BEE.conomics: Transformation in South African Asset Management (2020)

BEE . conomics ™

Transformation in South African asset management

17sustainabledevelopment

go

al s (SDGs) to transformourworld

A: Overall participation statistics

B: Public markets

B5

C: Private markets

Abbreviations

ABSIP Association of Black Securities and Investment Professionals

ASISA Association for Savings and Investment South Africa

AUM Assets Under Management

B-BBEE Broad-Based Black Economic Empowerment

CFA Chartered Financial Analyst

CIS Collective Investment Scheme

COFI Bill Conduct of Financial Institutions Bill

CRISA Code for Responsible Investing in South Africa

DFI Development Finance Institution

DTI Department of Trade and Industry

EAC Effective Annual Cost

EME Exempted Micro Enterprise

ESD Enterprise and Supplier Development

ESG Environmental, Social and Governance

FSC Amended Financial Services Sector Code of 2017

FSCA Financial Sector Conduct Authority

FSTC Financial Sector Transformation Council

GEPF Government Employees Pension Fund

GIPS Global Investment Performance Standards

GP General Partner

JSE Johannesburg Stock Exchange

LDI Liability Driven Investment

LISPs Linked Investment Services Providers

LP Limited Partner

LSM Living Standards Measure

NPAT Net Profit After Tax

PA Prudential Authority

PIC Public Investment Corporation

QSFI Qualifying Small Financial Institution

SARB South African Reserve Bank

SARS South African Revenue Services

SAVCA Southern Africa Venture Capital and Private Equity Association

SDGs Sustainable Development Goals

SED Socio-Economic Development

SOE State Owned Enterprise

TER Total Expense Ratio

TIC Total Investment Charge

UCITS Undertakings for Collective Investment in Transferable Securities

UN PRI United Nations Principles for Responsible Investment

Criteria and methodology

Purpose of the survey

The purpose of this survey is to map the progress of transformation in the South African asset management sector and to showcase the universe of majority black-

Who would participate?

Asset managers which met the following criteria were approved for participation in the survey:

1.The company is at least 51% black-owned where black people hold at least 51% of the economic interest and where black people hold at least 51% of exercisable voting rights.

2.At least 51% of the company’s board of directors are black.

3.At least 51% of the company’s senior portfolio managers are black.

Research methodology

owned, managed and controlled asset managers across both public and private markets.

4.The company is registered with the Financial Sector Conduct Authority for the business that the company carries out.

Random checks were conducted by 27four to verify that each participant met the criteria. However, this was not independently vetted. All information was voluntarily provided as is by participating firms.

All data is presented as at 30 June 2020. The graphic below articulates the research process followed.

1Questionnaire design

2Research content

3Asset manager universe

4Invitation to participate

5Submission deadline

6Information collation

7Commentary

8Publish

Changing industry dynamics require an annual reassessment of the relevance of the questions asked.

A key feature of the survey is the inclusion of research articles of interest and interviews with stakeholders.

We cast our net wide to ensure that our universe is all-encompassing.

Asset managers were invited to complete the online questionnaire on 2 June 2020.

The cut-off-date for participation was 14 July 2020.

Information submitted was cleaned, verified, collated and presented in a visual format.

Statistics, facts and figures were interpreted, observations made and commentary provided.

The completed product is assembled for artwork, final editing and publication.

The survey has been designed with comparability to previous years in mind. The report is also published

and made freely available for the benefit of all stakeholders across the savings and investments ecosystem.

Foreword

by Polo Leteka Radebe, President of ABSIP

The year 2020 is turning out to be a watershed moment for the world at large and for South Africa in particular. As a country with a unique history premised on years of historical injustices and a unique transitional project into democratic rule, the South African story always needs to be narrated and articulated in a manner that acknowledges the uniqueness of our society at large.

The rise and the spread of the coronavirus pandemic has forced a reset of what the world thought were the rules of engagement and the ways of working and living. Similarly, in South Africa, it has forced us to confront so many of the fundamental fracture points inherent in our society that have become accepted rather than challenged. As a country that had a unique mission to proactively seek to heal and bridge the injustices of the past and map a future of shared prosperity and solidarity, South Africa by default had to come up with creative and innovative ways of bridging its great social divides.

This is the basis of the various transformation initiatives and instruments that have been put in place over the past 25 years. Key to these instruments is the regulatory regime that seeks to provide guidance for various market participants in various sectors on what needs to be done in order to achieve meaningful transformation in the various areas that they are in. The role of transformation legislation in its various forms can therefore not be over-emphasised in the South African context. What also becomes very critical in relation to any form of regulation and social leadership is the ability to monitor the effectiveness of intervention instruments that have been proposed and implemented. To this end, the idea of a policy barometer is an important concept for a country like South Africa.

This is simply because whatever instruments of intervention are proposed and applied must be evaluated against objective benchmarks that provide insights into the effectiveness of such instruments in converging our society closer to shared characteristics rather than amplifying our historic divides. In the financial services sector, given its transversal and pervasive role across all sectors of our society and economy, it is even more important to not only put transformation measures in place but also to objectively assess and evaluate them. It is with this in mind that ABSIP is fully supportive of the 2020 Transformation in South African Asset Management Survey.

In our view, this survey serves as an important barometer that enables us to track the performance and progress of transformation within the sector over a particular period of time. The reason why tracking and monitoring transformation is quite important is that we all acknowledge that this sector is still dominated by a few market participants who possess significant market power. Such market power is amplified by the significant barriers of access for incomers. The new and emerging players in the asset management industry therefore need to be assisted in firstly understanding the market and also identifying points of entry.

It is in a survey of this nature that we are able to identify whether such initiatives exist and if so what their effectiveness has been in ensuring that we open up the sector and create an ecosystem that is receptive to new entrants, and for black asset managers in particular, to be able to succeed within the sector. As 27four Investment Managers has conducted this BEE.conomics Transformation in South African Asset Management Survey for the past 12 years, it has become an important reference point for deliberations around the table within ABSIP structures in analysing and understanding the asset management industry and what its ongoing challenges are. It is with this in mind that we welcome the 2020 survey which indicates to us that not only do we still have a lot of work to do but also identifies particular areas of focus that must become the focus area for ABSIP and the various role players in the asset management sector going forward.

Executive summary

1.Black-owned market share

• As at 30 June 2020, total assets managed by blackowned firms advanced to R668 Billion, an increase of 15% from last year.

• There are 51 black-owned asset managers across both the public and private markets (2019: 50).

• The universe of participants includes a small number of very large firms and a long tail of medium and small-sized firms. Median asset manager AUM is R1.6 Billion and mean AUM is R13.1 Billion.

• Black market share of the total estimated South African savings and investment pool is 9%.

2.Impact of COVID-19

• Around half of all participants expect COVID-19 to have a negative impact on their bottom-line. Such firms have implemented a number of cost containment measures which include reducing marketing budgets, deferring or cancelling planned investments, placing freezes on new hires and taking bonus and salary sacrifices.

• Only a handful of firms took advantage of government relief measures such as tax deferral holidays.

• An overwhelming majority of firms envision a new world of work with less air travel and an increase in remote working and use of technology-based communication platforms.

• The pandemic has also brought impact investment to the forefront as many debt and equity recovery funds have emerged to support businesses mitigate the negative financial consequences inflicted by the economic slowdown.

3.Asset allocation trends and changes in the demand side

• Within public markets, just over 60% of industry assets are currently invested in low risk money market and fixed income products. These are also low margin products and require significant scale to drive profitability. Domestic equities have progressively been losing market share over the past decade and now make up just 22% of AUM having made up 50% of total AUM in 2010. Exposure to domestic equities has fallen sharply, a reflection of lacklustre performance,

low investor confidence and an economy on its knees. Outflows from domestic equities were equipoised by flows into domestic money market and fixed income, where the safety of real yields and low volatility was favoured by investors. The lion’s share of managers operating in the public markets space are focused on the management of specialist domestic equity mandates and have been the hardest hit by this shift. Managers with established fixed income and money market offerings gained the most.

• Less than 2.5% of public markets AUM is managed in global mandates even though eleven firms have global offerings. It is unfortunate that managers with global offerings have not been able to build adequate scale even though institutions and individuals have taken full advantage of the global exchange control allowance.

• The demand side in South Africa is changing, and investors have become much more discerning and less tolerant of lacklustre performance and high fees particularly in the case of active fund management. Institutional investors are also searching for diversified sources of return that can match long-term liabilities, cushion portfolios from the shocks of market selloffs, meet developmental goals and deliver inflation beating returns. Given these multiple objectives, we can expect the industry to gradually adapt to such pressures with more offerings emerging at opposite ends of the spectrum - costly high alpha alternatives where managers are paid for the delivery of longterm performance, and low-cost passive beta solutions.

4.Private markets, prescribed assets & change in regulations

• An already weak economy exacerbated by COVID-19 has left government seeking a new narrative to accelerate an economic recovery. As such, the idea of using prescribed assets to help foster economic growth has resurfaced, packaged in the form of an infrastructure fund to finance strategic projects by combining capital from the public and private sectors, retirement funds, development finance institutions and multilateral development banks. With expectations of capital flows into real assets, the asset management industry appears to be readying itself - new and existing firms are building capacity and skills to be able to manage such flows.

• Twenty private markets firms completed our survey this year, which have raised a total of R19.3 Billion across 30 funds, representing both an increase in participation and AUM from last year. While the overall asset size is encouraging, it is important to note that the universe of participating firms’ AUM is highly skewed, with many managers currently at subscale and continuing to experience challenges of long fundraising cycles.

• The resulting growth in appetite for impact investment through unlisted assets may precipitate a change to Regulation 28 of the Pension Funds Act, which currently caps private equity and hedge funds at 15%. Calls have been made by SAVCA to separate hedge funds from private equity and gradually increase the private equity limit. The Minister of Finance has publicly flirted with the idea of increasing the limit indicating that this is under review by the National Treasury. Similar calls have been made to amend CISCA to allow unit trusts to hold unlisted exposure.

5.Scale and distribution

• There are now two firms who each manage more than R100 Billion and collectively represent almost half (48%) of total assets. Breaking beyond the R15 Billion mark appears to be the largest challenge for managers. Most private market participants fall in the <R1 Billion category.

• Ninety percent of public market asset managers’ asset base is sourced from institutional investors such as retirement funds and are therefore concerned about the consolidation of retirement funds under umbrella arrangements. This apprehension is not without merit as argued in “The Shift to Umbrella Funds – Does Consolidation Support Transformation?”.

• Retail penetration appears to be lethargically progressing with black-owned asset managers’ market share of the unit trust industry now at 9% represented by 25 firms managing 106 unit trust portfolios.

• Firms also envision a greater increase in mergers and acquisitions as companies harness skills, expertise and resources together in a shift towards greater market consolidation.

6.ESG

• Twelve firms are signatories to the UN PRI.

• Ninety percent of all firms integrate ESG into their investment processes and over two-thirds of public markets managers acknowledge that ESG factors have impacted the risk and return characteristics of the portfolios they manage.

• The overwhelming majority of firms agree that the pandemic has once again exposed the fragility of the financial markets and current economic systems and that a shift of alignment to achieving the UN SDGs is becoming urgent.

7.Socio-economic statistics

• The revenue model of asset management is built for scale, and so the increase in industry AUM did not translate into an increase in job creation. The industry currently employs a total of 638 people, marginally down from last year.

• There was little movement in the demographic composition of asset manager teams since 2019. None of the managers’ teams are homogenous and positively reflect both race and gender diversity.

• There was a marked improvement in the number of firms achieving profitability as 76% of all firms indicated that they are profitable up from 68% recorded in the previous year.

• There was overall improvement in the size of public markets firms based on revenue as 44% (2019: 48%) are classified as EMEs, 34% (2019: 34%) as QSFIs and 22% (2019: 17%) as large enterprises.

• Women representation at both ownership and directorship levels continue to disappoint relative to all other sectors within the economy (B-BBEE Commission, 2020).

• Over half the universe of public markets managers procure less than 20% of services from more than 51% black-owned and / or 30% black women-owned businesses suggesting that the industries from which asset managers procure services from are largely untransformed.

• Going into 2021, transformation of the financial sector will be in the spotlight with new legislation focused on achieving parity within the sector coming into play. Such legislation includes the Employment Equity Amendment Bill, currently in draft form, which will allow for the Minister of Employment and Labour to identify sectoral numerical targets to ensure representation reflective of our demographics. We can also expect to see the Conduct of Financial Institutions Bill come into effect, and an updated iteration of the Financial Sector Code gazetted.

Overall participation statistics

Sector overview Section highlights

DECLINE

a. Total number of participating firms and AUM

The disruption brought on by COVID-19 on the global financial system has forever changed the structure of asset management. Market volatility and capital depletion has been much more severe than that witnessed during the Global Financial Crisis of 20072008. Given how closely asset management revenues are tied to the capital markets, these are extremely uncertain times for the industry. Regardless of these difficult conditions the overall assets managed by blackowned firms advanced to R668 Billion (up 15% year on year). The number of firms who met our criteria for participation has now reached 51, comprising 31 managers focused on public markets, 19 on private

markets and one manager with an offering across both markets.

This growth, however, has not been widespread as risk off sentiment has favoured those asset managers with strong fixed income offerings. The outlook for the overall sector remains bleak as is evidenced by the share prices of publicly traded asset managers. Given the headwinds caused by the slowdown in our economy we expect to see consolidation across the industry, as well as growth in impact investment offerings that can advance social and economic sustainability objectives.

The proportion of private market respondents has been increasing in recent years and now make up 39% of the dataset (20 out of 51), up by five new entrants since last year’s publication. Private markets have in recent years experienced favourable momentum and this trend is expected to continue as investors seek sources of return that can achieve the dual objectives of inflation beating returns and contribute to the revitalisation of our economy. Investors have become increasingly frustrated with returns from the domestic listed markets which, represented by the All Share Index, has returned a paltry 4,16% annualised over the five years to 30 June 2020. There is also a lot more openness to the unlisted asset class than before.

c. Exits and entrants to the survey

Entrants

Ascension Capital Partners

Eklavya Asset Managers

Idwala Capital

Makalani Management Company

Medu Capital

Tamela Capital Partners

Volantis Capital

Vuna Partners

Exits

Acanthin

Black Mountain Investment Management

Convergence Partners Management

Differential Capital

Legacy Africa Fund Managers

Pan-African Asset Management

2020 saw seven new participants join the survey with five firms operating in private markets and two in public markets. Makalani Management Company is not a new entrant to the survey. They previously only participated under public markets and now also participate under private markets. Idwala Capital and Tamela Capital Partners are both re-entries to the survey having previously participated in the 2018 edition. Budding new entrants Volantis Capital has come to market with a fixed income offering and Vuna Partners is a private

Markets Markets

Markets Markets

equity manager focused on the mid-market sector. There were a total of six exits this year, five in public markets and one in private markets. One of the six is no longer in operation. Reasons for non-participation include: missing the deadline to submit data, being focused on retail clients only, have experienced a contraction in AUM or not been successful in asset gathering, no longer meet the criteria for participation or find no value in participating.

