Q1 2020 - (released May 2020)
SA's quarterly Private Equity & Venture Capital magazine
A crisis to awaken the sleeping giants?
by Michael Avery
In Viktor Frankl’s bestselling book, Man’s Search for Meaning, in which he relays how he managed to survive Auschwitz – the brutal Nazi concentration camp – against all odds, one finds the seeds that, if planted in South Africa, might provide the green shoots of our economic and societal recovery.
“In times of crisis, people reach for meaning. Meaning is strength. Our survival may depend on our seeking and finding it.”
Following so closely on the heels of the lost Zuma decade of state capture, pillage and political plunder, South Africa is facing the triple threats of a social-humanitarian, economic and fiscal crisis the likes of which we have never encountered. As Ricardo Hausmann quipped in a presentation to the Centre for Development and Enterprise recently, this is no garden variety crisis.
As the country looks to create some fiscal headroom to tackle the coronavirus pandemic, and to cushion the impact on businesses and households in the face of mass closure and retrenchments (Business Unity SA estimates at least 1 million jobs are on the line), with regards to the role of institutional capital like pension funds – amid poor returns locally – forging a response is key.
John Oliphant – former head of the largest pension fund on the African continent, SA’s Government Employee Pension Fund (GEPF), current chair of specialist asset management group Third Way Investment Partners, All Weather Capital and JSE-listed healthcare investment company, RH Bophelo – has unique insights into how we should be thinking about mobilising pension funds at this time.
Catalyst caught up with Oliphant at his new Sandton HQ, which is sandwiched between the two glistening new HQs of the JSE’s most talked-about corporate concerns, Sasol and Discovery.
We took a seat in the corner of Oliphant’s spacious ninth-floor office, with glassed panoramic views of what is increasingly empty Sandton office space. Hard times out on the street seem far enough away.
“I don't envy the president,” says Oliphant frankly. “He's got a tough job, but I agree with you that his leadership style is more consensus-seeking, and my wish is for him to make decisions quickly and get us moving. I always say to people that what can create paralysis is not making decisions, and trying to consult with everyone. We need to just get going. There are many things that have been announced and we are starting to see progress on them – we just need to accelerate. He must know that he's got a mandate. We voted, he's in the office now, he must just make decisions; let's get going.”
Oliphant comes from a poor background and his journey is one that holds many lessons for the sort of interventions required to catalyse the latent human capital so often singled out by the World Bank and others as a significant structural constraint to growth.
Oliphant graduated as an actuary, one of the most demanding degrees academically, despite the pass rate in his matric year being a staggering 29%, which provides a glimpse into the size of the mountain he had to overcome in terms of access and quality of teaching, and all of those historical issues we are trying to deal with as a country.
“I went to a township school in Tumahole in Parys (the home town of one Stompie Sepei) and I didn't even know what actuarial science was,” says Oliphant. “I was the first person in my township to be in the top 100 of the Free State. My mother and father invested a lot in me. My mother always said to me that the only way out is education. Let alone entrepreneurship, we can talk about that later.”
Interestingly, Oliphant credits much of his early academic success to Professor William Smith who was awarded the Order of the Baobab (silver) in recognition of his services to teaching and the "demystification of mathematics and science".
“I'm a beneficiary of his wisdom. I used not to go to school and rather sit at home and watch him on SABC, and that's how I learnt my maths and physics. I would then go to school and teach my classmates. My mother knew that irrespective of whatever little money she had, she needed to allocate R2 to me every Friday so that I could go and buy the Sowetan which had supplements from the learning channel, and that was my study guide. One week I would solve problems, and the next week I would buy the paper and mark myself and see the progress that I was making. And that is how I learnt.”
It’s an experience not lost on Oliphant as we look to improve the country’s dismal basic education outcomes.
“I feel that, considering where technology is today, we are not really taking advantage of talented people within the economy to teach much bigger classes. The SABC was my teacher.”
High among Oliphant’s accomplishments as head of the GEPF was not to get a special mention at the Zondo Commission. The cancer of corruption, which has snowballed since 2007, has eroded the ethical foundations of society, and business has been ensnared by the system’s rules, which were established by the politics. BEE lends itself to the creation of a layer of middlemen, for example. With these business challenges, how does someone in his position of influence remain ethical?
“Ethical leadership and morals must always be at the centre of what you want to achieve.”
Touching on Frankl’s maxim, Oliphant credits his ability to remain moored to his values and principles to his sense of higher purpose.
“If you look at how I ended up at the GEPF, I wanted to make a difference. At the time, I was young and doing well in the private sector as the head of the quant franchise at Stanlib, which had more than R20bn in that proposition. I was 25 at the time, and was head hunted. I remember saying to my mother that I was going to the GEPF and was going to sacrifice my bonuses and salary, but I felt like it was the right thing to do because it felt like an opportunity to make a difference.”
