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This review takes place against the backdrop of a year when our national economy began experiencing challenges which were primarily a result of the global economic crisis.
The NEF is acutely aware of the fact that the current financial crisis has had a profoundly negative impact on many Black Economic Empowerment (BEE) transactions. The significant decline in market values of many JSE-listed companies has reduced the value of the collateral that is typically provided to financiers as part of the financing structure. In some cases the trigger prices set by funders have been breached, resulting in remedial measures having to be taken by BEE parties and vendors to ensure the continued sustainability of transactions.
The other critical factor is that the crisis has led to a slowdown in economic growth and a tightening in credit markets, which hampers the ability of companies to expand their businesses and grow their earnings.
Fortunately, the NEF typically funds medium-sized BEE transactions in an unlisted environment and thus has not had the same exposure to the fall in listed equity prices. The NEF has, however, had to put in place measures to support investees with increased cost of borrowings and worsening economic conditions in general. The NEF has done this primarily through the post-investment and business mentoring functions.
The organisation has:
(i) adhered to sound risk management practices;
(ii) taken a longer term investment view; and
(iii) restructured balance sheets when necessary, all in the interests of ensuring the sustainability of its clients.
Of particular interest is how this fund focuses on the national priority of rural development as articulated by President Jacob Zuma this year. The RCDF, established during the year under review following Board approval in April 2008, is mandated to facilitate the ownership and management by workers, cooperatives and other collective enterprises in sustainable investment projects in local and rural communities.
The investment focus is on early-stage opportunities as well as on investments by community groups in existing companies. The Fund seeks to champion economic empowerment of community groups by providing access to finance as well as technical support to community beneficiaries to build capacity. Funding generally ranges from R1 million to R25 million.
The NEF set itself specific objectives in the Business Plan of 2008/9 relating to concluding investment transactions. Fund Management aimed to approve and disburse a large portion of 13 transactions of R300 million for the Corporate Fund and 50 transactions of R160 million for the iMbewu Fund and six transactions of R65 million for the Development Fund.
These targets were set within the context of the approval of capital for the year for Fund Management purposes of R313 million and cash reserves of just over R1 billion for Fund Management purposes.
Fund Management
The NEF’s Fund Management Division (FMD) is structured into three funding operations, namely:
(i) the Corporate Fund;
(ii) the iMbewu Fund; and
(iii) the newly created Rural and Community Development Fund (RCDF).
The Corporate Fund offers several products aimed at improving access to capital for Black entrepreneurs, namely Acquisition Finance, Project Finance, Expansion Finance, Capital Markets and Liquidity and Warehousing finance. Funding generally ranges from R5 million to R100 million in the Corporate Fund environment.
The iMbewu Fund is a suite of products aimed specifically at Black entrepreneurs wanting to start new businesses as well as supporting existing Black-owned businesses with expansion capital. iMbewu, which is Nguni for “seed”, is buttressed by funding products such as entrepreneurship finance, procurement finance, and franchise finance. Here funding generally ranges from R250 000 to R20 million.
Of particular interest is how this fund focuses on the national priority of rural development as articulated by President Jacob Zuma this year. The RCDF, established during the year under review following Board approval in April 2008, is mandated to facilitate the ownership and management by workers, cooperatives and other collective enterprises in sustainable investment projects in local and rural communities.
The investment focus is on early-stage opportunities as well as on investments by community groups in existing companies. The Fund seeks to champion economic empowerment of community groups by providing access to finance as well as technical support to community beneficiaries to build capacity. Funding generally ranges from R1 million to R25 million.
The NEF set itself specific objectives in the Business Plan of 2008/9 relating to concluding investment transactions. Fund Management aimed to approve and disburse a large portion of 13 transactions of R300 million for the Corporate Fund and 50 transactions of R160 million for the iMbewu Fund and six transactions of R65 million for the Development Fund.
These targets were set within the context of the approval of capital for the year for Fund Management purposes of R313 million and cash reserves of just over R1 billion for Fund Management purposes.
Further targets were set for non-financial support in the area of Pre- and Post-Investment Unit, specifically with respect to the implementation of a customer relationship management system (CRM), and further professional assistance to investment applicants by Investment Associates with a view to improving the overall application to approval ratio of 3%.
Further, at the pre-investment level, a business planning toolkit and solution was made available online to those entrepreneurs requiring assistance with drafting bankable business plans. The toolkit is institutionally agnostic and thus budding entrepreneurs can utilise the NEF business plan toolkit and seek funding from other financial services institutions.