Senatla

Bopa Moruo Private

Ata Capital

RH Managers

Sanari Capital

Moshe Capital

Kleoss Capital

PAPE Fund Managers

Crede Capital Partners

Third Way Investment Partners

Ethos Mid Market Fund I

Khumovest

Eklavya Asset Managers

Summit Africa

Tamela Capital Partners

FyreFem Fund Managers Ascension Capital Partners

Vuna Partners

g. Assets managed by firm size

>100bn

50 to 100bn

30 to 50bn 15 to 30bn 5 to 15bn

This year, Prescient Investment Management joins Taquanta Asset Managers in the plus R100 Billion club. Collectively the two managers represent almost half (48%) of total assets managed by all firms that participated in the survey. Breaking beyond the R15

Billion mark appears to be the largest challenge for managers. The majority of private market participants fall in the <R1 Billion category. Little has changed from previous years as the data re-affirms the lopsided topography of this group of managers.

h. Combined market share of top firms by AUM

Concentration in the pool increased between 2019 and 2020 with the top five and ten firms now representing 72% and 86% of overall industry assets, respectively. The COVID-19 shock to the capital markets in February this year resulted in members of retirement funds switching out of growth portfolios into low risk portfolios

heavily weighted to fixed income securities. Asset managers with established track records in fixed income, of which there are several in the top 10, were recipients of this flow. In this light, the increase in concentration levels is not surprising.

i. Public markets - top ten firms by AUM

1 (1) (1)

Taquanta Asset Managers

Prescient Investment Management

Aluwani Capital Partners

Vunani Fund Managers

Mergence Investment Managers

Kagiso Asset Management

Argon Asset Management

Sentio Capital Management

Aeon Investment Management

Perpetua Investment Managers

Aeon Investment Management appears in the table for the first time, having increased firm AUM by 8.49%, positioning the asset manager as the ninth largest public markets asset manager. Listed property manager Meago Asset Managers dropped out of the top 10 due to the decline in the performance of the sector, which saw the SA Listed Property Index drop by 40% over the period

1 July 2019 to 30 June 2020. Over the one year to 30 June 2020 the Capped SWIX Index delivered -10.78%. In line with this decline and outflows from the sector, domestic equity focused managers experienced the largest drop in AUM. Managers with fixed income offerings benefitted from better performance, and new inflows to the asset class.

j. Private markets - top ten firms by AUM

Medu Capital

Ethos Mid Market Fund I

Makalani Management Company

Third Way Investment Partners

Ata Capital

PAPE Fund Managers

RH Managers

Bopa Moruo Private Equity Fund Managers

Kleoss Capital

Senatla Capital

*indicates new entrant to the survey **indicates new entrant to top 10

Both Medu Capital and Makalani Management Company make the top 10 this year with Summit Africa exiting the top 10. Many of the firms are still raising capital for fund closure, whereas some have closed and begun deployment. Overall private market assets have increased from R15.2 Billion recorded last year to R19.3 Billion this year - the top 10 account for 90% of this figure. This universe of managers include managers focused on private equity, debt, and infrastructure.

As South Africa responds to its developmental needs through infrastructure investment, inviting blended finance and public private partnership opportunities, we expect this pool of managers to benefit from such activity. The biggest tailwind for the industry is the expected increase in the retirement fund investment limit of 10% to private equity which we understand is currently under review by the National Treasury.

k. Black asset management market share of the overall savings pool in South Africa

To calculate the total black market share of the regulated savings pool in South Africa we need to first calculate the total size of regulated savings stocks. This calculation is provided next and excludes short-term insurance, medical schemes and banking stocks. It is important to

note that there is no official source for this statistic and different figures have been quoted in the industry, varying from R6.5 Trillion to R8.5 Trillion. The values provided are from a range of sources which report at different times.

Total size of regulated savings stocks excluding banks, short-term insurance and medical schemes

Add up all of this:

Minus all of this:

Collective Investment Schemes (“CIS”)

R2 535 Billion (30 June 2020, ASISA)

Investments in CIS Portfolios

Retirement Funds

R2 652 Billion (31 May 2020, FSCA Active Funds List)

Public Investment Corporation

R2 461 Billion (2020, ASISA) +++

R1 615 Billion (30 June 2020, ASISA) Underwritten

Retirement Funds

R533 Billion (2018, FSCA Annual Report)

R2 131 Billion (31 March 2019, PIC Annual Report)

The total value of savings and investments managed by black-owned firms is R667.8 Billion which represents a market share of 9% of the overall regulated savings pool. It must be pointed out that not all regulated stocks are available for management by private sector asset managers, for example, the Public Investment Corporation in its 2019 Annual Report indicates that only 12% of all domestic listed equities are managed by external asset managers.

l. Black asset manager market share of the unit trust industry in South Africa

According to ASISA the total value of ZAR denominated CIS portfolios as at 30 June 2020 was R2.54 Trillion up 5% from R2.41 Trillion recorded last year. Black asset managers’ market share of this total currently stands at 8.7%.

The top ten management companies account for on average 76% of total CIS AUM and have held onto their rankings with Allan Gray and Coronation dominating

the top 2 positions. The only black-owned firm appearing on this quilt is Prescient who entered the top 10 in 2018 and have subsequently moved to ninth position in 2020.

n. Participation and AUM by province

According to SAVCA the Southern Africa private equity industry recorded R184.4 Billion in AUM at the end of 2019, of which 82.4% (R151.9 Billion) of AUM were unrealised investments, with the remaining R32.5 Billion classified as undrawn commitments. The number of black private markets participants increased from 15 to 20 with a total AUM of R19.3 Billion representing 10.5% of total industry AUM.

0. B-BBEE contribution level

The criteria for participation in the survey is at least 51% black ownership. The majority of respondents are classified as EMEs and QSFIs and therefore automatically qualify under the FSC for either a level 1 or 2 rating,

p. Total headcount vs AUM

depending on their level of black ownership. There are a number of large enterprises in the survey pool, one of which holds a level 3 rating.

The revenue model of asset management is built for scale, as is demonstrated here. The increase in AUM did not translate into an increase in job creation. The increase in AUM was concentrated across three asset managers: Taquanta Asset Managers, Aluwani Capital Partners and Vunani Fund Managers, who saw their AUM rise by 36%, 25% and 35% respectively. However, over the period, Taquanta Asset Managers added one job, Aluwani Capital Partners lost one job and Vunani Fund Managers added three jobs.

Firms have also responded prudently to COVID-19 by implementing cost containment measures such as deferring planned investments and not replacing staff losses with new hires. We also anticipate the demand side to change. The type of skills needed to respond to this shift will be different, which should see the composition of workforces within asset management begin

transform.

q. Demographics of all employees

There was little movement in the demographic composition of black-owned asset manager teams since 2019. None of the managers’ teams are homogenous and reflect both race and gender diversity. There was a marginal reduction in White Males and a slight improvement in Coloured Males. The seismic shift in the world of work brought on by the COVID-19 pandemic is placing greater emphasis on talent management. It is without doubt that diversity and inclusivity are a

necessary requirement to promote stronger organisations and failing to achieve such targets will be costly for any asset management business. The influence of big data and fintech on the sector will also see the industry recruiting more data science and tech savvy skills whilst at the same time adjust to deal with a younger generation of talent who do not share the same expectations as previous generations.

There has been a marked improvement in the number of firms achieving profitability. This is a pleasing statistic but must be considered with caution as the full impact of COVID-19 has not filtered through the economy, and is expected to result in widescale business closures and retrenchments, forcing retirement fund exits and savings withdrawals. There are also a lot more asset managers in the market targeting this declining savings pool, and so investors will be much more discerning and less tolerant of lacklustre performance and high fees. This is particularly relevant in the case of active fund management. We therefore expect the industry to gradually adapt to such pressures with more offerings emerging at opposite ends of the spectrum - costly high alpha alternatives where managers are paid for the delivery of long-term performance, and low-cost passive beta solutions. Asset management is also built for scale, and so managers unable to achieve scale advantages will be crowded out in a tough economic environment.

s. Trends in asset allocation

Multi-Asset Class (Absolute Return and Balanced)

South Africa Listed Property

South Africa Money Market

South Africa Fixed Income

South Africa Equity

This graph displays the trend in asset allocation, of the top six investment strategies, collectively employed by public market participants over the last decade. Exposure to domestic equities has fallen sharply over the period, a reflection of a lost decade of lacklustre performance, low investor confidence and an economy on its knees. This situation has been exacerbated by the shockwaves of COVID-19. Outflows from domestic equities were equipoised by flows into domestic money market and fixed income, where the safety of real yields and low volatility was favoured by investors. The lion’s share of managers operating in the public markets space are focused on the management of specialist domestic equity mandates and have been the hardest hit by this shift. Those managers who have consistently underperformed have been the biggest losers. Domestic listed property managers have shared a similar, if not worse fate given the selloff in the sector. Managers with established fixed income and money market offerings have gained the most. There are only a handful of managers with global offerings which explains the low allocation to this asset class.

There is no doubt that the demand side is changing, and institutional investors are searching for diversified sources of return that can match long-term liabilities, cushion portfolios from the shocks of market selloffs, meet developmental goals and deliver inflation beating returns. Whilst much of this is cyclical in the context of interest rates, we cannot ignore the influence of structural challenges facing our capital markets and the economy on investor behaviour. Managers focused only on the management of a single asset class will need to guarantee exceptional performance, whilst others may choose to diversify across product offerings to protect their businesses from downturns in any specific asset class at any given time.

Colonialism, apartheid and democracy - the evolution of South African asset management

Asset management plays a critical role in the functioning of the South African economy through the efficient mobilisation and allocation of savings. The sector supports financial market infrastructure and ensures the smooth functioning of the capital markets, a barometer of the health of an economy. The sector is also a significant contributor to GDP. In fact, financial services as a whole is the largest contributor to GDP, at 22% 1 . The asset management industry is also wellregulated, thereby providing trust, confidence, and stability to the financial system.

South Africa’s status as the most mature financial market in Africa is a culmination of its evolution from colonialism, through apartheid, and its eventual entry into the global marketplace following democracy in 1994. The structure and institutionalisation of the sector has largely been influenced by the politics of the day. This review explores the periods before and after democracy and is subdivided into distinct periods of political reign, control, and leadership.

We

1845 - 1947: Era of colonisation

The institutionalisation of the savings and investments sector began with the establishment of insurers and banks in the 19th century, which saw the emergence of the bancassurance model. This model of cross shareholding between insurers and banks remains prevalent today. For example, Sanlam and Absa share a relationship, as do Old Mutual and Nedbank, Liberty and Standard Bank, and Momentum and FirstRand. The bancassurance model also gave birth to the asset management industry as these financial institutions established investment management arms, to manage

life and other assets. According to Alexander Forbes2, as at the end of 2019, insurer owned asset management firms Old Mutual Investment Group, Sanlam Investment Management, Stanlib Asset Management and Momentum Asset Managers are ranked one, five, six and thirteen by total assets under management respectively. On this basis, one could argue that South Africa has never really conceptualised a new economy and that the colonial or apartheid structure remains intact with a few companies, their subsidiaries, and associated companies dominating the sector.

It was also during this period, in 1882, that the first recorded pension fund was introduced in the Transvaal Republic 3 which set the foundation for formalised retirement savings. The next big step in the development of the financial sector was the launch of the Johannesburg Stock Exchange (“JSE”) in 1887, today ranked the nineteenth4 largest stock exchange in the world with a market capitalisation of R15.7 Trillion5. The JSE have successfully held this monopoly until recently when in 2016, the regulator began approving the licensing of four new exchanges: ZAR X, A2X, 4AX, and Equity Express Securities Exchange. The JSE, however, remains the primary exchange catering for trade in stocks, bonds, commodity and interest rate derivatives.

A defining moment for the development of public pensions was the passing of the Public Debt Commissioners Act in 1911, which laid the foundation for the present-day Public Investment Corporation. This Act created a single government entity which was able to manage and control government funds, borrow against pension fund assets, and finance government budget deficits.

1948 - 1993: Emergence of apartheid

This period can be described as the darkest period in our history, a period marred by social policies of

apartheid based on racial segregation eventually leading to large-scale unrest and bannings. In response, the United Nations introduced world-wide economic and financial sanctions against South Africa in 1986. Exchange controls are a remnant of such a past, where they were used to limit the outflow of capital to support macro-economic stability. This, however limited the growth of our capital markets.

An important milestone for retirement funds was the passing of the Pension Funds Act in 1956 which put in place the regulatory framework for the sector and remains the primary legislation governing retirement funds today. The Act made provision for the appointment of a Pension Fund Registrar and for the registration, incorporation, regulation, and dissolution of pension funds. Apartheid savings laws, however, were discriminatory and prejudiced black workers. The scene was set for a hard-won battle by trade unions to set up retirement funds designed to improve their members benefits, leading to the establishment of Defined Contribution Provident Funds in the 1980s. The graph below presents the growth in formal retirement savings in South Africa since the period before democracy.

Source: FSCA Annual Reports

The move to Defined Contribution Funds triggered the entry of independent asset managers to the market. Ninety One (previously Investec Asset Management) and Coronation Fund Managers are examples of such independent firms which today are global brands and rank second and third by total assets under management in South Africa, respectively. The rapid rise of independent asset manager participation was not inclusive. At the end of this period there were no black owned, managed, and controlled asset management companies in South Africa.

Another watershed juncture in the development of South African asset management was the passing of unit trust legislation in 1965, which saw the launch of South Africa’s first unit trust. The legal framework to pool savings was a first step towards providing consumer access to the capital markets and an alternative to banking products, thereby enhancing the role of asset management. The growth in AUM and number of registered unit trusts is presented below.

The next iteration of the Public Debt Commissioners Act of 1911, before the corporatisation of the Public Investment Corporation in 2005, was the passing of the Public Investment Commissioners Act of 1984. The Commission began to play an investment management role over public funds and fulfil its mandate as a debt provider to the apartheid government. This was essentially a policy of prescribed assets, effectively forcing pension funds and insurers to invest in government-backed securities. Prescribed assets were later abolished in 1989 but subsequently resurfaced in 2017 at the launch of the election manifesto of the African National Congress.

1994 – 2008: Democracy!

This was a period of exuberance when apartheid laws were finally abolished. The first democratic election was held in 1994, a new constitution was founded, and sanctions were lifted. It was the golden period for growth in our capital markets as we entered the global marketplace, and exchange controls were relaxed. According to a report published by Business for SA6, “during this period GDP doubled in USD terms to $287bn, debt to GDP almost halved to 27.8%, we secured an investment grade rating in 1999, foreign direct investment grew 30 fold to $12bn and tax revenues grew by 550%”.

The unlocking of the economy and our participation on the global stage catalysed the strengthening of our financial market infrastructure, stimulating widespread innovation and development. Trading volumes in our bond and equity markets rose sharply, our derivatives market flourished, electronic trading was introduced, and we saw improvements in the clearing and settlement of securities. Many foreign financial institutions set up offices in South Africa - the resultant competition and improvement of liquidity contributed to job creation and innovation. The increase in foreign participation in our capital markets is demonstrated in the graph delow.

Foreign participation in South African capital markets since democracy

In 1999 South Africa became a founding member of the G20. This has significance since subsequent regulatory reforms introduced in the financial sector have been premised on G20 principles. Policymakers and regulators have often been criticised for being too focused on meeting international standards without considering important parochial features of the domestic economy. Putting it bluntly, the policies failed to transform the financial services industry to broaden the participation of black people in the sector. An example of South Africa fulfilling its G20 commitments was when in 2015 hedge funds which were previously unregulated, became regulated under the Collective Investment Schemes Control Act (“CISCA”). Under the new legislation hedge funds were required to be registered under CISCA approved Hedge Fund Management Companies. However, the licensing approach was not supportive of new black entrants, inadvertently entrenching the dominant positioning of incumbents. This has been corrected in subsequent legislation such as the Insurance Act and the Draft Conduct of Financial Institutions Bill, where the regulator has adopted a more developmental approach and is explicitly supportive of transformation imperatives.