Oliphant was extremely young; 26 when he was appointed head of investments and, at 29, the youngest head of the GEPF. But he ascribes the experience as an opportunity to see life through a different lens. That motivated him to do a Masters in Economic Policy through the University of London.
“I was starting to see the bigger picture: from a quants background of building models and understanding retirement funds, to understanding what retirement funds can do to transform society. I believe that what we need to see more of in South Africa is a servant-type leadership style. The reality is that there will always be bad apples, but I think we have a lot of talented people in our country who can add a lot of value.”
And ultimately, it’s about harnessing that talent to rebuild the country, which is also where pension funds come into play.
“We need to look at the pot of capital that we have in South Africa, which is worker capital. I've always said that workers need to wake up and see themselves as partners in the economy, and not just as employees. If you look at the pot of capital that they have – there are estimates as to whether this is R6 trillion or R8 trillion – but whatever the number, we need to look at regulation 28, which regulates savings, and ask if it is fit for purpose, and my view is that it's not.
“If you are saying that roughly 60% of portfolios are sitting in listed equities, and you look at listed equities and who the big players are, it is predominantly Naspers, which is roughly 20% of the benchmark. What are the big assets in Naspers? Tencent, which is in China. So, we need to start thinking about an allocation of capital in our economy and make sure that the actual allocation of capital is used to stimulate the domestic economy. In the bigger scheme of things, we are not allocating capital efficiently.”
Oliphant believes that pension funds haven’t explored the opportunities because there wasn't a need to search hard for returns. The current environment, as difficult as it is, is actually creating opportunities for alternatives.
Oliphant has been hard at work at Third Way trying to create these opportunities for pension funds to invest in.
One of them is the Third Way Infrastructure Fund which has raised roughly R2,5bn, of which R1,2bn has been deployed in infrastructure projects generating CPI plus 4 and 5% returns in this difficult environment, which is exciting.
“We've created a health care platform called RH Bophelo, which is trying to solve the issue of access to healthcare.”
It’s a hotly debated theme in South Africa with many health experts questioning the funding mechanism for the National Health Insurance, especially against the backdrop of COVID-19’s demands on the fiscus.
“We see it as an opportunity,” says Oliphant. “I know people have been talking about the NHI (criticising it) but we see it as a real opportunity. I know, as a father, that every time I pay my medical aid, within three months I've run out of funds in my medical savings and the question is, why? Because healthcare has become so expensive. If you look at how much we spend, in terms of percentage of GDP on healthcare, we spend 10% of our GDP on healthcare – 5% from government and 5% from the private sector – and the private sector services 20% of the population, while the public sector services 80% of the population. And the 10% that we allocate of our GDP is in line with OECD standards. So the issue is not that we are not allocating enough money, but that we are not getting the efficiencies. The RH Bophelo story is about asking how we get into the real economy and make healthcare affordable”.
The conversation swings towards student accommodation and, again, there are real opportunities in the economy for pension funds to generate returns.
And the on-balance sheet funding model for infrastructure that government and state-owned enterprises such as Eskom and Transnet have used for the past 25 years has run its course.
“Now that model has come to the end of the road in my view. Because what has happened is that state-owned enterprises have become inefficient allocators of capital and investors are saying, ‘now, why don’t we go towards a public private partnership-type model?’ and that has been demonstrated successfully in the renewable energy space. I know there has been a lot of political debate around whether you need renewable energy and so on, and I don't want to venture into that [debate], but the reality is that the actual model itself is the correct model for funding because then you bring the private sector in to participate.”
Oliphant calls it pension public private partnerships (PPPPs)
“I've added the fourth P. We want the pension fund community to become a strategic partner. It's ordinary people. I think that what we need to decide on now is the framework. Either we are going to build, own and operate, and transfer later on, or something else, but that model is what will catalyse pension funds into these opportunities across water, transport, all forms of infrastructure.”
Which sounds good, but how do we solve the Eskom crisis?
“Let's look at the impact of load shedding. The economy has now slipped into recession. If you are a pension fund and you work on Reg 28, you can have 40% of your assets outside of SA (30% outside Africa, maybe 10% inside Africa), which means 60% of a typical pension fund’s assets are in invested in SA. If the South African economy is not growing, and you've got 60% of your allocation delivering negative returns, it means that workers are going to retire poorer – they might argue that they are poor now, but they will retire poorer. That's why I think we need to find a solution to Eskom, to ensure that we are able to supply energy to the economy and sustain growth; it’s in everyone's interest to find a solution. We need to awaken the sleeping giant of worker capital to help find a solution to Eskom. Pension funds must take their responsibility much more seriously.”
With much debate around the spectre of prescribed assets, one hopes that South Africa’s policymakers settle on this third way of harnessing private savings by ensuring that there are enough bankable and investable projects out there, from clinics, to roads, to railways. This shouldn’t be out of reach as the country looks to rebuild after COVID-19.