Ramaphosa says SME fund starting to ‘pay off’

South Africa is facing a dire unemployment crisis, with highly skewed patterns of ownership in the business sector. Reams of red tape and legislation, such as Broad-Based Black Economic Empowerment which has been put into place to address racial inequality in the business environment, has been criticised for being more of a hindrance to doing business than anything else. 

The CEO Initiative is working on various projects, such as the launch of an SME fund to help boost job creation in the country, and President Cyril Ramaphosa says these efforts are starting to pay off. 

Speaking at an event in Johannesburg on Thursday, Ramaphosa said: “When we started off, people thought we were smoking something but it is beginning to bear fruit. When funds flow into the country, it will lead to continuous growth in our economy. We are operating where it matters most. SMEs are going to create the jobs that we need. It will no longer be the big factories and mines.” 

The CEO initiative was formed shortly after the firing of Nhlanhla Nene in an effort by Pravin Gordhan and a group of about 90 CEOs and business leaders to manage the fallout that followed and avert a credit ratings downgrade.

The grouping, which is led by Eskom chairman Jabu Mabuza, is working to improve the relationship between business, government and labour and to assist SMEs with mentoring and access to market. The SME Fund and Youth Unemployment Service are one of the five streams that have been created by the initiative. Business Leadership SA’s Connect platform, which works to link corporate SA with black suppliers, is another one of these efforts.

According to UNIDO-Harvard University research, there are various opportunities that could be availed to SMEs through linkages with large firms including procurement, enterprise development, distribution and franchising, among others. 

This is where the CEO Circle, which was launched on Tuesday, comes into play. It aims to filter approved small companies to shareholders of the SME fund in order that the bigger company can provide the support and mentorship necessary for these smaller companies to grow. 

Shareholders in the fund include more than 50 listed businesses such as Anglo American, Growthpoint, Curro, Vodacom, Imperial, FirstRand, Mr Price, Sasol and Sun International, among many others. 

Discovery CEO Adrian Gore, who also spoke at the event, said that the unique shareholder base of the SME fund will be leveraged to develop black companies and incorporate them into their supply chains. He says that the fund has received a collective commitment to support SMEs in SA.

In terms of the search and selection process, mentor businesses must have a current annual growth rate of 20% and higher for five years with an annual turnover of over R50 million. Gore says the team will look for a company that has been in operation for at least five years with a strong leadership team. 

“It’s an eco-system that goes further than just funding,” Ramaphosa says. “It brings together entities that will create an impactful process. What we are seeking to do is address SA’s challenges such as unemployment. There are certain initiatives that can curb the problem and we have heard from BLSA that government must remove operating barriers.”

He says that with the CEO initiative, “SA is in a good space” and adds that he appreciates the efforts to create a broader eco-system and the willingness by companies to come to the party by assisting SMEs to get into their value chains.

Ramaphosa uses SAB Miller as an example and commends the company’s efforts for assisting “mom and pop” barley farmers with funding and mentorship to produce what the company is after.

Around R1.5 billion in seed funding has been committed to the SME fund by shareholders to invest in venture capital and social impact funds, which invest directly in scalable SMEs with the potential to become drivers of growth in the economy. 

Gore adds that the fund got off to a slow start but that things are now moving quickly. “The fund is about job creation, growing black businesses and developing entrepreneurship in the country. It’s a fund of funds approach and has invested in some solid black-managed funds.” 

Fifty-percent of the investment capital is deployed to black funds, 25% to Indian and 25% to white. Gore says this decision follows research on what the initiative thought was practical. The governance structure of the fund is strong with a solid committee chaired by Bank Zero’s founder Michael Jordaan. Former Public Investment CEO Dan Matjila has left his position as a board member following his resignation from the public money manager.

Of the almost R1.5 billion committed to the fund, which is managed by Ketso Gordhan,  R725 million has been invested to date with the remainder to be invested by August. By this point in time, “we will be the largest institutional investor in venture capital in SA,” he says.

However, he explains that this pales in comparison to the VC market in the US. “Economies grow because of innovation and technological advances and venture capital brings this together, In the last year, the US invested $82 billion in venture capital. This is almost three times SA. In a day, they invest more than we do in a year.”

While the fund’s focus is on SMEs, the desire is to create large big businesses, Gore explained. “The goal is to create 10 significant black businesses, 200-plus SMEs and five global businesses in five years.”

In adding to the update on the fund, Gordhan says that at the end of the investment process, they want to see that the business has grown three to five times. “We are finding the fund managers to deliver this outcome.”

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