Q2 2020 - (released August 2020)
SA's quarterly Private Equity & Venture Capital magazine
Goddess of growth
by Michael Avery
“I see one-third of a nation ill-housed, ill-clad, ill-nourished.” “The test of our progress is not whether we add more to the abundance of those who have much; it is whether we provide enough for those who have too little.”
The words, immortalised by US President Franklin Roosevelt during his second inaugural address on January 20th, 1937, find particular resonance in South Africa in 2020, as the country – which entered the global coronavirus pandemic on the back of two recessions in as many years – looks to find inspiration for an economic recovery with its own New Deal.
A pair of economic recovery plans during the month of July, the Economic Transformation Committee of the ANC’s Reconstruction, Growth and Transformation: Building a New, Inclusive Economy, and Business for South Africa’s A New Inclusive Economic Future for South Africa: Delivering an Accelerated Economic Recovery Strategy, intersect with the Treasury Paper on economic reform, Towards an Economic Strategy for South Africa, updated last year, and the NDP, on the issue of infrastructure to catalyse growth.
Where they might diverge slightly is on the funding, but already, the building blocks – in the form of the mobilisation of vehicles through which capital can flow into these projects – are being put into place.
And one such building block was announced in June, with the formation of Maia Capital Partners and the launch of a maiden R3bn impact investing fund – the Maia Debt Impact Fund I – as one of the post-COVID-19 economy reset measures to build an inclusive and resilient economy.
The name is inspired by Maia, one of the seven Pleiades and the Goddess of growth.
The Fund is a partnership between Thirdway Investment Partners, the Black-owned infrastructure investor and asset manager, founded by former head of the largest pension fund on the African continent, SA’s GEPF, John Oliphant, and Mutle Mogase (Chairman) and Dinao Lerutla (co-founder and managing partner), of Maia capital.
Speaking at the Thirdway Leadership Dialogue webinar to mark the launch of the Maia Debt Impact Fund, former Deputy Finance Minister, Mcebisi Jonas, said there was no shortage of money in South Africa; what we have is a shortage of leadership.
“In times of crisis, we often say that there are also opportunities,” says Oliphant. “From a Third Way perspective, even though the former Deputy Minister of Finance said there is not really a shortage of capital, what I think our problem has been [is] an allocation of capital that is not really optimal and not geared for our type of economy.”
“Maia Capital is the evolution of this view that we have sufficient local savings, in the form of our pension funds, to invest in infrastructure, healthcare and other areas. Looking now at what is happening due to COVID-19, we thought that it would be important to invest with Mutle and Dinao in areas of inclusive growth.”
Oliphant believes that Jonas’ remarks hit the bullseye in that, for the bold infrastructure programme to deliver the spark this economy so desperately needs, it will require bold leadership from both government and business.
“We need to deal with the trust deficit between government and business. If we all believe that we have a vested interest in making the country work, only partnership between government and the private sector will take us out of the current crisis.”
Mogase explains that, due to government’s constrained finances, with public debt expected to reach 104% of gross domestic product (GDP) by the end of 2021 as a result of the COVID-19 pandemic, and the failure so far of the Treasury’s R200bn Loan Guarantee Scheme to deliver on infrastructure, ambitions will require access to mezzanine debt.
“We are looking at mostly mezzanine instruments,” says Mogase, “and mostly because during times like these, businesses need a mixture of debt and equity capital and we will deliver a form of quasi-equity which will enable the businesses to raise a little bit more debt, but doesn’t dilute them to the detriment of the shareholders.
“That also helps with the inclusiveness, the fact that it helps avoid shareholder dilution. And that is the reason that we are raising a R3bn fund, because we need to play a role in determining the impact and guiding the investment with the investees.
Lerutla says that there is already a healthy R1bn pipeline of projects that the team has evaluated and lined up.
“And this is only the beginning for us,” says Lerutla. “We are quite confident that we have done enough work that we are going to be able to deploy capital into these assets fairly quickly. We have quite a number of offerings in healthcare, which are assets that will enable us to roll out more affordable healthcare facilities in the areas where the need is greatest. We have a pipeline that also includes investing in education. We need more student beds in the country and one of the areas that affects the quality of education is the lack of student housing, and it’s a market that has been opened significantly for private sector investment.”
Lerutla adds that the asset manager also sees a number of opportunities in financial inclusion and affordable housing.
She explains that this is where the team believe that true economic reform and empowerment will stem from.
“If you look at load-shedding in the townships, like Soweto, for a week at a time during a time where we are supposed to be learning online as schools are only partly reopening, you can imagine the impact on that kind of society. These are the things that are exacerbating inequality.”
Lerutla admits that, “it’s not an easy landscape”, but is quick to add that, “because we’ve seen quite a number of successful models on the ground that can be scaled”, Maia is up to the challenge.
What makes the Maia approach unique is also the fact that the asset manager is not only looking at single assets, but also where it can invest into a portfolio of assets in order to ensure there is sufficient capacity to oversee the investments, while at the same time being able to deploy capital.
“Our sweet spot would be between R100m and R300m for an investment cheque size,” adds Lerutla.
The expected IRR is CPI plus 8%, which is typical given the type of product, ranking slightly less than senior debt.
What gives Oliphant confidence that the time is ripe for such a fund?
“Government recently hosted the Sustainable Infrastructure Summit and, by their own admission, they feel that it’s important to replicate a model similar to the REIPPP (Renewable Energy Independent Power Producer Programme). Government believes that model will work in other areas of infrastructure. And government is also working hard on generating a pipeline of projects that are bankable.”
But Oliphant hastens to add that he’s hoping, from the government’s perspective, that the Summit was not the measure of success.
“I was just talking to the CEO of the Development Bank of Southern Africa [DBSA], Patrick Dlamini, and he was saying that it’s critical, now more than ever, to partner with the private sector and [DBSA], being the custodian of this blended capital injection that’s coming from government. He said they have actually accelerated it internally to build capacity so that they are able to engage with partners in the form of pension funds and so on. I get that there is a sense of urgency and everyone is pushing in the right direction. As long as we measure success on actual investments and not on summits; politicians like measuring success by the number of people who have attended their conferences. We want to see the projects coming to the market. Overall, it’s exciting.”
At the time of going to print, 50 projects that were promised to be gazetted within a week of the Sustainable Infrastructure Development Symposium on June 23rd, had just been gazetted.
Trust starts by sticking to your promises.
“We’ve got elected sectors. We are looking at social infrastructure such as health, social housing, climate, and obviously in businesses themselves. We were discussing this recently as the Maia team, that government put up these guarantees, the R200bn, and it’s hardly been used because banks are just not geared to deal with this kind of environment, just by their nature, from a risk point of view. And the need is for quasi-equity as opposed to pure debt.”