The historic Financial Sector Summit was held in 2002, where Nedlac social partners committed to the development of a Black Economic Empowerment (“BEE”) Charter for the financial services sector. The Charter was signed in 2003 and came into effect in 2004. The next iteration of the Charter was the Financial Sector Code of 2012 followed by the Amended Financial Sector Code of 2017. The last iteration included a voluntary BBBEE Scorecard for the Top 100 retirement funds, which obliged them to report to the Financial Sector Transformation Council (”FSTC”) on their preferential procurement activities, on an annual basis. This was a significant win for black owned asset management firms, furthering representation and ownership reflective of our demographics across the industry. The current Code is under review and it is expected that this dispensation will move from voluntary to compulsory in the next iteration of the legislation. The illustration which follows shows a historic timeline of the evolution of the Financial Sector Code.

History of the Financial Sector Code

Another profound milestone for asset management worldwide was the launch of the United Nations Principles for Responsible Investment (“PRI”) in April 2006, an organisation dedicated to promote the incorporation of environmental, social, and corporate governance factors (“ESG”) into investment decisionmaking. The Government Employees Pension Fund of South Africa was a founding signatory to the PRI. Since then the PRI has grown to 3 2477signatories worldwide representing over US$100 Trillion in assets under management. Currently 61 South African institutions (asset managers and asset owners) are signatories to the PRI.

2009 – today: Lost years

Following the global financial crisis of 2007-2008, regulators responded by revising regulations to strengthen the financial system and to protect consumers and economies. South Africa responded through the passing of the Financial Sector Regulation Act in 2017 giving effect to what is referred to as the Twin Peaks system of financial regulation. This regulation is aimed at making the sector safer and closing any regulatory gaps within the system. Under Twin Peaks, two new regulators came into operation: the Prudential Authority which is the regulator of financial institutions, and the Financial Sector Conduct Authority which regulates market conduct with respect to ethics and transparency. The reform process is ongoing with the next phase being the harmonisation of the legal landscape within which financial institutions operate. The draft Conduct of Financial Institutions Bill published in December 2018 represents this new legal framework. This Bill is also best placed to give legal effect to transformation requirements in support of targets agreed through the Financial Sector Transformation Council and specified in the

Code.

Ironically, just one year after the launch of the PRI, the global financial crisis laid bare the vulnerabilities of the global financial system.

Whilst much has been achieved since 1994, the extent to which economic growth has been shared equitably amongst all South Africans has not been adequate for the requirements of a stable, integrated, and prosperous society. Over the last decade rising levels of unemployment, highly unequal distribution of income, and low levels of growth and investment have become deeply entrenched. Our economy was also subjected to the lethal triple cocktail of greed, weak governance and inadequate oversight, overshadowed by state capture and malfeasance. South Africa subsequently lost its investment grade rating and our fiscal position has deteriorated sharply, with debt to GDP expected to exceed 100% by 2023.

An already weak economic position has been exacerbated by COVID-19, leaving government desperately seeking a new narrative to accelerate an economic recovery. As such, the idea of using prescribed assets to help foster economic growth has resurfaced, packaged in the form of an infrastructure fund to finance strategic projects by combining capital from the public and private

sectors, retirement funds, development finance institutions and multilateral development banks. With expectations of capital flows into real assets, the asset management industry appears to be readying itselfnew and existing firms are building capacity and skills to be able to manage such flows. The COVID-19 pandemic has also brought impact investment to the forefront with many new debt and equity funds popping up to support businesses in their efforts to mitigate the negative economic impact, whilst providing investors with a competitive return.

The resulting growth in appetite for impact investment through unlisted assets may precipitate a change to

Private equity vs the JSE

Regulation 28 of the Pension Funds Act, which currently caps private equity and hedge funds at 15%. Calls have been made by the Southern African Venture Capital and Private Equity Association to separate hedge funds from private equity and gradually increase the private equity limit. The Minister of Finance has publicly flirted with the idea of increasing the limit indicating that this is under review by the National Treasury. Similarly calls have been made to amend CISCA to allow unit trusts to hold unlisted exposure. The growth in private equity and the decline in the listed markets is presented in the graph below.

What then does the future hold for South African asset management?

The two-century long trajectory described here sheds some light on the way forward for the asset management sector. The pendulum swing from prescribed to unprescribed, and back, reflects the changing social and economic dynamic in our country. These are tidal forces, to which the asset management industry must adapt, with transformation being a vital component.

There are a number of developing trends facing the sector - we list our top three which we anticipate will have the most significant influence:

1ESG will take centre stage. Both asset owners and policymakers will be uncompromising in their efforts to promote a more sustainable financial sector and economy. There will be a rise in demand for impact investment aligned to meeting UN Sustainable Development Goals, a collection of 17 global goals designed to be a “blueprint to achieve a better and more sustainable future for all”8. We will also see an increase in public private partnerships and blended finance investments.

2The number of listings on the JSE will continue to decline as businesses seek alternative sources of capital through, for example, private equity. This will result in concentrated listed markets offering limited diversification benefits, thus negatively impacting active asset managers who are primarily focused on the domestic equity markets. The rise in passive investing is also expected to continue.

3Transformation of the financial sector will be in the spotlight with new legislation focused on achieving real parity within the sector coming into play. Such legislation includes the Employment Equity Amendment Bill, currently in draft form, which will allow for the Minister of Employment and Labour to identify sectoral numerical targets to ensure representation reflective of our demographics. We can also expect to see the Conduct of Financial Institutions Bill come into effect, and an updated iteration of the Financial Sector Code gazetted.

Life on land

Public markets

Impact of COVID-19

Section highlights

41%

Of firms expect a drop in revenue/ profits for this financial year

CHANGE

66%

Of firms have implemented cost containment measures

Unanimous agreement that the world of work has forever changed 84%

94%

Of firms see a rise in appetite for impact investment aligned to the UN SDGs

Of firms believe that global allocations should be channelled through local firms 78%

Of firms expect an increase in M&A activity

In the first week of January with South Africa continuing its sojourn into the New Dawn with a 20/20 vision of growth and possibility, there was little anticipation of what was to be in the coming months. COVID-19 has come to the fore with dramatic economic and social implications - not only in South Africa, but across the globe. The global pandemic has brought into question predicted trajectories for economic growth, employment, profitability, sustainable development and - vital within

a. Top 3 concerns with respect to COVID-19

the South African context - B-BBEE. Whatever gains have been made in the past decade are potentially set to be undermined and possibly reversed. On the other hand, this moment could be the tipping point to spearhead B-BBEE as the economy prepares itself for a period of uncertainty. The asset management sector - like all other sectors - will be affected in the short, medium and longterm - and this section therefore considers the COVID19 impact.

Early into the pandemic a range of concerns have been raised across asset management firms. The biggest concern identified is the bottom-line: the financial impact vis-a-vis profitability, liquidity and capital resources. This speaks to the direct short-term hard-hitting impact of COVID-19. Another major concern is the loss of client confidence in the capital markets and not having enough information to make good decisions matched with a reduction in staff morale and productivity. This speaks

to a combination of external (client) and internal (humanresources) concerns - suggesting that a dual-strategy to mitigate the impact is foremost in mind. Other concerns include regulatory changes (with potential enhanced state intervention in the economy), cyber threats and supply chain issues with the domino-effect COVID-19 is likely to have within established lines of supply.

b. COVID-19 impact on firm revenue and profits

Decrease

Increase

Forty percent of asset management firms are confident and do not expect any impact on revenue and/or profits, suggesting confidence in a range of factors such as financial market performance and stable market share. This is in stark contrast with an equal number of firms on the other end of the spectrum expecting a decrease in profit and/or revenue this year because of the pandemic. The remaining firms making up close to 20% of the dataset are optimistic and see a more positive impact with an increase in revenue and/or profits by year end, suggesting that the pandemic may provide opportunities for growth, greater market share and gains piggy-backed perhaps on the losses of other players unable to absorb the unexpected shock of the pandemic.

c. Implementation of cost containment measures

Two-thirds of asset management firms have implemented cost-containment measures. This on its own suggests a robust environment able to act in response to the anticipated impact in an imperfect market, affected in the main by lack of information and high uncertainty. One-third have not implemented costcontainment measures and this could be due to marketstrength, dominance and/or confidence in the market to absorb what may be perceived to be a short-term impact on the economy. There may also be structural constraints in place such as size, duration in the market, sunk costs and other factors affecting the ability to act and/or react to COVID-19.

Although not an examination of the quantum of costcontainment within the sector, a range of short-term measures have been taken to steady the ship. Majority of firms went straight for reducing the marketing budget, defer or cancel planned investments and place a freeze on new hires. Other key internal saving amongst firms include bonus and salary sacrifices - suggesting that some of the immediate cost-containment measures

come from reducing increments and bonuses until greater certainty emerges. The major cost-containment measures across firms are at this juncture low-hanging fruit based on established infrastructure and human resources with zero to little expansion. The assumption behind the measures is that they will allow the impact to be absorbed without negatively impacting the medium to long-term sustainability trajectory of the business.

An overwhelming majority of firms sought no relief at all from government, suggesting that this segment is sustainable and able to seek internal and/or private means of ensuring sustainability, with the ability to absorb the COVID-19 shock to the system. Those requiring defibrillation did so mainly through tax deferral

holidays and relief. UIF relief is negligible in the industry. At a glance, this snapshot suggests little confidence in support from government or no reliance on the state’s ability and capacity to intervene in the market to protect the sector.

The major changes envisioned in the post-COVID environment intuitively witness a decrease in air-travel and face-to-face engagement with clients and industry stakeholders. This is met by a concomitant increase in more online/digital platforms, remote working by staff and firms seeing an increased focus on the health and well-being of staff. This highlights the importance of people and skills within the industry and ensuring that productivity and skills are retained. It is interesting to note that one of the main cost-containment measures

identified earlier is a reduction in technology expenditure, yet in the post-COVID environment most firms see an increase in a technology dependent modality of work. This suggest that firms may already have key technology systems and platforms in place and that virtual work has already been implemented industry-wide, albeit not at the level currently witnessed at the peak of the pandemic and in the post-COVID world going forward.

COVID-19 has been a tipping point and a wake-up call with regards to medium to long-term sustainability. The fragility of markets and the current systems have been highlighted under COVID, with a shift in thinking more aligned with the UN SDGs increasingly coming to the fore. It is therefore no accident that close to 85% - an overwhelming majority of asset management firmsare thinking more acutely with regards to the alignment of investment with the SDGs.

g. Become South Africa centric by allocating global exposure to domestic asset managers

One of the key implications of COVID-19 is the development of a more direct “act local-think global” approach with a view to harness investment to protect national resources. Almost 94% of asset management firms are in favour of a South Africa centric approach. They would like to see global allocations of domestic investors being channelled through local firms. The benefit to local asset managers is clear - they see this as a means to protect gains made to date and build on the platform already in place.

h. Change in regulations to cater for returns from wider than just the quoted economy

Most firms - two-thirds in fact - feel there needs to be greater levels of deregulation in both the pensions and unit trust markets by opening avenues for a more diversified investment portfolio. This reflects the prevailing view that equity markets, which are vulnerable to shocks such as COVID-19, should be balanced by expanding the return base.

i.

COVID-19 will lead to an increase in mergers and acquisitions amongst asset management firms

Most asset investment firms envision a greater increase in mergers and acquisitions, because of the pandemic. This is aligned and congruent with the earlier views that more of the globally directed investment should be harnessed locally within firms that have capability to invest globally. Such moves will be a major factor prompting growth and consolidation within the industry and will potentially be the driving force crowding out the smaller firms, or alternatively crowding them in through greater levels of corporate activity. It could be a win-win for growth in this segment as fewer firms harness skills, expertise and resources together in a shift towards greater market consolidation, thus protecting overall black-market share of the sector.

j. Top 3 factors driving corporate activity

To survive: distressed because of drop in AUM and requires capital partner

B-BBEE rating to increase market share

It is telling that black-owned asset management firms rate survival as the top factor that would drive consolidation of the sector. This is worrying, in that existential threats to smaller firms is top of mind in the current environment. Building scale, as well as distribution channels are also seen as important factors driving mergers and acquisitions, consistent with a view

that the sector has not achieved maturity, and scale. Building on the reflections in the previous question, consolidation and pooling of resources could have a positive impact by enhancing sustainability and contribute to the strategic and visionary imperative to harness energies and expertise to protect B-BBEE sector gains.

k. Largest business risk factors in a post-COVID-19 environment

The thrust of the environmental snapshot analysis is that most asset managers surveyed are frustrated by economic policy uncertainty, slow economic growth, high government debt, and financial market performance and volatility. Firms are divided on the threat of competition a limited market brings and whether they can withstand the de-risking of portfolios

by retirement funds. Also, the risks associated with changing investor demand and behaviour is seen as significant. The regulatory environment and political interference also emerge as a concern for many companies. Encouragingly, most respondents feel that their investment performance signatures are resilient, or can be adapted, to the post COVID-19 environment.

There is still a rainbow at both ends of the COVID-19 storm. Most asset management firms do not see any major negative impact on their B-BBEE ratings. The main ones to keep an eye out on are skills development, and the impact on the socio-economic environment. ESD

and procurement scores are also a concern. The results indicate that black-owned managers are confident in their ability to maintain control of their businesses but concerned about how external factors will influence their

Fund facts

Section highlights

90% Of client base is institutional -8%

Decline in domestic equities AUM

THREATS

Managers see Umbrella Funds and a shrinking JSE as the largest threats to their businesses

+28%

Growth in domestic money market and bonds AUM

34% Of managers classify their performance style signature as Value

Responsible consumption & production

a. Investor base

There was a notable reduction in the 0-20 bracket during this period of reporting and a welcome increase to the 20-40 and 40-60 buckets. The decrease in the >100 bucket was offset by an equal increase in the 80-100 bucket.

Asset managers compete for the same pool of assets from the same group of investors, and so gaining market share requires firms to innovate and differentiate in order to stay ahead of the competition. The COVID-19 lockdown has also slowed decision making at some investor institutions.

Strong retail inflows have lifted retail market share to just over 10% of overall assets. This growth has largely come from Prescient Investment Management, Vunani Fund Managers and Terebinth Capital, whose retail AUM have grown considerably over this reporting period. The shift by retail consumers to low risk fixed income products has benefitted these managers, who all have competitive solutions in this space. In recent years, the industry has witnessed a meaningful shift in the intermediary space towards the use of Discretionary Fund Managers (”DFMs”). These are independent researchers who assist financial advisors when making portfolio recommendations to their clients. Asset managers looking to grow their retail market share should work on getting onto the buy lists of such DFMs. The impending Retail Distribution Review legislation is also expected to further disrupt the industry.

Many are waiting to see how the pandemic unfolds, given the performance dislocation between the real economy and the capital markets. Defined Contribution funds, particularly those offering member investment choice, witnessed large scale panic from members when the pandemic first hit equity markets in February 2020. This motivated members to switch from growth portfolios into low risk options, which resulted in institutions disinvesting from domestic equities. Those asset managers who only focus on the domestic equity market were most affected by these switches, whilst those with diversified offerings coped better.

This is a satisfying trend as the data evidences year on year improvement in the diversity of client portfolios. An acceptable target for key client exposure is below 20% of overall firm AUM and ten firms now fall into this bracket. Every growing enterprise’s priority is to mitigate key account risk through diversifying its revenue base. Building resilience to such vulnerabilities is not an easy task, especially in the current economic environment. It is therefore critical that businesses exposed to such risk focus on client retention by continually building

trust with existing clients and looking for new pathways to expansion. Asset management, like all other industries impacted by the pandemic, will have its own casualties, with businesses in financially weak positions most impacted, while those with scale coming out stronger. Black-owned asset managers face the added burden of structural challenges that underscore their participation and representation within the financial services sector. We hope the pandemic will serve as an impetus to address such structural impediments.

