Major shifts towards tangible social transformation well underway in South Africa’s PE industry
ESG has become somewhat of a mantra in the investment world. As a framework for establishing and evaluating the sustainability and ethical impact of investments, labour practices and corporate policies, ESG provides a baseline for decision-making.
In South Africa’s private equity (PE) space – as in other sectors, with good progress made on Governance historically, leading the charge towards decarbonisation on the continent and emphasis on harnessing the power of diversity and human capital have come into increased focus.
Sustainability was one of the central narratives that emerged out of this year’s 2024 SAVCA PE Conference. The event, hosted at Cavalli Estate in Somerset West brought together a cohort of the industry’s leading role-players and stakeholders, including fund managers, investors, regulators and service providers.
Several panel discussions, keynote presentations and fireside chats made up the two-day programme, with many of these forums homing in on the themes of sustainability and impact investing.
Decisive action now for long-term impact later
Elaborating on this point was panellist Martine Botha, Global Financial Services ESG Executive – Senior Manager at KPMG, who believes that PE’s emphasis on a long-term investment outlook aligns it with the impending risks presented by climate change.
“PE is unique in that it takes a longer-term view on investing capital. Its standard 10-year investment horizon coincides with a time in history where the consequences of climate change will reach a peak”, said Botha.
The return-sustainability correlation
In the opinion of Tanya Goncalves, Head of Investor Relations and Impact, Metier Investment & Advisory Services, PE is already well on its way to setting a good example. In 2022, South Africa was one of the first countries to launch a Green Finance Taxonomy as a classification system that defines the criteria of environmentally sustainable economic activities for investment purposes.
“When it comes to raising capital in an evolving world, with evolving needs, ESG has become somewhat of a ‘bare minimum’ that is now widely regarded as being on the basic boxes that prospective investments should tick. This is particularly true of the strategic approaches of institutional investors, where factors such as ESG provides a ‘foot in the door.’
Gonclaves explained, “This is not to say however, that in these cases, performance is compromised – in fact, the opposite is very often true. In one example, a portfolio company began working towards sustainable operations by switching to energy-efficient lightbulbs. This small change added a very significant R20 million to the company’s bottom-line.”
Concurring with the pont of a positive correlation was Tracey Austin, Director of Financial Services at the Department for Business and Trade Africa at the British Consulate-General in South Africa. “When we look at the UK, currently the world’s third biggest institutional investors, we see that there is a demand for a clear linkage between delivering on commercial objectives and ESG-related imperatives.
The journey towards sustainable investing up until this point has been transitory – the mechanisms to accommodate change have been what is missing. However, with initiatives like The Institutional Investors Group on Climate Change, this transition will undoubtedly gain pace. Unlocking investor action relies on being able to make sustainable investing very practical, and with taxonomies like the one adopted by South Africa, the way forward is becoming clearer.”
A Sharper focus of the ‘S’ in ESG - diversity in acquired businesses
The need to make the ‘social’ component of ESG a focal point at every level of PE structures is both a professional concern and personal conviction for Dolores Mashishi, Managing Director of DSM Advisory.
As part of a panel discussion, she explained that according to a Harvard Business Review, as much as 30% of the leaders in companies that are acquired, leave after a year. Mashishi attributes part of this trend to an inadequate focus on nurturing relationships, which as she explains are the “currency of authentic leadership.”
“Business leaders need to lead by being trustworthy and in turn, learn to trust the people they manage. This should include opening the door to different people – those who represent a cross-section of society in terns of gender, talent level, skillset, age and ability,” said Mashishi.
The LP perspective on gender parity among fund managers
Echoing these sentiments in a panel entitled, ‘A glimpse into the LP mindset,’ was Mantuka Maisela, Chairperson of the Motor Industries Retirement Fund (MIRF). Maisela explained the approach taken by LPs, where realities such as the economic downturn that has followed the pandemic, exposed inefficiencies and infrastructural depreciation, require collaborative solutions. Touching one key aspect of diversity, she said that only 49% of women in the financial services sector are employed in senior positions, from where they cannot maximise their impact.
Apart from the ethical imperative attached to striving for gender parity in leadership, it’s also vital to consider the effectiveness of women leaders in addressing socioeconomic issues and changing both lives and livelihoods. “As we raise funds and bring in women – give them capital to invest, many of them who come from underserved rural areas are the same women who reinvest in changing lives on the ground.”
“We’ve been intentional about allocating funds to these women and they have not yet disappointed,” she said.
Investing in tech entrepreneurs for social impact
Even in the digital era, where technology is setting the pace of change, it’s imperative that the investment world does its bit to ensure that no one gets left behind. Panellist, Marlon Parker, Founder of RLabs highlighted on the launch of investment arm, RLabs Capital, which aims to inject funds into the ambitions of aspiring tech entrepreneurs in townships and underserved communities.
“We’ve seen first-hand how technology can be used to take start-ups to the next level, driving efficiencies and enabling opportunities. But it’s important when upskilling, to never overlook the human factor and the need to supplement what people already do. It’s important not to become caught up in the hype of new technology but to make decisions led by the need to empower and uplift communities,” said Parker.
State-led support initiatives
Rounding up the agenda on Day Two of the conference was a fireside chat with members of the Public Investment Corporation (PIC). Leading the discussion was Yvonne Maitin, Executive Head of Unlisted Investments at the PIC, who spoke to the PIC’s emerging fund manager programme and its commitment to giving new fund managers a foot in the door.
As Maitin concluded: “Our new initiative supports emerging managers by giving them the opportunity to build their track record. We fund emerging managers into transactions and ensure they receive management fees on invested capital, deal by deal.” Employing different funding models, the PIC is able to either invest long term or over a defined shorter period and focusses its due diligence on the target investment.
