Edition: Dec 2014 - Feb 2015


Partnership at work

By government and private sector respectively doing what they’re good at doing, a new opportunity for retirement funds is presented.

Now that National Treasury has transferred management responsibility for the R9bn Jobs Fund from the Development Bank (DBSA) to a newly-established Government Technical Advisory Centre (GTAC) under the respected Andrew Donaldson, accelerated progress is in the offing. So too is the potential for a model partnership between the public and private sectors, significantly for retirement funds.

The invigorating prospect arises from acceptance by the GTAC of the Atlantic Asset Management (AAM) proposal to launch a fund whose investments will be backed by a government guarantee. This will protect retirement funds from downside risk. It will necessarily encourage them to broaden their dyed-in-the-wool investment paradigm from listed equities to the unlisted sector, spurred by revisions to Regulation 28, and fulfil essential social objectives into the bargain.

By investing in well-established intermediaries, Atlantic is able to channel support for smaller to medium-sized enterprises. Generally, they're more prolific job creators than retrenchment-prone corporates.

Jackson . . . social worker’s heart,
banker's mind

Add the backing of government guarantees to the sifting of investable projects by a skilled operator and the package must be worth at least the serious consideration of trustees. This addendum to privateequity and private-debt attractions begs comparison with the relative volatility of the listed environment, and stimulates portfolio diversification too.

GTAC has been established as an advisory and project-management agency of National Treasury. It incorporates the Public Private Partnership (PPP) Unit and the Technical Assistance Unit.

The first phases of the Jobs Fund, created three years ago, approved 91 projects for R4,96bn in grant funding for some 160 000 new jobs (approx R30 000 per job). This came at a cost to the taxpayer through the DBSA disbursement of grants.

The third phase, now launched, is different. It sees, as National Treasury puts it, "a shift towards partnerships with larger intermediaries to enable the Jobs Fund to scale up its activities". Importantly, it embraces not only the disbursement of grants on a 1:1 matching ratio with the private sector but also government using the strength of its balance sheet to leverage a multiplier considerably higher.

Total size of the national savings pool – inclusive of retirement funds, unit trusts and life funds – is around R6 trillion. Having created a vehicle to marshal and manage the prospective private-sector involvement, Heather Jackson of Atlantic points out: "Even a small allocation to high-impact investments, which do not compromise these funds’ financial performance, would make a big difference. Our network and sizeable pipeline suggest that there are commercially-driven, innovative entrepreneurial solutions to many of our social challenges in housing, transport, education, health, renewable resources and the like."

Jackson refers to a "huge" universe for funding investments, pointing to a 60/40 split between the listed and unlisted space. The AAM fund, which will be closed, is looking initially to raise R680m from institutional investors. The amount has to be limited by the extension of government guarantees.

If the exercise is a success, it could be expanded hopefully with the finite government guarantees being topped up. Present target is for more than 9 000 new jobs over the next four years. Should it be achieved, it will be more cost-effective than past efforts through other government agencies.

In essence, the AAM fund will provide expansion capital to existing businesses that are entrepreneurial, innovative and have capacity to create jobs. Many such businesses have struggled to raise bank finance, especially with banks’ restrictive capital requirements looming under Basel III.

The fund will confine itself to investment-grade companies rigorously checked for their corporate governance. This is intended to ensure that the probability of default is extremely low. But in the event of default, the government guarantee will kick in. The term of the guarantee is seven years. However, the facility exists in perpetuity so could be rolled.

For investors, AAM as fund manager will decide where the money goes. It will make loans on behalf of clients to the applicant companies selected. Impact measurements will be submitted to National Treasury.

Atlantic will originate the respective debts, conduct the due diligences and monitor the debtors’ performance on explicit indicators. Loan agreements set out strict terms and covenants, including interestcoverage ratios. Debtor companies are required to provide their management accounts monthly. Where there’s a need for corrective action, it can be identified and taken quickly. Further to reduce risk, capital repayments are made during the course of the loan.

"We've invested heavily to build systems for continuous monitoring," says Jackson. "By using our credit expertise to identify good investments – and we have our fingers on the pulse of many unlisted companies – we foresee a genuine opportunity for investors to generate alpha."

The Jobs Fund guarantee will cover 50% of any portfolio losses on a first-loss basis whilst not compromising on investment merits. In prospect is a predictable yield of inflation plus 4% after fees. Returns are linked to prime, in a modestly-rising interest-rate cycle, targeting a fixed spread of prime plus 1%.

"Our intention is to get to the end of the seven years without having touched the guarantees," says Jackson. "The challenge is not in finding the pipeline, for it’s worth billions, but in convincing those with conventional investment mindsets that they should access it."