TIP: harnessing the power of black capital

New transformation fund offers black investors an opportunity to diversify their savings while building a new class of African businesses.

We all know that the key to transformation in South Africa lies in the creation of black businesses across the spectrum, from SMEs to giant industrialists. While it was one of the stated objectives in the state of the nation address, the question is: How do we achieve that goal?

The founders of BayHill Capital, a black-owned investment company, believe the answer lies in learning from the rise of Afrikaner businesses in the second half of the 20th century. Through the creation of investment companies and insurers like Sanlam, capital was raised through ordinary Afrikaner households and then invested in the development of Afrikaner-owned businesses.

There is no reason why a similar model cannot be used to raise investments from South African black households to invest in black business, argues Geoff Blount, managing director of BayHill, who points out that currently there is an estimated R700bn of formal savings in black hands – which includes BEE share schemes, pension funds and direct shareholding. This does not even include the estimated R49bn held in stokvels.

Transformational Investment Portfolio

In order to tap into this pool of savings, BayHill Capital is launching the BayHill Transformational Investment Portfolio (TIP) which will be listed on ZAR X, the new alternative South African stock exchange. The fund, which will always be a minimum of 51% black owned, will “harness the power of black capital to target transformational investments while simultaneously delivering competitive returns back to investors.” A good comparison would be a listed company like Remgro which invests in a wide range of South African businesses – both listed and unlisted.

Anyone can buy shares in TIP, although non-black investors will be limited to a 49% stake. This means that TIP will be able to act as an investor in sponsoring listed companies’ BEE schemes, as well as a long-term strategic BEE partner to private equity firms.

How to invest

In order to tap into existing black capital, TIP has several capital-raising strategies:

  • Swop your BEE shares: TIP will offer a share swop with selected BEE share schemes on a rand-for-rand basis. For example, if you own shares in a BEE scheme, you could have the option to swop your shares for a shareholding in TIP. The benefit to the investor is that you immediately diversify your investment away from a single company into a broader investment portfolio. It also provides liquidity should you want to sell the shares. Currently there is an estimated R400bn held in BEE share schemes, however, TIP will be selective in which schemes it will participate as they have to meet their investment criteria.
  • Buy directly: Investors can buy TIP shares in the public offering or through a stockbroker once listed. Due to its listing on ZAR X, TIP is more easily available to small retail investors as ZAR X has lower trading fees, allows for smaller-value transactions, has easier FICA verification methods and will soon be launching a mobile trading app. Due to the more flexible rules of ZAR X, TIP will be able to issue new shares as capital is raised, in a similar way to a mutual fund.
  • Include in retirement funding: As a listed company, it can be included in retirement funds and living annuities. This effectively unlocks retirement funding to be used in the development of black business by making it an attractive option for retirement funds to improve their B-BBEE scorecard.
  • Stokvels: BayHill Capital is also in discussion with stokvels as well as union funds as potential investors.

Investment strategy

TIP aims to become a preferred BEE investment partner for both listed and non-listed companies. TIP investment decisions will be undertaken by the experienced investment committee and be held accountable by an independent board of directors.

BEE share schemes: While providing an opportunity to swop BEE scheme shares for TIP, TIP in turn is able to include these BEE share schemes in its investment portfolio.

Owner-managed firms: There are many medium-sized businesses in South Africa that are still owned by their founders. They remain unlisted and need a BEE partner, but invariably a BEE partner needs funding as they do not have access to the capital required to buy a stake in the business. This is effectively underwritten by the company (vendor financing) and is a risky strategy for the company. TIP can now become the preferred BEE partner by investing in the company, bringing capital as well a black shareholding.

Black industrialists: While there is funding available for black entrepreneurs through institutions such as the IDC, it is often only up to 75% of the required capital with the remaining 25% to be self-funded. TIP can close this gap in funding by purchasing a stake in the business, providing capital to the entrepreneur while providing investors in TIP access to up-and-coming black corporations.

Should you invest?

TIP creates an opportunity for investors to not only support the creation of black industry, but also ‒irrespective of demographics ‒ to benefit from the growth the South African economy unlocked through transformation. Like any portfolio performance, the key will be in the ability of the investment team to select winning companies.

Due to the nature of the fund, this should be considered a long-term investment with returns realized over at least ten years. This is not a fund that is going to focus on quarterly returns but on the longer-term transformation of the economy.

The fees are relatively high with a 1% annual management fee and a 10% performance fee above the benchmark of CPI+4% (that would currently be around 9%). However, as Craig Gradidge of Gradidge-Mahura Investments points out, “this is a more management-intensive investment. There is no index here to track, and some of the underlying investments will require management to negotiate directly with broad groups of people – that is time consuming.”

In terms of investing his own clients’ money, Gradidge is optimistic about the fund. “It gives investors access to deals that they would otherwise not have had access to in the past. This is potentially a good thing and provides an opportunity for investors to further diversify within this space. At the moment investors need to open multiple accounts to own the various shares such as Phuthuma Nathi, YeboYethu, Sasol Inzalo, etc. Now they can potentially get all that and more in one investment”.

Gradidge says his advice to clients is to look at it on a case-by-case basis. “Where a client is not suitably diversified, TIP becomes attractive. Where a client is well diversified it may be worthwhile to sit on the fence for a bit and see how the portfolio takes shape. If there is enough in the portfolio that they do not have exposure to, then switching may become an attractive option.”

TIP is expected to list before the end of April 2018. Although it is open for private placement at R1.00 per share, the minimum investment is R1 million per individual or wealth-planning firm. This could be raised through an investment group; alternatively if you invest via a stockbroker, smaller amounts can be invested. Once it is listed you can buy shares as per normal.

Why ZAR X

As a new exchange ZAR X offers more flexibility than the JSE as well as being more cost effective for smaller trades. Trades are executed in real time which means that the shareholding can be monitored continuously to ensure that the black shareholding remains at a minimum of 51% at all times. It allows for the creation and repurchasing of shares within TIP. It also allows for market-making (where the share price is determined by the value of the underlying investments) which means the investment portfolio will trade at net asset value (NAV) in the same way as a unit trust fund for example. This is unlike other listed investment funds which typically trade at a discount to NAV. Unlike the JSE, ZAR X has no minimum transaction charge (typically R100 on the JSE) but a guided stockbroker charge of 1.5%. This means an investor can buy just R50 of TIP shares for a transaction fee of only 75cents.

This article first appeared in City Press.

Leave a Reply

Your email address will not be published. Required fields are marked *