There was an overall improvement in the number of firms where the top 5 clients make up between 80% and 100% of total firm AUM. There are no businesses where the top 5 clients make up less than 20% of total firm AUM. There are a handful of managers with large asset bases followed by a large segment of mid and

small sized firms. This is evidenced by the difference between the mean value of AUM and the median where the median is much lower than the mean because of the small number of managers with large AUM as demonstrated in Section A, Sector Overview.

e. Top five asset managers by institutional assets

Taquanta Asset Managers

Aluwani Capital Partners

Prescient Investment Management

Vunani Fund Managers

Mergence Investment Managers

There were no new entrants or exits to this table for this reporting period. Unsurprisingly, with institutional clients representing 90% of AUM, the assets of the top five managers are predominantly institutional. Domestic retirement funds represent the majority of institutional assets. Aluwani Capital Partners achieved another strong year of institutional growth leaping 25% from R69.5 Billion to R87 Billion. The demand by institutions for fixed income strategies has been strong and those with

f. Top five asset managers by retail assets

scale have been rewarded.

R87 017

R59 295

R33 269

R32 413

What is disappointing to note is that no incumbent asset managers, over this reporting period, have made sufficient progress on their B-BBEE status to be considered for inclusion in this publication, signalling a slowdown in efforts by large established corporations to transform meaningfully.

Prescient Investment Management

Vunani Fund Managers

Kagiso Asset Management

Terebinth Capital

Sentio Capital Management

There has been some movement in the fourth and fifth position this year with Terebinth Capital and Sentio Capital Management entering the top 5, and Value Capital Partners and First Avenue Investment Management exiting the top 5. The retail market remains highly intermediated and in anticipation of the Retail Distribution Review legislation independent financial advisors are gradually outsourcing asset allocation and fund picking responsibilities to DFMs.

Over the last three years, according to statistics made

available by ASISA, more than 50% of annual unit trust flows were allocated to defensive interest-bearing funds. For the year ending March 2020, such funds saw inflows in excess of R150 Billion, while domestic equities (including listed property) and Regulation 28 multi-asset class unit trusts, saw net outflows of R23 Billion and R35 Billion respectively. Global funds also experienced net positive flows. As such those asset managers with respectable income and global offerings and access to distribution prospered from such shifts.

Aeon

All

Aluwani

Argon

Benguela Global Fund Managers

Cachalia Capital

Excelsia Capital

First Avenue Investment Management

Fortitudine Vincimus Capital Advisors

Idwala Capital

Independent Alternatives Investment Managers

Kagiso Asset Management

Lima Mbeu Investment Managers

Lodestar Fund Managers

Lunar Capital

Makalani Management Company

Meago Asset Managers

Mergence Investment Managers

Mianzo Asset Management

MSM Property Fund

Ngwedi Investment Managers

Perpetua Investment Managers

Prescient Investment Management

Prowess Investment Managers

Sentio Capital Management

Taquanta Asset Managers

Terebinth Capital

Value Capital Partners

Volantis Capital

Vunani Fund Managers

Total

h.

Percentage of industry assets versus number of products managed

Six firms currently manage 76% of the total public market asset pool. The maximum number of products managed by a single asset manager is eight. More than half of the dataset manages three or less products. Firms focused on single strategies or asset classes face the risk of saturation during periods of declining demand, as has been the case with domestic hedge funds and listed property for example. On the other hand, the benefits of specialisation are the ability to build scale, promote efficiencies and develop a brand that is recognised for the company’s core skill.

Start-up and emerging asset manager investment teams are generally small and attention is focused on first proving their worth through the delivery of solid performance on a single product, which would allow them to build a reputation, gather assets and grow revenue. Once the milestone of sustainability is reached new talent and product is added and business models evolve to maintain market relevance.

i. Mandates currently managed

Over 60% of industry assets are currently invested in low risk money market and fixed income products. These are also low margin products and require significant scale to drive profitability. Domestic equities have progressively been losing market share over the past decade and now make up just 22% of AUM. To put this into perspective, this asset class made up 50% of total AUM in 2010. Internationally the adoption of passive investing has been remarkably successful, and is in fact on course to overtake actively managed market share. South Africa, whilst behind currently, is slowly beginning to play catch-up, especially amongst nonblack-owned asset managers.

The largest threat to the domestic equity market is the growth of the unlisted markets. More companies will choose alternative routes to raise capital, and should prescribed assets be introduced in the form of infra-

structure investment, it is most likely that the budget for this exposure will come from the listed markets. Hedge funds and African listed equities have been on the decline for several years; sub-par returns and high fees have lowered investor confidence in the strategy/asset class with only a handful of managers operating in this space. Less than 2.5% of AUM is managed in global mandates even though eleven firms have global offerings. COVID-19 has incited an air of protectionism, with an increasing number of institutions clamouring to utilise local skills for the management of global assets. It is unfortunate that managers with global offerings have not been able to build adequate scale despite the fact that institutions have taken full advantage of the global allowed exchange control limit.

j. Rand size of mandate growth

South Africa Active Equity

South Africa Passive/Index Equity

South Africa Active Fixed Income

South Africa Passive/Index Fixed Income

South Africa LDI

South Africa Money Market

South Africa Listed Property

Shari’ah (Equity and Balanced)

The asset class which has witnessed the most conspicuous growth over the course of the last three years has been domestic fixed income, both nominal bonds and money market. Heightened economic uncertainty and exceptionally poor returns from domestic equities have pushed investors into such lower risk asset classes. COVID-19 monetary stimulus effected through a series of interest rate cuts has now reduced the real return opportunity of money market. However, given ongoing uncertainty we are unlikely to see investors aggressively flock back into domestic equities.

Central banks globally have responded to the COVID19 economic fallout by slashing interest rates to near zero with some even going negative, leaving global fixed

South Africa SRI (all)

South Africa Hedge Funds

Infrastructure

Multi-Asset Class (Absolute Return and Balanced)

Offshore

Africa Listed Equity

Other

income investors hungry for yield. In such an environment, the yields on some emerging market debt remain attractive. We can expect South African bonds to continue to benefit under these conditions as developed market interest rates are likely to remain low for the foreseeable future. Downside risks remain on the quality of our debt and policy reforms relative to other emerging market peers. It is therefore unlikely that we will see a dramatic shift out of this asset class. Interestingly, investors have preferred investing actively in bonds even though managers’ ability to outperform the All Bond Index by any significant margin has been poor.

There was limited movement in the other strategies and asset classes.

k. Mandate growth as a percentage of industry assets

South Africa Active Equity

South Africa Passive/Index Equity

South Africa Active Fixed Income

South Africa Passive/Index Fixed Income

South Africa LDI

South Africa Money Market

South Africa Listed Property

Shari’ah (Equity and Balanced)

The shift in allocation patterns over the last decade has benefited some and hurt others. Whilst some of these shifts are cyclical others tend to gradually accelerate and eventually become a reality. Managers who take the time to understand such evolving patterns are bound to find future success and take the lead. Some of these trends include ESG, embracing the use of big data,

South Africa SRI (all)

South Africa Hedge Funds

Infrastructure

Offshore

(Absolute Return and Balanced)

Africa Listed Equity

Other

understanding the role of asset management in the economy as a steward and allocator of capital and responding to client needs more effectively so as to achieve better outcomes. Managers who do not respond to such underlying forces will ultimately fall out of favour and be displaced.

l. Implementation of mandates

% of industry assets

The proportion of assets managed on a segregated basis increased to 60% of total AUM, followed by 4% invested on life balance sheets and 36% invested through unit trusts and its global equivalent UCITS. Pooling arrangements have grown over the last four years given

m. Fee models

Unit trusts/Mutual funds/UCITS Life policy

Segregated

the expansion in retail AUM and a client base that is no longer made up of only the very large retirement funds in the country.

Alignment of interests is best captured through fee models. Performance-based fees remain a relatively small part of the industry’s revenue generation, with only 16% of AUM subject to management and performancebased fees. Interestingly a small proportion of assets are managed on a performance fee basis only. Fee compression on active mandates will continue, especially in an environment where the low-cost passive sector has delivered better returns than active management.

n. Active manager styles

While style in South Africa is difficult to determine because of our smaller bourse, concentration to Rand hedge counters and illiquidity, we can classify the styles utilised by domestic active managers into the five styles described in the chart. Just over a third of managers classify their style of investing as Value, followed by Quality, then Growth, Low Volatility and lastly Momentum. Understanding a manager’s style is important to allocators who seek to diversify their equity exposure through optimal style blending. Nineteen percent of equity managers do not classify their investment approach under any specific style.

o. Threats and opportunities

Black-owned asset managers are worried about the consolidation of retirement funds under umbrella arrangements. This apprehension is not without merit as argued in “The Shift to Umbrella Funds - Does Consolidation Support Transformation?” Interestingly, the number of managers who see prescribed assets as a risk has declined, and may mean that managers feel more comfortable with the ‘revised’ prescribed assets narrative of public private partnerships in infrastructure investment. They potentially see a role for themselves under this scenario. Concomitantly there is growing insecurity amongst managers of the growth in appetite for private market investments indicating that managers

in the public markets space are conflicted as to how these developments will play out.

Managers in general agree on and recognise the importance of artificial intelligence in helping identify complex patterns to improve investment processes. This dataset appears undecided when it comes to passive and rules-based investing and whether the strategy will grow in South Africa. Managers unanimously agree on the importance of responsible investment practices. Concerns around the depth and breadth of listed markets in South Africa has increased and is a primary concern amongst the firms.

Using machine learning to select the best asset managers

As a selector of asset managers, 27four strives to provide its clients with the best risk-adjusted returns by identifying managers who can consistently outperform investable benchmarks. We also remain committed to the principles of diversity and inclusiveness through our support of black-owned, managed and controlled asset managers. One of the tools that can facilitate the integration of our goals and our principles is the emerging science of machine learning. In this article we shed some light on this groundbreaking technology, and how 27four is actively developing machine learning techniques for the selection of asset managers.

To most people, the notion of machines thinking and making decisions sounds like the theme of an 80’s science fiction novel. What society doesn’t always fully grasp is that we are already reliant on computer programs (algorithms) for the completion of daily tasks, ranging from menial to complex. Applications range from social media, kitchen appliances, to smart phones and systems that govern credit card transactions. A simple example is a spam filter on your email. The programmed algorithm that determines whether an email is spam learns from your actions in terms of what messages are 1) read, 2) read and deleted or 3) not read and deleted. The algorithm does this by determining a set of attributes that best predict whether the email is spam or not. These attributes include whether or not the email contains ‘WARNING’ or ‘PROPOSAL’ in the subject line or body (both have become common in spam and phishing emails). Importantly, the algorithm learns to identify spam by analysing your actions, and therefore organically adapts its rules to maximise its accuracy. This process is best known as machine learning.

Arthur Samuel, a pioneer in the field of computer gaming and artificial intelligence, is credited with the popularisation of the term ‘machine learning’ where he defined it as ‘the field of study that gives computers the ability to learn without being explicitly programmed’. Given that machine learning is all around us, why isn’t it applied to investments? We at 27four believe the question should be phrased differently. Instead of asking why, the real question is ‘how?’

Investment decisions and machine learning

The use of machine learning can be synthesised into two discrete fields, namely classification and regression. The output of classification is generally binary i.e. ‘yes‚’ or ‘no’ but can be extended to categorical classification, such is the case in alphanumeric character recognition. This is how automatic number plate recognition works. Regression would consider forecasting continuous numbers (such as rainfall or temperatures) and generally can be used with data that are indexed by time. The biggest difference is that classification is generally found to be more accurate than regression-based time-series prediction. Obviously, it would be wonderful to be able to predict the direction of the JSE or yields in government bonds, but the current set of tools available have limited predictive ability (if it weren’t the case, there would be a few more millionaires walking around). There is however benefit in converting time-based questions into classification problems.

Consider multi-managed multi-asset class funds. There are two sources of return or alpha for such a fund. The first is strategic asset allocation, which involves determining the optimal weights in different asset classes that will translate into the highest risk-adjusted return. The second and equally important source of alpha is manager selection, requiring the ability to identify managers that are best placed to exceed their respective benchmarks. We have found that machine learning can assist in finding the best managers. But first, let’s frame the problem.

How do active managers perform?

For the purposes of illustration, consider the figure below that describes South African general equity manager aggregate performance from 2009 to 2019. The figure shows excess performance over the SWIX/Capped SWIX benchmark over a 1, 3 and 5 year period. For example, the maroon bar for 2009 implies only 30% of managers outperformed the benchmark

while in 2018 almost 70% successfully outperformed the benchmark over a one-year period. Turning to the green bars for the same years, only 23% of managers outperformed over a full five-year cycle from 20052009 while 31% outperformed the benchmark over the 2014-2018 period. The respective averages of the discrete periods considered are shown in table 1.

The results provide evidence in favour of the commonly quoted adage that the majority of active managers fail to outperform their respective benchmarks over longholding periods. The results show that over a typical investment cycle of 5 years, only 20% of active managers actually outperform the benchmark on average. Therefore, the best option for any investor or multimanager would be to just buy the benchmarks via a passive tracker fund. Such a conclusion is logical but heavily contingent on the assumption that the 20% of managers that outperform their benchmarks are unidentifiable. But what if machine learning can be used to identify the minority of active managers that will deliver alpha?

A classification problem

Identification of managers that will outperform their respective benchmarks can be articulated as a ‘classification’ machine learning problem. Simply put, by using a number of explanatory variables (or ‘features’ as used in the machine learning lexicon), can we determine which managers have a higher probability of outperforming the benchmark? Let us consider a number of attributes that we would focus on as investors when evaluating managers, such as:

• Historical cumulative performance

• Risk-adjusted performance

• Performance consistency

• Style

• Proportion of return explained by style vs. manager skill

• Tracking error

• Active share (off-benchmark share bets)

• Active sector (off-benchmark sector bets)

• Concentration of small capitalisation and illiquid holdings

Theoretically, we could rank managers using the above set of attributes by assigning an equal weight to each. This simple heuristic makes sense but fails to determine which attribute is most important and whether the current combination of attributes has predictive power. Machine learning solves this by optimising the weight of each attribute based on which contribute most to future performance.

Mathematically, the problem can be expressed as

perft = w1F1,t-1 + w2F2,t-1 + ...+ wnFn,t-1

Where perf t is future performance of a manager, F n represents each attribute and wn represents the weight or importance of each attribute. The objective of any machine learning algorithm is to optimise wn in order to determine perft with the highest level of accuracy.

Attributes

Figure 2 shows an excerpt from the 27four machine learning model that considers ten managers, two of whom outperform the benchmark (blue and maroon stars), across 36 attributes. The purpose of a machine learning algorithm is to detect a pattern across the

features that best predict which managers have the highest probability of outperforming the benchmark. One can then use the model to determine a prediction for each manager, in the form of a probability of outperforming the benchmark.

Machine learning output

Going into the details of each machine learning model available is well beyond the scope of this article, however, we have found that on average, we can predict with an accuracy of around 65% - 75% whether a manager will outperform the benchmark over the next twelve to eighteen months. Generally, it is best practice to utilise multiple machine learning models to define a composite machine learning score. Typical output is described in figure 3 that follows.