The targets set for the Post-Investment Unit were largely around improved monitoring systems through the CRM with direct access to information on the investee’s loan servicing performance as well as the finalisation of a post investment management methodology captured in a procedure manual.
Overall, the performance impact of the NEF remains as measured by the assessment of Fund Management activity against the Empowerment Dividend, which aims to quantify the impact of investments against key criteria as follows:
• BB-BEE
• Women’s participation
• Job creation
• SME development
• Regional development
• Sector specific support
• Portfolio return
On the transaction level the Corporate Fund achieved 10 new approvals of R297 million and disbursed eight transactions of R230 million. The iMbewu Fund and the RCDF collectively achieved 18 new approvals of R197 million and disbursed 35 transactions of R49 million. The iMbewu disbursement activity exceeds the approvals activity significantly because the reported disbursements include 24 investments undertaken through a bulk finance facility.
Despite reaching its highest ever value of approved and disbursed transactions, the Corporate Fund did not meet its overall targets as set out in the business plan for this fund. The investment levels of the Corporate Fund of R230 million, however, exceed the investment values achieved in 2007/08 of R101 million by 128%. The disbursed volumes represents a 33% increase on the 2007/08 levels.
The iMbewu Fund was again able to implement a large portion of its bulk financing product strategy with 35 transactions worth R49 million being disbursed, the highest number of loans ever advanced in a year and largely (over 60%) being attributable to the bulk financing facilities e.g. the Daimler Chrysler facility. The volumes of investment activity increased by 40% against the disbursed volumes achieved in 2007/08.
In aggregate, FMD achieved 28 approvals of R495 million and 43 disbursements of R279 million. This represents the highest rand value of investment activity in the five-year operational history of the NEF as well as a 37% increase in disbursement values and 39% increase in disbursement volumes over that achieved in 2007/08. The Division has also developed a pipeline of transactions that are at the legal stage, and that will be disbursed in the first quarter of the 2009/10 financial year.
It was during this period that the NEF cemented its reputation as a leading empowerment funder, having recorded the important milestone of cumulative approvals totalling more than R1 billion since its inception.
The cumulative approvals of R1.4 billion as at 31 March 2009 to Black businesses and Black entrepreneurs is an exceptional achievement in the NEF’s commitment to growing BB-BEE.
This important accomplishment further demonstrates the NEF’s commitment to contributing meaningfully to Black economic participation and indirectly to the Accelerated and Shared Growth Initiative for South Africa (AsgiSA) initiatives by investing in sectors such as transportation, tourism and entertainment, ICT and media, food and agri-processing, construction and textiles, as prioritised by the dti.
The Pre-Investment Business Unit continued to provide a dedicated and professional customer interface amid challenges such as the poor quality of business plans received. The Unit processed 2 560 enquiries during the financial year, and screened 916 applications out of a total of 1 115 received. The Unit prides itself on the fact that it has adhered to the contracted turnaround times, and has kept complaints to below 3% of applications received.
The Pre-Investment Unit developed the business planning toolkit during the year. This was launched in the 2009/10 financial year. The toolkit allows for a highly interactive business planning system with substantiated assumptions, in multi languages and is Internet based for wide access by the public, at no fee. The strategic intention is for this system to assist with improving the overall approval rate being achieved by FMD from its current average of 3% (2% in 2008) of applications received. It will do this by assisting the entrepreneurs to compile well thought out and substantiated funding plans.
The Post-Investment Business Unit had an eventful year both in terms of managing the NEF portfolio and in terms of assisting the appointed consultancy to conceptualise the Portfolio Management Solution. The Unit concluded more than 220 site visits and performed risk assessments on nearly all the NEF investee companies as at the financial year end.
The Unit finalised the establishment of a mentorship panel during the year through a public tender process and by adopting best practice in the selection of consultants appointed to the panel. The finalisation of the panel is a landmark achievement for the NEF. The NEF now has the capacity, through the mentorship panel, to assist investee companies requiring technical assistance following the NEF’s investment.
To this end, the Unit has already begun to implement mentorship programmes for a number of distressed investee companies to mitigate the effects of the ongoing economic recession. In addition, the team developed a sector position paper for the transport sector incorporating the lessons learnt by the NEF in investing here. Further, the finance and post investment functions have been integrated at a systems level allowing both tracking and the managing of the performance of the NEF loans book.
The Legal Unit has become a key partner and service provider to the Funds and to Post Investment in implementing various important procedures. The Unit provided legal advice on more than 20 due diligence investigations, and has drafted and project managed numerous legal agreements and disbursement compliance processes. In addition, the Unit assisted Post Investment with more than 30 work- out and reorganisation matters.
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