Enterprise Development has really been utilised as a potential conduit for alignment for impact investing, while in fact 4 out of the 5 elements could be utilised either directly or indirectly for this purpose. We at Simanye have managed to do just that in fact, and we therefore know that others could as well. What is needed is better communication and collaboration across various parties, industry bodies, sectors and government.

Some examples of how various elements of the Amended Codes align with impact investing:

  • Ownership: to date BEE ownership has often been done through private equity like structures which do not, in fact, operate like private equity as the BEE shareholders often do not put actual cash down but get the shares through vendor financing and where the businesses offering equity are not doing it for accessing cash. However, there is no reason that as these develop they could not take a form closer to traditional private equity. At the same time, using broad-based structures for ownership can also lead to funding for the broad-based entity through dividends which could then be used to further invest in small and growing enterprises as well as other impact based initiatives.
  • Skills development: although it would be difficult to use this directly to harness funds for impact investing, skills development funding could be used to help up-skill funded businesses thus helping lower the risk for the investment companies. There are plenty of good skills development organisations that could help in this regard but what would be needed would be partnerships with impact investors who see the value of this alignment in terms of their own risk management as well as top level funders who wish to promote such strategic alignment through their own BEE efforts.
  • Enterprise and Supplier development: these are the areas already largely in use for impact investing but since supplier development is new we are finding the need for a deeper understanding of what exactly drives successful market access outcomes and thus leads to real impact. Since enterprise and supplier development can make use of loans and other types of investments it is popular with many companies as the funds spent could be recovered and even generate a return in some cases thus making it overall a less potentially ‘’expensive’’ area to focus on.  However, more work needs to be done in this space to ensure that sufficient pipeline is being developed.
  • Socioeconomic development: this area is largely grant based and thus presents a very large and untapped opportunity to be used for the more high risk and early stage funding that is so badly needed in order to build a pipeline for the enterprise development funds. Since the money is non-recoverable in any case it would make sense to use it in this way and if any money is recovered through such investments it could simply be recycled into further high-risk early stage investments. Again what would be needed is for companies to drive such behaviour through their own strategy and how they bring various intermediaries together.

As we have often said, the BEE Codes are very much a tool which is flexible and could be used in a myriad of ways to drive impact in South Africa. If used well, BEE could not only drive real development impact outcomes and sustainable transformation, but also present real value add for the companies that use their spend in strategic ways. We need to look beyond and see that development and transformation are in fact true business imperatives.

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