Figure 3: Machine learning output

The figure describes output of each machine learning model applied and depicts the top 10 managers based on a composite score across the five models. This method is not only beneficial for arriving at a short-list of managers but can be used to evaluate a current portfolio by ascertaining the combined probability of exceeding the benchmark. Therefore, we now have the ability, with a high level of accuracy, to determine which managers will add the most value to a portfolio by generating benchmark beating returns.

Conclusion

In summary, even though the adoption of machine learning in the investment space has been relatively slow, there are very clear benefits to its application. We find the biggest benefit to be the ability to bridge the gap between passive investing and active management. It is certainly true that the majority of active managers underperform the benchmark, but machine learning

provides the ability to rank managers based on a scientifically based prediction of their future performance. Therefore, machine learning provides tools for identification of the minority of active managers that can truly add alpha. An additional, and very important, advantage of machine learning is that the biases that limit our decisions as humans can be identified and avoided.

There is obviously no absolute certainty in the outcome of any methodology. But accuracy rates in the region of 70% are very promising, especially when considering the rate of progress in both machine learning algorithms and technology. In the near future, we envision that accuracy rates could increase by an additional 10% to 20%, meaning that the science of selecting managers is indeed a science and not just an art. Watch this space!

Clean water & sanitation

a. Affidavit or B-BBEE verification certificate submitted

Just over two thirds of asset managers submitted affidavits indicating that the dataset is largely made up of EMEs and QSFIs.

Affidavit

Verification Certificate

b. Classification by revenue

How participants are classified in terms of B-BBEE sheds light on the relative strength and size of black-owned asset management firms. Under the FSC, an EME, QSFI and Generic enterprise is classified as follows:

Total annual revenue of up to R10 Million

SFI

annual revenue of more than R10 Million but less than R50 Million

R50

There has been little movement between the three revenue bands in the year that has passed. There are currently only seven firms in this segment who generate annual turnover greater than R50 Million, another confirmation that the industry is made up of a handful of large managers and a long tail of mid-sized and small managers.

sector remains stubbornly low relative to other sectors (24,75% relative to national average of 29,66%). In fact, black ownership in the financial sector appears to be decreasing annually in comparison to other sectors that have witnessed an increase, indicating that a lot more work needs to be done to transform the sector. c. B-BBEE contribution level

Under the FSC an EME or QSFI which is 100% blackowned qualifies for elevation to a level one contributor and an EME or QSFI that is at least 51% black-owned qualifies for elevation to a level two contributor. Given that 78% of this universe is classified as an EME or QSFI it is understandable that most managers hold level 1 and 2 ratings. Hence the outlier with a level three rating must be a large enterprise.

According to the annual report published by the B-BBEE Commission in 2020, black ownership in the financial

d. B-BBEE verification

There were ten firms who provided B-BBEE verification certificates and the verification agencies appointed is provided in the graph below of which AQRate is the preferred provider of this service.

e. Generic (large) enterprise scores

Prescient

Mergence

Kagiso

Under the FSC Generic entities are measured against the following scorecard:

Seven out of 32 asset managers active in the public markets space are currently classified as Generic enterprises and have B-BBEE ratings of between one and three. Four of the seven managers meet the ownership target. None of the managers meet the

Management Control and the Skills Development targets. Three managers meet the Procurement and ESD target and six managers meet the Socio-Economic and Consumer Education target.

Exactly half of the firms surveyed have four or less directors serving on their boards. Most firms have one or two independent non-executive directors. The

Percentage of directors who are black South African:

increase to two independents this year suggests a growing emphasis on enhancing governance by this pool of managers.

Percentage of directors who are

The representation of women on boards continues to disappoint in 2020. There was a marginal uptick of women participation in the 60%-80% band. It could also speak to a concerted effort amongst a few firms to

achieve higher levels of gender-equity at a rate faster than is currently the case across the industry. Overall, it still appears that parity and greater levels of gender equity are far from expected targets.

g. Ownership Black

Black economic interest has been steadily declining since 2011 when roughly two thirds of firms had 90% to 100% black economic interest; this figure has since halved. The steady increase in the number of firms that

have 50% to 60% black economic interest signals dilution of black ownership within the sector, indicating a rise in B-BBEE corporate transactions over the period.

Black women economic interest (ownership) with equivalent voting rights:

Since 2014, there have been some gains in black women ownership in the lower ownership bands. However, if we look closer at ownership levels beyond 30% we witness a declining trend. For example, in 2015, 24% of firms indicated black women ownership of more than 30% which in 2020 dropped to 22%. What is interesting and shocking at the same time is that in the financial

sector black women ownership is the second lowest at 8.77% relative to all other sectors in the economy (BBBEE Commission, 2020). The 90-100% range remains unchanged, suggesting that there could be a glass ceiling, and this needs to be examined and shattered if any major breakthrough is to be made to achieve parity visa-vis gender equity.

Whilst ownership of the sector remains tightly held, 2020 data suggests that some firms have widened ownership participation to include broad-based schemes.

h. Submit annual verified rating to the Financial Sector Transformation Council

period. The submission of data to the FSTC is important as it allows the council to collate and report transformation statistics across the entire financial sector and monitor and measure advancements made in achieving the objectives of the B-BBEE Act. Economic interest (ownership) of black designated groups and broad-based schemes:

The FSC requires each entity conducting a business in the South African financial sector to report annually to the FSTC on their progress in implementing the provisions of the FSC. It was pleasing to see an increase of 10% in the number of respondents who submitted their annual rating to the FSTC since the last reporting

Just over half of this universe of asset managers have mapped out and put transformation policies in place. The benefits of having done this is that management have articulated in writing the steps they will take in achieving transformation objectives which allows them to assess gains and shortfalls and put measures in place to remedy any weaknesses identified.

j. In respect of the Amended Financial Sector Code of 2017

Don’t have a view

Here we provide managers the opportunity to express their views on the FSC. Across most firms, views are positive with respect to fairness of targets and the establishment of compliance mechanisms for licencing. Setting targets for asset consultants and making the BBBEE Scorecard for Retirement Funds compulsory will

k. In respect of financial sector regulation

progress the penetration of black-owned asset managers in the pensions industry and therefore receives a resounding vote in favour of such targets. The jury is still out with regards to the effectiveness of the FSC in monitoring B-BBEE compliance of the sector.

Do you think that some regulations have the unintended effect of increasing the barriers to entry and impede the growth of emerging black enterprises within the sector?

Do you think that the new Conduct of Financial Institutions (COFI) Bill will improve inclusion and transformation of the financial sector?

The key finding here is that the visible hand of the state has the potential to act as an impediment to market participation, and this has the potential to hinder attainment of B-BBEE goals and the concomitant growth of the asset management market. This will be exacerbated due to the impact of COVID-19 with possible greater barriers to participation on the horizon should there be more regulations and state involvement in the sector such as for example, the introduction of prescribed assets legislation. With regards COFI - given that it has not yet come into play and the impact is yet to be seen - the jury is out with only less than a third of asset management firms feeling positive that it will improve financial sector inclusion and transformation.

The shift to umbrella fundsdoes consolidation support transformation?

Two important strategic objectives of the FSCA are consolidation and transformation. Specifically, the consolidation objective envisages a reduction in the number of registered retirement funds to 2001 from more than 1 4002 active funds at present. The transformation effort aims to create a retirement industry that is financially inclusive and supportive of broadening the participation of black-owned companies in the financial sector.

But can these two objectives co-exist in the current retirement fund environment? Does consolidation support or hinder transformation?

We will look firstly at the consolidation of funds across the industry. Based on the latest active data listing from the FSCA, there are now just over 5 000 (from over 16 000 in 1999) funds actively registered.

Distilling the information and focussing on the funds in the ‘Normal active fund’ status (these are the funds that are running in a business-as-usual mode), the shift from standalone to umbrella fund is quite evident. This change has been happening at an accelerated pace over the

past decade resulting in a handful of “super” umbrella funds dominating the market. This becomes clearer when the ‘Normal active fund’ line item is broken down in terms of members and assets, as per the table below.

- Umbrella4236,965,062R 718,634,051,177 Total1,44115,741,133R 2,619,475,246,349

*Top 5 commercial umbrella funds by membership

Currently there are 5 commercial entities that have created “super” umbrella funds, which collectively account for approximately 1.8 million members and have in excess of R315 Billion in AUM.

In the beginning, the move to umbrella fund arrangements was motivated by the following positive arguments:

• economies of scale,

• administration cost reduction, and

• removal of the fiduciary burden on employers running a standalone fund.

Open any umbrella fund brochure and these will be among the first reasons to join their fund, but these arguments are slowly being challenged.

Over the period 2010 to 2019, the differential in average costs of administration between standalone and umbrella funds has been eroded. The table below shows this erosion of differential in the average cost of administration as a percentage of salary between 2010 and 2019:

In view of the ever changing and more complex regulatory environment facing the retirement industry, this shift to commercial funds is understandable and plausibly to the benefit of members and employers. Keeping abreast with these changes can distract employers from core business activities and so an umbrella fund provides the governance structure and the support of the sponsor to help the employer navigate the regulatory changes, relieving them of that burden. The downside, however, becomes starkly clear when one observes that the five ‘super’ funds have a total of just 35 5 trustees who are responsible for making decisions on more than R315 Billion of assets on behalf of 1.8 million employees!

The transformation objective of the FSCA aims to promote financial inclusion, improve access to financial markets and broaden the participation of black-owned financial services providers across the sector. The latter is stipulated in Section 2c(iii) of Regulation 28 of the Pension Funds Act which states:

“A fund and its board must at all times apply the following principles... in contracting services to the fund or its board, consider the need to promote broad-based black economic empowerment of those providing services”.

Retirement funds are a primary source of assets for black-owned asset managers as the retail industry is highly intermediated with high barriers to entry. Public sector and union retirement funds have been supportive of transformation imperatives and were the earliest movers to support black-owned asset managers. However, gaining access to some of the private sector retirement funds has been near impossible due to the intermediation of the “super” umbrella funds where the majority of assets are concentrated directly in the asset portfolios managed by the sponsors themselves. Umbrella funds are a form of asset gathering for such ”super” funds and diversifying to independent asset managers would dilute their AUM and by proxy their income. Hence there is no incentive for them to do so.

Couple this with 60% of consultants4 indicating that they do not consider B-BBEE when recommending service providers to boards of trustees, increasing the proportion of assets managed by black-owned asset managers is going to be an uphill battle.

Over the past 5 years, the assets of 3 of the 5 super funds increased by 132%6.

Over the period from 2017 to 2019, the total assets managed by black-owned asset managers across the entire savings and investments industry increased by only 39%7 and off a low base. The proportion of assets managed by black-owned asset managers within umbrella funds is insignificant (refer to section titled “Product distribution”).

So, does consolidation support transformation? The cost argument for moving to umbrella funds has been eroded, the responsibility for a significant portion of the economy’s savings is in the hands of only 35 people, and the rate at which the assets in commercial funds is

growing compared to the growth in the proportion of these assets managed by black asset managers, would suggest that consolidation is contrary to transformation. The FSCA needs to ensure that its consolidation policy is implemented in a way that is consistent with its transformation policy.

Business sustainability and societal impact

a. Business sustainability

Company profitability:

Delivered three consecutive years of positive NPAT over last three financial years:

Yes No

Made an income tax payment to SARS in the last financial year:

There was an overall improvement in all three profitability indicators for the period ending June 2020. The impact of COVID-19 on these indicators will become clearer in the next print as the effects of the pandemic sweep through the economy and the sector.

b. Mechanism used to finance company at start-up

More than two-thirds of companies were financed through personal finance - either that of the founders or that of their friends and families. The data suggests

that other avenues of raising finance appears not to have been fully explored or that asset management is not a sector which funders typically support.

c. Business breakeven assets under management

Over R15 Billion

R10 Billion-R15 Billion

R7 Billion-R10 Billion

R5 Billion-R7 Billion

R3 Billion-R5 Billion

R1 Billion-R3 Billion

Less than R1 Billion

The most stand-out movements recorded was the decline in the R3-R5 and R5-R7 Billion bands and an equipoised increase in the R1-R3 and R7-R10 Billion bands. Breakeven AUM is largely dependent on the product offering of the asset manager as some offerings

are less resource intensive than others. Seventy five percent of firms breakeven AUM is below R10 Billion of which 22% are able to reach profitability managing less than R1 Billion in AUM.

d. Number of new permanent jobs created over the last 12 months

There was a net recorded gain in new jobs over the period. However, this gain was offset by the net loss of five firms exiting the survey, therefore showing a decline in jobs for the overall sector. The negative impact of COVID-19 on the sector may lead to job losses as firms implement cost containment measures to navigate the uncertainty of earnings.

Offer learnership programmes for black people:

These figures disappoint somewhat, with the number of firms offering learnerships down in 2020. This should not come as a surprise given the small size of most survey participants. Only a handful of asset managers generate turnover of more than R50 Million which is when skills development requirements become more stringent under the FSC. Also evident is that not all the

firms that ran learnership programmes absorbed such learners into full time employment. The financial strain thrust upon firms by COVID-19 may discourage companies from running such learnership programmes at a time when the country so desperately needs more of them.

e. Percentage of total procurement spend from more than 51% black-owned and/or 30% black women-owned businesses

Fifty three percent of respondents sourced less than one-fifth of their procurement from black-owned businesses, evidencing a small improvement from 2019. Asset managers’ largest procurement spend include international data vendors, fund administrators, auditors, technology, and compliance service providers. It is unfortunate that many of the providers of these services

are untransformed with international companies such as Bloomberg and Reuters not having a local equivalent. Firms can do a lot more to shift their procurement away from untransformed suppliers and can start by issuing notices to their current suppliers to improve their BBBEE status.

f. Percentage of total stock brokerage spend with more than 51% black-owned stockbrokers

g. Enterprise and supplier development

Fifty six percent of firms procured more than 40% of their brokerage spend from stockbrokers that are more than 51% black-owned. It is disappointing that 25% of firms allocate between 0% and 20% of their brokerage spend to black-owned stockbrokers of which there is no shortage and who face similar challenges in securing market share as those surveyed.

There are currently four managers (EMEs and QSFIs) in this dataset who are recipients of enterprise and/or supplier development contributions from other measured entities (generic) within the sector.

Contributed to third party managed ESD fund

Managed the ESD programme internally

Eleven asset managers currently contribute to enterprise and/or supplier development initiatives to meet their respective FSC targets. Of these eleven firms, four outsourced the contribution to externally managed ESD funds and seven managed the contributions internally.

The decision on whether to manage the contributions internally or outsource this function is dependent on capacity and resources, wanting control over the process and fees.

h. Socio-economic development

Fifty six percent of firms contribute to SED, marginally increasing in 2020. This spend is, not surprisingly, dominated by education followed by community development, small business support, sport, disaster relief and arts and culture. The other sectors do not

receive much support. The emergence of COVID-19 may see a shift in expenditure towards healthcare, whilst at the same time the overall spend on SED may likely be affected by cost containment measures particularly in the short to medium-term.

i. Consumer financial education

There was a small improvement in the number of companies providing consumer financial education, however the overall statistic remains low (72%). This is disappointing given the abysmal state of South African consumers’ financial, especially investing, literacy. What is also worrying is that the current allocation towards consumer financial education may be slashed in the wake of cost containment measures applied to withstand the financial shock of COVID-19 on businesses.

Of the 28% who do offer consumer financial education, this is largely executed through face-to-face training

Interactive face-to-face training through courses and workshops

Awareness through the provision of information through print and other mediums

courses and workshops. There are many practical ways in which asset managers can provide financial education while building their brands and bringing their products and services to the attention of potential customers. Such methods would have to be further explored - moreso in the context of a COVID-19 social-distancing environment.

j. Offer products that target the LSM 4, 5, 6 market

Thirty-four percent of companies offer products which target the LSM 4, 5 and 6 economic groups. Targeting these economic groups will prove to be an even greater challenge given the yet unfolding financial, economic and social impact of COVID-19 across all sections of the population, and more so to these economic groups which could see a decline in household income as well as employment levels.

Curiously, none of the firms translate any of their marketing material and product information in other languages. This could be produced, and used, very inexpensively, on social media, for instance. Such efforts may widen the appeal of asset managers’ products and improve distribution and profitability. Produce marketing literature in any of the other official languages outside of English:

k. Wholly acquire or invest in another company

Historically, this segment of managers has not engaged in M&A activity. This may however change as the impact of COVID-19 is felt across the sector. Investor behaviour is also changing, with an increased focus on unlisted investments, rules-based investing, global, impact and ESG investing. This may potentially result in corporate activity focused around products, skills, the objective of achieving scale and being better positioned to meet such changing investor demand.

Team

Section highlights

503

Total number of people employed, down 14% since 2017

PRIORITY

Improving gender representation is a top talent management priority for firms

21% Of portfolio managers are women

a. Total number of people employed

Employment in the public markets space peaked in 2017 and has been in decline since despite the increase in the number of participating firms and AUM. The asset management industry is one that is built for scale and so an increase in AUM does not necessarily translate into job creation as growth in existing products often is less expensive to maintain.

b.

Demographics of all employees

For start-up asset managers there is a fine line to balance between over-extending the business too soon and retaining skilled capacity to deliver. In the current COVID19 environment businesses are primarily focussed on maintaining financial stability through cost containment measures without being overleveraged.

Encouragingly, women are well represented in the industry, certainly at black asset managers, making this one of the most progressive sectors. The industry employs a total of 247 women and 256 men, with women representing almost half of the workforce. Promising as this is, women participation at ownership level and

on the boards of black-owned asset managers remain low. It may help if companies put gender diversity targets in place aligned to the FSC. Gender representation has become an expectation across all industries and failing to make progress in this area could cost asset managers potential clients.

c. Total number of portfolio managers

Portfolio managers with five or more years’ experience in managing money:

The decline in the number of portfolio managers is correlated to the overall decline in the number of people employed within the sub-sector. There were five exits and two new entrants to the survey which also explains the decline.

Demographics of portfolio managers:

Eighty five percent of portfolio managers have been managing money for at least five years.

Women represent just 21% of all portfolio managers. In recent years there have been several published studies demonstrating the benefits of gender diversity in the context of the delivery of superior investment returns. Women representation within asset management has historically been reserved for the back office as opposed

to the front office. However, allocators of capital are utilising diversity metrics in their selection of asset managers and therefore challenging the industry to become more representative. We therefore hope to see future improvement in these statistics.

d. Total number of investment analysts

The impact of the fall in overall jobs was hardest felt by analysts (down 12%) as opposed to portfolio managers. The ratio of analysts to portfolio managers has dropped since last year and will have to be monitored closely to ensure that the talent pipeline and succession planning remains firmly on track and is not in fact a sign of decline.

Women currently represent 42% of the analyst pool which is double the composition of women in portfolio management. The data intimates a bottleneck for women transitioning from analyst to portfolio manager

and requires the industry to take a closer look at their talent management efforts and seek mechanisms which promote the advancement of gender diversity in professional roles.

e. Founders of the firm

Equity remains tightly held by the founders of the firms which in 80% of firms represent no more than four individuals. There has been some dilution in favour of employees over the reporting period. At 72% of firms, employees hold less than 25% of shares. There is one company in the dataset where employees now hold more than half of the equity in the business. With an

expectation of an increase in M&A activity spurred by COVID-19 we could potentially see a different trend emerge. However, it is unlikely for the founders of these businesses to step away entirely given that many of them play the role of key decision maker in the management of portfolios.

f. Employees invested in the firm’s own products

This percentage continues to inch upwards with 84% of teams trusting their investment strategy with their own money, Skin in the game is important as it demonstrates confidence to investors that asset manager interests are aligned to theirs.

g. Members of team who are

CFA charterholders

In more than half of firms there are one or no CFA charterholders. Whilst these statistics continue to disappoint, they also insinuate that the industry and the demand side is changing and that the type of skills required for the future is different to the past. The rising

dependence of the asset management industry on data science may suggest that the future represents a medium where traditional financial analysis intersects with data science.

At a glance the key priorities emerging is meeting diversity and inclusivity objectives, improving employee retention followed by the hiring of tech savvy skills to harness the influence and advancements in technology. Talent management is the most important priority in any asset management business and so attracting and retaining the best and brightest minds helps firms stay

ahead of the competition. The industry is also rapidly changing and becoming dependent on a range of competencies which include both traditional and technology-based skills and so achieving the right mix of talent will successfully position firms for the future.

Life below water

Regulations all asset managers

need to be aware of

All asset managers, big and small, adhere to the same set of regulations - regulations which have materially evolved over the last decade. South Africa, like many other countries globally, have gone through a process of financial sector reform following the global financial crisis of 2007 and in 2017, passed the Financial Sector Regulation Act adopting the Twin Peaks framework of financial sector regulation. This gave birth to the establishment of two new regulatory bodies for the financial services sector: the Prudential Authority (PA) and the Financial Sector Conduct Authority (FSCA). The

PA, as ‘Peak One’ is responsible for creating and enforcing regulations, aimed at ensuring the soundness of our financial institutions. The FSCA, as ‘Peak Two’ is responsible for preventing financial misconduct and protecting consumers of financial products and services.

The reformed regulatory oversight of licensed financial services providers in South Africa is rapidly taking shape. Here, we summarise the most significant elements of the regulatory framework asset managers need to be aware of.

The COFI Bill outlines what customers and industry players can expect of financial institutions and aims to streamline the legal framework for the regulation of the conduct of financial institutions and to give legislative effect to improving market conduct and customer protection.

COFI will also require financial institutions to have policies in place to comply with the Financial Sector Code. The supervision of institutions’ implementation of policies will be undertaken by the FSCA. The expectation is that the FSCA will be empowered by COFI to issue penalties, with financial and/or license impact, to institutions that breach transformation principles and requirements.

The PA has a clear mandate to advance financial inclusion, competition and transformation under the provisions of the Insurance Act.

The FSCA and the PA are in the process of developing a Joint Standard relating to outsourcing. The Standard is largely based on the current prudential outsourcing standard with respect to the outsourcing of material, management and control functions, but has been amended to incorporate various conduct specific requirements.

In December 2019, the FSCA published an update and it is clear from this paper that there has been a lot of progress made even though there are still a number of proposals that have not been finalised.

Status

The revised Bill has been submitted to Cabinet. The next iteration of the COFI Bill is expected to be published for public comment during the third or fourth quarter of 2020.

Regulation

ASISA Retirement Fund Standard, Effective Annual Cost (EAC) for Individual Fund Members

Protection of Personal Information Act (POPIA)

Description

Standardised retirement savings cost disclosure methodology.

The Protection of Personal Information Act 4 of 2013 gives effect to section 14 of the Constitution which provides that everyone has the right to privacy. The Act promotes the protection of personal information processed by public and private bodies and seeks to balance the right to privacy against other rights, such as access to information.

Financial Consumer Education Initiatives

Insurance Act has been signed into law. Prudential supervision of the asset management sector will be further expanded in the near to medium term.

Joint standard effective date unknown. The PA has considered the draft standard and discussions are on-going between the FSCA and PA on the way forward.

Update is expected in 2020 regarding the proposals for ‘Advisor Categorisation’ and ‘Investment-related matters’.

Environmental, Social and Governance (ESG)

The FSR Act extended the jurisdiction of the FSCA to protect financial customers by providing them with financial education programmes, and to promote financial literacy and sound financial decision making.

The FSCA has affirmed its commitment to refining the regulatory framework relating to issues of sustainability in consultation with industry players.

Status

Standard was approved in May 2019 and comes into effect 1 October 2020.

All institutions that process personal information are required to be POPIA compliant by 1 July 2021.

Discussion document published in June 2020.

The expectation is that the final set of requirements, in relation to ESG, will be incorporated into prudential and/or conduct standards in future.

Compliance and operations

Section highlights

a. Licenced by the FSCA

For the second year running all of those surveyed hold FSCA licences. In the past we have seen companies using other’s licences, which is not considered best practice. Specifically, start-ups had gone out to raise capital, before obtaining their licences. It is encouraging to see that the 100% record has remained consistent.

b. Number of key individuals on FSCA licence

While the majority of firms have one or two key individuals on their FSCA licence, it is encouraging to see that the number per firm has increased compared to the previous survey. Key individuals have a number of responsibilities including exercising executive control for the activities of the business as well as the fiduciary responsibility of treating customers fairly. These responsibilities must be executed with the necessary

care, skill and diligence. With several key individuals, it is more likely that the asset manager will follow best practice in terms of governance and accountability, since more people are responsible for executive decisions. Given the size of the businesses, it is understandable that the numbers are low, but it is encouraging to see a shift in the right direction.

c. Hold licences with regulators outside of South Africa

outside South Africa

Central Bank of Ireland

Central Bank of Lesotho

Financial Services Regulatory Authority (eSwatini)

Namibia Financial Institutions Supervisory Authority

Non-Bank Financial Institutions Regulatory Authority (Botswana)

Qualified Foreign Investor (QFII, China)

The percentage of companies that operate internationally remains low and has seen a marginal decline to approximately 16% from 17% on the previous year. This reflects a continued, and perhaps increased focus on the domestic market. The low numbers are

d. Compliance officer

not surprising, as global expansion requires mature strong balance sheets. There is clearly much work to be done by black-owned asset managers when it comes to playing in the international market.

Our 2020 survey shows an increase to 19% of companies with internal compliance officers, a 4% improvement since 2019. The low percentage of black-owned asset managers that have internal compliance officers is consistent with the make-up of this universe of managers where the large managers with scale and multiple licences have appointed full-time compliance officers whereas the smaller managers have outsourced this function.

Managers seeking to transform their supply chains do not have many options as there are a limited number of black-owned external compliance officers, reflecting a potential black skills deficit in the compliance officer profession. Managers who do outsource their compliance function to such untransformed firms should push for greater diversity in the teams that service them.

BDO

Certified Master Auditors

Deloitte

Exceed Johannesburg

EY

Integritas Auditors & Chartered Accountants

KPMG

Mazars

Moore

Nexia SAB&T

PwC

SNG Grant Thornton remains the single largest appointed auditor in the black-owned asset management segment. New entrants to this list include EY and Integritas Auditors & Chartered Accountants. Smaller firms are fee sensitive and seek to achieve an optimal balance between costs, auditor reputation and capability as well as meeting their preferential procurement objectives.

There has been a steady decline in the use of the big 4 following a number of high-profile corporate scandals. The asset management sector should lead by example and apply the same ESG principles to which they hold investee companies accountable when it comes to audit tenure and the independence of audit partners.

f. Internal audit function

Companies who have an internal audit function:

At present only six firms have a dedicated internal audit function and two of these firms outsource this function to an independent external third-party auditor. The role of internal audit is to provide independent assurance that an organisation's risk management, governance and internal control processes are operating effectively.

g. Fund administration

2020 has seen a marked increase in the internal administration of funds by asset managers. In general, the outsourcing of this responsibility is considered international best practice. Independent administration mitigates the likelihood of potential conflicts of interest arising between fund management and portfolio valuation providing clients with confidence in the integrity of such valuations. Small asset managers in particular would be better served by focusing on their core competencies and avoid the distraction of the resource intensive task of fund administration.

This is an important function for businesses that are rapidly growing as it helps to provide the board and senior management with insight to improve and enhance operational processes.

The concentration of the fund administration sector has unfortunately not improved since our last report. It is to be expected that greater competition in this area would lead to better pricing and quality of service. Globally, fund administration services have extended beyond the provision of portfolio valuations to include investment risk analytics, back-and-middle office support and regulatory reporting. The South African market is ripe for disruption from new entrants in this space.

h. Crime and civil liability and directors and officers liability insurance

The two consecutive years of 100% compliance in terms of insurance cover is good news. In previous years we have noted that several start-ups only bought insurance after they had raised AUM. On the downside, there are still no black-owned insurers that asset managers can turn to. Insurance pricing remains stubbornly high. We believe this is an area that the authorities should pay attention to, with the aim of promoting greater competition and diversity in the industry.

Rand value of annual cover:

In previous editions we focused on the level of insurance coverage as a percentage of firm AUM and grouped firms, based on their cover, within bands of 0%-2%, 2%4% and >4%. However, the bands were too wide and did not provide sufficient insight into the level of cover held by the dataset. Many firms grapple with determining what insurance coverage they should have given the limited guidance provided by insurance companies and the regulator. We hope that by publishing the Rand value of cover held by this group of managers it will serve as an industry benchmark against which firms can measure themselves.

A key observation from the data is that managers hold different levels of cover for the two types of insurance. Around 40% of firms hold the minimum cover as is required by the FSCA. A little under 20% of firms hold more than R100m cover across both insurance categories.

i. Cyber risk insurance

Our previous report identified the emergence of cyberattacks as a major threat facing financial institutions. Unfortunately, the companies surveyed this year indicate a decrease in the number of firms who have cyber-risk insurance - down by almost 5% from the already low base of 20%. Having adequate measures in place to

prevent and respond to cybersecurity breaches should be a priority especially as the use of data and technology solutions expand. Hence the decline is disappointing. Possible reasons for the trend may include a lack of awareness of the risk, and possibly the expense of this type of insurance cover.

Of the five managers who have cyber cover, three hold cover of R50 Million, one has cover of R10 Million and the other has R1 Million cover. Such insurance should be correlated to the size of business, data use and technology infrastructure. In the event of a cyber incident the severity of a data breach could be disastrous for the reputation of a firm and could potentially lead to client losses and therefore should be taken much more seriously.

This result seems to indicate that most asset managers consider the risk to be “somebody else’s problem”. This could explain the low levels of cover taken out by the companies surveyed. It is our view that everyone is vulnerable to cyber-attacks, and that this segment of managers is overlooking an important aspect of their risk management policy.

Retirement funds are required to demonstrate compliance with prudential limits under Regulation 28 of the Pension Funds Act. Asset managers managing compulsory savings are therefore responsible for collating data, monitoring, and identifying breaches. This function is either conducted in-house by the asset manager or outsourced.

As most fund administrators offer Regulation 28 compliance reporting as an add-on service to asset managers, most companies outsource this function, where it is cost-effective to do so. Outsourcing this responsibility appears to make business sense for over 65% of respondents, and this figure has increased since last year.

k. In-house versus outsourced functions

Many emerging enterprises comprise small teams and therefore turn to outsourced providers to help streamline their operations so that they can focus on managing money. It is also not uncommon within these businesses for executives to perform multiple functions until profitability is reached. Specialised functions such as legal and company secretarial are in general outsourced.

Managing an asset management business is becoming increasingly costly and complex. Fee compression, regulatory complexity, cost of skill and technology are just some of the pressures faced. And in a tough economic environment, managers need to weigh which

functions can be performed in-house and what benefits can be gained from outsourcing certain functions.

The growing role of technology in financial services, makes this a key differentiator, and so it is of concern that most respondents (more than 90%) outsource this function. A similar argument can be made for keeping the accounting function in-house - over half the dataset outsource this function.

The results correlate with the composition of the pool of survey respondents which comprises a few very large managers followed by a string of mid-sized and small firms. The larger firms have instituted board subcommittees as their businesses are much more complex and therefore allow boards to divide the work of the board into manageable sections. Such committees

m. Largest future technology spend

Enchancing the client experience (distribution, access to information) etc.

Improving the efficiency of back office systems

Data vendors

Portfolio management - using big data to manage investments

constitute an important element of the governance and oversight process. Whilst small companies do not in general establish separate committees to perform such oversight functions, they should still ensure that these functions are appropriately addressed by the board.

(Where 5 is the most important and 1 the lowest investment made)

We see a clear shift compared to 2019 with respect to future technology spend (BEE.conomics 2019). In 2020 respondents are generally much less optimistic about future technology spend. Compare the >50% positive response to enhancing the client experience through technology in 2019, to just under 20% in 2020. This shift away from a bullish view on technology spend is seen all through the value chain. It appears that respondents are taking a more cautious view on investment in technology, which may be part of a general conservative approach to investment in response to a battered economy and potentially long road to recovery.

The top two areas of future investment are focused on operational aspects of the business - back office efficiencies and protfolio management. Data vendors (the likes of Bloomberg and Reuters) are a low priority. The low importance placed on enhancing customer experience, especially in the context of a world where technology is becoming the main channel for communicating and servicing customers, is a cause for concern. We feel that it is important to keep abreast of technologies which make life easier for the customer and allow the firm to remain relevant.

Compliance policies

The improvement in the implementation of good practice policies, which are regulatory requirements, has continued into 2020. It is also encouraging to see that almost 80% of respondents make their policies available on their websites. This is a marked improvement compared to the 40% response reported in 2019. Accessibility and transparency promotes good governance and ethical behaviour.

o. B-BBEE rating of external service providers

External service providers make up a large portion of an asset management firm’s expenses, outside of human capital and technology. Licenced financial services entities are measured under the Financial Sector Code where preferential procurement targets need to be met to achieve a competitive B-BBEE rating.

Compliance officers and insurers remain the least transformed. It is disappointing to see black-owned firms procure services from companies with poor ratings of which some are in fact non-compliant for services in industries where black participation is high, like for example audit.

LARGEST SOURCE

Asset consultants are the largest source of assets

IRELAND

The preferred domicile for global funds

19%

Of firms’ funds are accessible through Umbrella Funds

No poverty

106

The number of registered unit trusts, up from 84

40% Of firms’ funds are accessible through LISPS, up from 38%

Black-owned firms, in the primary, depend on the institutional market for flows as is evidenced from the three bars to the left side of the graph. Retail market share has always been low for this segment. Hence the largest threat to the sector is the consolidation of private sector retirement funds under “super” commercial umbrella funds, currently a negligible source of flows for this pool of managers. This move towards consolida-

b.

tion is being given additional momentum by the regulator.

The retail industry is highly intermediated through financial advisors who are increasingly making use of Discretionary Fund Managers who in turn are implementing on Linked Investment Service Providers. The data affirms our long-held view that there are excessively high barriers to entry to this value chain.

Domicile of global clients:

This pool of managers has always held a home client bias with around 20% of managers having expanded outside of South Africa. The majority are focused on African institutional investors from Lesotho, eSwatini, Botswana and Namibia. Close to home countries are attractive sources of flows for South African asset managers given the dearth of managers that exist in those regions. There are currently two managers who have European clients.

c. Collective investment schemes

There was a small uptick (one manager) in the number of firms offering unit trust portfolios and a 26% rise in the number of registered unit trust portfolios.

According to statistics released by ASISA for the period ending 30 June 2020 there were a total of 1629 Rand denominated unit trusts with a total value of R2.54 Trillion and 509 foreign currency denominated funds with a total asset value of R533 Billion.

So, despite the impressive increase in the number of registered funds, this dataset only represents 6.5% of

the total number of registered unit trusts in South Africa. Our data indicates that the total value of assets managed in unit trust portfolios by black-owned managers stands at R221.2 Billion as at 30 June 2020, which represents just under 9% of the total value of Rand denominated funds.

Of the 25 managers who have registered unit trusts, more than half manage two or less funds. This is expected as many of the firms who make up this dataset are specialist managers focused on the management of assets in no more than two asset classes.

Over the years hedge funds have given up market share to other competitive products. Much of this lacklustre appetite has to do with muted performance, high costs and slow reporting. The largest threat to this industry

is that hedge funds are bucketed together with private equity and collectively limited to 15% of a total retirement fund’s exposure to alternatives. The rise in private equity does not bode well for hedge funds as institutional investors could potentially allocate their full Regulation 28 allocation to such unlisted investments.

Of the firms with unit trust offerings, only two such firms have their own unit trust management companies with the remainder opting for co-naming arrangements. This has not changed from last year. Given that Prescient Investment Management forms part of a larger group which operates one of the largest third-party unit trust management companies and Kagiso Asset Management is one of the top 5 managers by retail AUM, it is understandable for these firms not to utilise co-naming arrangements. Anecdotally, for smaller firms the co-naming option could be more beneficial and cost effective.

There are a number of co-naming partners available to select from. The decision of which partner to choose is largely dependent on cost, reputation, the quality of administration

(RF) (Pty) Ltd, following corporate activity over the reporting period, has been renamed 27four

and B-BBEE. Africa Collective

d.

Reasons for not owning a CIS management company:

Other reasons

Cannot meet licencing requirements

An overwhelming majority of participants hold the view that owning a unit trust management company is a noncore activity and that outsourcing this function leads to efficiency and productivity gains. It is also encouraging to observe that licencing is no longer considered a barrier to entry.

LISPs

Unit trust products available on LISPs:

The majority of managers have only accomplished getting their products loaded onto one and two LISPs with two managers succeeding on eight LISPs. Not all

LISP platforms remain the largest distribution channel for retail investors in South Africa. Independent Financial Advisors are placing more business on such platforms on behalf of their clients as they allow them to switch between funds, deduct fees and manage and report on client portfolios. There has been little improvement in the percentage of firms whose products are available on LISPs. This is an ongoing frustration for black-owned firms as the barriers to accessibility remain excessively high thereby limiting participation in the retail market.

LISPs are the same and some are more popular with financial advisors than others.

Currently the Glacier platform houses the largest number of black-owned firms’ products. Often LISPs will only add a product onto the platform if they receive demand from financial advisors to do so. One also has to be

e. UCITS compliant products

aware of the changing patterns of retail distribution, which is increasingly becoming muddled in view of the linkages between asset manager, advisor, DFM and LISP.

There was no real change since last year in the number of managers offering UCITS compliant global funds. Global portfolios have consistently attracted strong retail flows as evidenced from the data released by ASISA on foreign denominated funds. Such funds have offered domestic investors diversification, Rand hedge exposure and better investment returns. Considering

how these funds may support retail market penetration, it is disappointing that so few managers have opted to establish global portfolios. Ireland is the preferred domicile for South African asset managers.

f. Umbrella funds

Less than 20% of firms’ products are accessible on umbrella funds. The consolidation of private sector standalone funds into umbrella arrangements was motivated by the regulator based on anticipated reduction of costs and enhanced governance. As argued in the piece titled “The shift to umbrella funds - does consolidation support transformation?” this has only led to the establishment of commercial “super” funds whose primary focus is to expand the distribution of their own asset management products. The result of such consolidation has led to an exclusionary outcome which is not supportive of transformation objectives.

Only a handful of manager funds are available on any of the commercial “super” umbrellas. Also, many umbrella funds have different entry points meaning that they may have a core list and a demand list, where the core list is what is marketed to clients, while the

demand list is driven by the asset managers who bring clients to the umbrella fund. There are many barriers managers face to get onto the core list, which can result in despondency and so managers eventually give up trying as they lose confidence in the system.

Online, direct-to-consumer distribution is a powerful medium to attract AUM. Consumers have become digitised and more so following the lockdowns instituted due to COVID-19, making it the norm to purchase goods and services online. Less than forty percent of managers’ funds are available for investment through the companies’ websites. Online distribution should be part of any asset manager’s strategic blueprint for market penetration.

These numbers are discouraging. Mainstream asset managers should have the ability to play a role in both the accumulation and decumulation phases of investor lives, and cater for varying needs including promoting tax efficiencies. To grow a retail footprint requires

We don’t manage this type of product Annual Management Fee only

Total Investment Charge

Total Investment Charge (”TIC”) is the Total Expense Ratio (fund management fees + administrative costs) plus transaction costs. TIC is important in that it allows investors to evaluate the all-in cost of funds so they can make an informed decision when purchasing a fund. High fees can erode investment returns and so asset managers are required to provide full transparency and disclosure on all fees charged. It is worrying that some managers only disclose the annual management fee charged and not the TIC.

products that can appeal to such a market. Only a few firms have established such products, which limits the level of retail participation by this segment.

Brand building and industry influence

a. South African industry body memberships

There are several industry bodies representing business in South Africa that are relevant to the interests of blackowned asset managers. These range from industry wide initiatives, to those focused on the specific challenges faced by black-owned business. Given the centrality of networks of trust and reciprocity essential to growth and development - key components of social capitalit is somewhat disappointing that membership remains low. What is encouraging is that membership of both ASISA and ABSIP increased by approximately 10% during the current period. While ASISA membership is considered by many to be expensive and representative of the largest firms in the industry, it is the overarching representative body and plays many vital roles in setting

Black Business Council (BBC) Black Management Forum (BMF)

Business Unity South Africa (BUSA)

Business Leadership South Africa (BLSA)

Institute of Retirement Funds (IRF)

industry standards, ensuring best practice and making the sector’s voice heard by government and regulators. As black-owned investment managers it is important that companies join ABSIP, to advance the cause of meaningful transformation and to have our particular concerns and needs addressed. A third of firms are members of TAF, and nearly 10% of public markets firms are members of SAVCA, up from 6% compared to 2019.

The low levels of leadership participation in the activities of industry bodies is disappointing. A probable factor in the representation of leadership by black-owned asset managers is that they are small, with the owners

(BMF) Business Unity South Africa (BUSA) Institute of Retirement Funds (IRF) Business Leadership South Africa (BLSA)

and directors immersed in the day-to-day operations of their businesses. That aside, the low representation is inadequate and needs to be addressed urgently if the industry is to transform at an acceptable rate.

In an environment of changing policy and gazetting of new legislation, it is very important that black asset managers have a seat at the table. While more than half of respondents report regular engagement with financial sector policy makers, it is disappointing to see a slight trend in the wrong direction this year. With South Africa having established the Twin Peaks framework there is much legislation currently under review (refer to “Regulations all asset managers need to be aware of”).

In particular the draft Conduct of Financial Institutions Bill (COFI), aimed at reforming the financial sector, is expected to be gazetted soon. This is an opportunity to effect real change in the industry, one that we hope will be seized by black-owned financial firms.

c. Thought leadership

It is pleasing to see an increase in the prevalence of regular presentations by senior staff at industry events. This is a cost effective means to increase visibility, influence thought, and extend networks. It is good to see that more than half of the survey pool publish

articles regularly. While this is onerous on already busy senior staff, it is important that firms express their views and unique insights publicly. We hope to see positive trends with respect to thought leadership from this part of the financial sector, going forward.

d. Industry awards won for investment performance Raging Bull Awards won (since inception of firm):

Morningstar Awards won (since inception of firm):

Number of Morningstar Awards

The prestigious Raging Bull and Morningstar Awards recognise top performing funds in the unit trust sector. While it is only a handful of managers who have been recognised, we note a pleasing positive trend in the Raging Bull Awards, with one firm boasting four bulls

e. Advertising, branding and marketing

in the trophy cabinet, and two firms with more than five. We see a similar positive trend in the internationally administered Morningstar Awards. It is important for black-owned managers to compete in this space, due to the prestige and visibility associated with these awards.

Advertising and marketing are key to market penetration, by making potential clients aware of your products, and what you stand for as a company. There is no doubt that effective spending in this area increases a firm’s client base. While this would depend on the development stage of a business, research indicates that for an established enterprise, spending approximately 10% of gross revenue on advertising and marketing is optimal. It is telling that almost half of surveyed companies spend less than 1% of revenue on marketing, although this is

a slight improvement compared to last year. Small firms find themselves in a “Catch 22” situation - having an insufficient client base to improve revenues, yet risk averse to allocating revenue to increase the client base. Any increased spend is likely to be affected by COVID19. As we have seen, asset management firms have indicated that one of the key cost containment measures targeted is marketing expenditure (see section titled “Impact of COVID-19”). Measures taken in 2020 are likely to be reversed in the short-term.

Advertising and marketing mediums used:

Print media and conference/exhibitions are the preferred means of marketing in 2020. The latter may be understood in terms of the targeting of institutional investors via direct contact. This is not surprising since most firms have a strong institutional bias in their

f. Communication with investors

investor base (see “Fund Facts”). It is concerning to see a continued decline in the use of social media and online marketing, where the eyes of a large, young retail market are focused. This trend does not augur well in terms of expansion in a limited market.

Medium used to communicate with investors:

The use of roadshows, a familiar tool in the industry, has returned to just over 55% in 2020, although one would expect that social distancing in response to COVID19 would adversely affect this measure in the next survey cycle. What is worrying to see is the sharp decrease in frequency of communication with clients, eroding the gain of 2019. For the first time there was

g. Access through technology

an uptick in the use of webinars which is reflective of the COVID-19 communication environment. The preferred means of communication however are still dominated by email campaigns and company websites, reflecting an institutional rather than retail bias. The professional network LinkedIn is used increasingly, but the use of social media in general remains unpopular.

A fully functional website should be considered a minimum requirement for any business, and so, while improving, there is no excuse for the large proportion (nearly 30%) who do not maintain a website. The website is the first stop when seeking information about a

company, whether by institutional or retail investors. No companies are providing a mobile app in 2020, reflecting the immaturity of the industry in the retail space, where this has become one of the most popular means for interacting with customers.

h. Brand recognition drivers

The distribution of brand recognition drivers, from the viewpoint of our survey pool, has seen little movement over the past three years. The delivery of consistent investment performance remains top, while having a differentiated product offering, a good team, and being client focused are all considered important. Values are also rated high, reflecting a recognition of ESG as a

differentiating factor. Marketing is not rated as important, in line with an emerging theme that most firms do not see this as an effective means to grow their brand. Low fees, interestingly, continue to not feature as a brand driver, despite the competitiveness of the market and the rise of low-cost passive investments.

i. Ambition to become South Africa’s next Coronation/Allan Gray or positioned as a boutique/niche asset manager

The upward trend in the ambitions of black-owned managers to become high profile brands in the public markets space has continued, despite more than half seeing themselves as niche players. The ambitious should find comfort in the fact that the tailwinds of BBBEE will continue to support their efforts. By keeping their eye on the ball in terms of investment performance, strong leadership, and high visibility, one would expect that these aspirations will eventually materialise for those with the will to battle on.

Environmental, social and governance

Section

12

Number of firms who are UN PRI signatories

69%

Of firms acknowledge that ESG impacted the risk and return characteristics of their portfolios

38%

Of firms have a dedicated ESG internal resource

a. United Nations Principles for Responsible Investment (UN PRI)

The Principles for Responsible Investment (”PRI”) were launched by the United Nations (”UN”) in 2006, in support of their Sustainable Development Goals (”SDGs”). These principles apply worldwide and seek to make financial organisations accountable to the imperatives of environmental, social development, and governance. This forward-looking initiative aims to accomplish its objectives through six guiding principles:

Principle 1: We will incorporate ESG issues into investment analysis and decision-making processes.

Principle 2: We will be active owners and incorporate ESG issues into our ownership policies and practices.

Principle 3: We will seek appropriate disclosure in ESG issues by the entities in which we invest.

Principle 4: We will promote acceptance and implementation of the Principles within the investment industry.

Principle 5: We will work together to enhance our effectiveness in implementing the Principles.

Principle 6: We will each report on our activities and progress towards implementing the Principles.

Being a signatory to the PRI requires a high level of commitment. One way in which the PRI monitors the efforts of its signatories is through its reporting tools. Reporting is a key mechanism to establish a framework of accountability, transparency, and assessment of the PRI signatories.

This year 12 of the 32 respondents in the public markets space are PRI signatories. While the trend since 2010 has been positive, the result has plateaued since 2014. Factors that limit the adoption of the PRI by South African

asset managers could be related to the cost associated with, and an under estimation of the benefits of, being a signatory.

Signatory PRI Transparency Report scores:

A signatory is able to calculate their performance in regards to the principles set out by the UN PRI. There are modules which assess the various individual indicators, and the modules are rated from E to A+. For the purposes of illustrating the data numerically we have converted the scores to percentages. The graph shows that the module “Strategy and Governance” has the majority of positive scores. Overall the managers have scores higher than 50% on the majority of the modules.

Of the companies that are signatories it does appear

that there is firm commitment to the goals of principled investment, reflecting a conscientious long-term approach which is encouraging. There is variation in terms of the investment categories, but even if limited it is a clear indication of a move in the right direction. The trends can be explored going forward with a buildup of longitudinal data to assess the trajectory and alignment of strategy over time with respect to the 6 PRI objectives. The 12 signatories will hopefully pave the way for a more enabling environment for the implementation and practice of the PRI.

b. The Code for Responsible Investing in South Africa (CRISA)

CRISA is a local set of principles focused on the South African market. The effectiveness of the Code is dependent on collaboration by all participants in the industry.

The period 2014 to 2020 has seen significant growth in the number of firms endorsing CRISA to a current value greater than 80%. While this bodes well, the result contrasts with the adoption rate of the PRI. Since CRISA is more “symbolic” and therefore less onerous on firms than the PRI, the results could reflect that, while firms see the importance of ESG for long term sustainability,

the cost and effort involved in implementation are still a barrier to progress on this front. In the absence of asset owner pressure and a champion to co-ordinate PRI objectives, there is no driver to effect movement towards a paradigm that prioritises the six overarching principles.

c. ESG policy is publicly made available

It is encouraging to see the continued increase in the number of black-owned asset managers who disclose their ESG policy to all stakeholders, with this measure breaching 80% this year. A transparent ESG policy provides investors with confidence that a firm is implementing procedures which are in line with global best practice. It is also an indication that firms are taking ESG seriously, and recognise the benefit of operating, and directing investments in a manner conducive to sustainability. The policies developed and reported will need to be evaluated relative to the practical steps taken in implementation.

d. ESG integration

Integrate ESG factors into the investment process:

Sources of ESG data:

The prevalence of ESG integration into the investment process has remained high (>80%), firms have stepped up corporate engagement efforts, while the use of positive and negative screening processes have seen a sharp decrease. It is pleasing to see that very few firms report no integration. The upward trend in corporate engagement suggests firms have been sensitised to this area, given the number of high-profile corporate scandals which have occurred in South Africa. The predominance of ESG factors in the negative screening processes can also be understood in this light.

The number of firms with dedicated ESG staff has remained steady at a reasonable 40%, which is pleasing

Investment team holds at least one monthly ESG meeting:

given that the firms represented in the survey are typically constrained in terms of personnel. It is also notable that investment teams are engaged with respect to ESG on at least a monthly basis by over 70% of respondents.

With regards to sources of ESG data, there has been a slight increase in the use of external data vendors, at the expense of internal analysts and the use of company reports. It is, however, clear that most companies use more than one of these sources. A good balance is important, to mitigate internal biases by referencing independent sources. A steady increase of firms report using other sources of data.

e. Proxy voting

Proxy

One would expect consensus in proxy voting. Most managers have voted on 40 to 60 companies. This is a balanced effort and reflects the desire of managers to engage and justify their positions. Proxy voting frequency has increased, with the majority (56%) voting more than 90% of the time. While proxy voting may be viewed as a form of engagement, we have also gathered data measuring to what extent the managers surveyed have engaged with boards or senior management of companies held in their portfolios. It is pleasing that around 80% of managers report having done so in the last year.

Regarding transparency, it is encouraging to see that most (66%) managers make their proxy voting policies publicly available. Managers surveyed, however, remain reluctant to make their votes public, and most do not cast votes directly, but through a service provider.

f. ESG reporting to clients

Communicating with clients on ESG matters enhances investor awareness and is an important aspect of client engagement. The data illustrates that there has been a move to more structured reporting, with more than 40% of the survey pool reporting on at least an annual basis. Going forward, we hope to see this trend continue, as a large proportion of companies report on an ad hoc basis, and a few are still not reporting at all.

g. Collaborated with other organisations in seeking to address an E, S or G issue in the previous 12 months

There exists significant leverage in the South African public and private sector, where the bulk of the savings of the ordinary South African is invested, to address the governance challenges faced in the country, and to improve investor outcomes. The moderate improvement in the collaborative efforts of asset managers in 2019 has unfortunately eroded in 2020, with 50% of managers reporting taking part in such activity. It remains to be seen how this trends in a post COVID-19 environment. Collaborative efforts by this population of asset managers has the potential to boost ESG awareness in the aftermath of what has been an unprecedented disruption to our economy.

h. Firm practice

Remuneration policy for the investment team requires the integration of ESG issues across the investment portfolios:

Company incorporates ESG in corporate culture:

ESG is not separate to the investment process; it is fundamental to business operations to promote transparency and integrity. The data suggests that there has been a marginal increase in companies incorporating ESG into their remuneration policies and practice for the investment teams, although the survey group remains largely split on the issue. As ESG issues are

i. Investment portfolios

incorporated into business functions, one would expect that they should naturally filter into the corporate culture of the company. While 2020 has seen a decline in managers reporting the incorporation of ESG into their culture, the percentage of positive responses remains high.

Investment does not meet an ESG rating is still considered investable:

j.

ESG team makes the final call on whether an ESG issue leads to a buy or sell decision:

Two thirds of managers surveyed agree that ESG does impact the risk and return characteristics of the portfolios they manage. This is in contrast to the fact that managers remain divided on whether an asset that does not meet ESG criteria is still considered to be investable. This means that many firms consider ESG as one of many factors, rather than a hard filter, when making investment calls. Most managers do not rely on ESG teams to make the final investment call. This is not surprising, as it is the portfolio manager, in most cases, who bares the final responsibility for investment decisions.

Risky to discuss ESG issues with large corporations because of the influence they have

It is encouraging that most firms feel comfortable discussing ESG concerns with large portfolio companies. This shows a widespread view that corporations, regardless of size, should be held accountable with respect to the way they are run, and the impact they have on all stakeholders. Despite the high numbers holding this view, it is noteworthy that there has been a decline by 7% in those who feel this way.

k. Invest in any ESG related bonds

Sustainability bonds are bonds where the proceeds are used to finance or refinance a combination of green and social projects and is the most preferred by those surveyed. The second most popular bond is the green bond, which is different in that the proceeds from the bond is used for environmental benefits which can be quantified and assessed.

Investment performance

Peace, justice & strong institutions

Section details

30 JUNE 2020

Portfolio and benchmark returns are as at this date

FEES

Gross of fees performance is used except for South Africa Hedge Funds which are net of fees

INFORMATION

RATIO

Demonstrates how successful the asset manager has been in outperforming the benchmark considering the degree of active risk the asset manager assumed in achieving this return and is measured over a 3-year period

ZAR

Currency in which all data is quoted

ANNUALISED

Returns longer than 12 months are annualised

RISK

Where available, 3-year annualised volatility and tracking error are provided

Performance and risk analysis is provided on the following product categories:

a.Multi-Asset Class (Absolute Return and Balanced)

b.South Africa Hedge Funds

c.Offshore

d.South Africa Equity

e.South Africa Fixed Income

f.South Africa Money Market

g.South Africa Income

h.South Africa Listed Property

a. Multi-Asset Class

SA ABSOLUTE RETURN FUNDS

statistics (3 years) Fund nameBenchmark30-Jun#Quarter#1 year#3 years #5 years #7 years#10 years #Volatility# Tracking # Information # errorratio

Balondolozi Absolute Return FundCPI+3%2,50%211,70%13,16%58,30%47,53%48,17%3--7,79%58,18%50,204

Mianzo CPI+3% FundCPI+3%3,05%110,52%22,87%65,81%66,05%6----8,34%68,74%6-0,096

Taquanta True Absolute FundCPI+3%0,68%60,74%68,83%111,11%111,40%1----1,01%11,46%13,061

Taquanta Absolute FundCPI+3%1,41%34,73%45,03%49,29%39,07%37,86%47,35%33,62%34,07%30,653

Taquanta Pooled Reg 28 Absolute FundCPI+3%0,77%52,65%55,23%310,43%210,08%28,44%17,81%22,78%23,25%21,172

Vunani Global Absolute Return Composite CPI+3% CPI+3%1,16%48,57%35,76%27,85%57,01%58,19%29,18%16,49%46,78%40,185 CPI+3%-0,36%-0,03%5,05%6,63%7,50%7,80%7,94%1,22%

Argon Absolute Return FundCPI+4%1,43%56,76%50,20%44,85%35,33%17,66%18,62%16,02%26,56%2-0,425

Mergence CPI + 4% FundCPI+4%2,95%110,29%30,63%24,76%45,04%36,47%47,79%27,09%37,57%3-0,383

Prescient Positive Return FundCPI+4%0,76%65,04%6-2,59%55,30%25,17%26,49%36,49%35,91%16,36%1-0,372

Sentio Absolute Return Fund CPI+4%2,91%211,22%1-5,52%61,90%60,87%54,83%5--9,79%610,24%6-0,566

Vunani Domestic Absolute Return Composite CPI+4% CPI+4%1,44%410,30%20,30%34,25%54,52%46,53%2--7,90%58,27%5-0,414

Vunani Global Absolute Return Composite CPI+4% CPI+4%1,59%39,58%44,93%17,43%1------7,75%47,98%4-0,031 CPI+4%-0,28%0,22%6,05%7,63%8,50%8,80%8,94%1,22%

Mergence CPI + 5 % (Local) FundCPI+5%3,51%112,18%1-1,20%24,78%24,92%26,66%28,11%28,83%19,26%2-0,422

Vunani Global Absolute Return Composite CPI+5% CPI+5%1,66%210,23%23,64%16,44%15,94%18,14%19,90%18,99%29,19%1-0,241

CPI+5%-0,19%0,47%7,05%8,63%9,50%9,80%9,94%1,22%

Vunani Domestic Absolute Return Composite CPI+6% CPI+6%2,25%111,61%1-0,65%13,63%13,37%16,04%18,43%19,99%110,27%1-0,581 CPI+6%-0,11%0,72%8,05%9,63%10,50%10,80%10,94%1,22%

Vunani Global Absolute Return Composite CPI+7% CPI+7%1,17%19,51%12,86%17,07%15,51%18,17%110,96%19,03%19,20%1-0,391 CPI+7%-0,03%0,97%9,05%10,63%11,50%11,80%11,94%1,22%

Kagiso Stable FundCPI+2%0,49%0,51%2,99%5,21%5,61%5,94%-1,02%1,62%-0,26

Prescient Absolute Defensive FundCPI+3%2,30%9,25%0,07%-------

Aeon Global Balanced FundCPI+5%3,43%16,41%7,11%7,12%6,92%8,75%-11,18%11,36%-0,13

Aeon Local Balanced FundCPI+5%4,35%18,21%-5,35%-------

Balondolozi Active Balanced FundCPI+5%3,07%15,68%-0,43%6,24%6,01%--11,59%11,82%-0,20

Kagiso Protector FundCPI+5%4,68%11,46%-2,12%4,56%6,10%7,52%7,81%10,99%11,37%-0,36

Lunar BCI Worldwide Flexible FundCPI+5%3,10%11,63%18,16%11,19%---11,90%11,82%0,22

Mergence Global Balanced Fund CPI+5%3,21%11,89%3,57%-------

Prescient Balanced FundCPI+5%3,92%15,38%1,93%6,32%5,73%--11,68%11,96%-0,19

Excelsia Balanced FundMedian Return: 6,63%23,93%-5,99%-------

Alexander Forbes Survey

Kagiso Domestic Balanced Fund Median Return: 9,07%14,43%-6,29%3,22%3,99%5,54%7,66%14,64%6,74%0,20

Alexander Forbes Survey

Taquanta Global Balanced Fund Multi Asset14,83%16,60%1,37%5,07%4,87%8,34%10,91%12,31%0,48%0,55

Lima Mbeu Multi Asset Fund Multi Asset23,50%13,91%-2,08%-------

Kagiso Balanced FundSouth African - Multi 5,79%13,46%-1,87%4,80%6,05%7,91%-13,63%5,74%0,21 Asset - High Equity

Kagiso Islamic Balanced FundSouth African - Multi 4,10%13,46%1,11%5,63%6,08%7,58%-10,22%2,67%0,75 Asset - High Equity

Perpetua Global Balanced FundSouth African - Multi 5,94%14,16%-1,45%2,01%2,32%--12,44%4,26%-0,38 Asset - High Equity

-0,36%-0,03%5,05%6,63%7,50%7,80%7,94%1,22%

0,44%1,46%6,86%7,17%7,20%6,81%6,48%0,12% STeFI +5%0,86%2,71%11,86%12,17%12,20%11,81%11,48%0,12% US Cash Hurdle (ZAR)-1,05%-2,78%24,77%11,40%8,33%--17,92%

Large Manager Watch

Median Return: Alexander Forbes Global Large Manager Watch3,06%13,89%1,42%4,73%5,02%7,86%11,34%

Kagiso Islamic Global Equity Feeder Fund Global - Equity - General1,56%14,60%16,58%------Global - Equity - General-1,65%13,80%13,74%

Aeon Active Equity Composite SWIX All Share6,68%1123,51%6-3,70%23,80%23,59%18,57%111,78%116,37%23,96%110,454

Aeon Smart Multi-Factor Equity Fund SWIX All Share6,78%1022,99%7-5,59%62,74%42,28%77,09%3--17,87%92,66%40,285

All Weather NCIS General Equity FundSWIX All Share7,42%824,22%4-7,93%91,54%83,06%2----18,99%123,95%10-0,128

ALUWANI SWIX Equity FundSWIX All Share7,25%920,34%12-6,37%74,10%12,83%3----17,03%52,46%30,853

Argon Specialist Domestic EquitySWIX All Share7,52%724,01%5-4,29%32,78%32,55%58,49%210,68%418,46%103,38%61,061

Excelsia Aggressive Equity SWIXSWIX All Share8,91%232,27%1-10,26%13-1,94%13------22,18%147,60%14-0,5212

Excelsia Core Equity SWIXSWIX All Share9,59%129,08%2-6,63%80,17%12------20,44%134,39%12-0,4210

First Avenue General Equity SWIX CompositeSWIX All Share5,20%1414,69%14-12,00%14-4,21%14-2,32%122,96%8--14,83%14,89%13-1,2714

Mergence SWIX FundSWIX All Share8,80%322,26%8-8,67%110,44%111,39%106,92%510,71%317,18%61,79%2-0,8713

Mianzo Active Equity Fund SWIX All Share8,54%424,43%3-10,01%120,50%100,90%116,02%7--18,76%113,40%7-0,4411

Perpetua Relative Value Equity Fund SWIX All Share8,40%521,35%10-1,93%10,89%91,62%8----16,95%33,01%5-0,379

Prescient Core Equity SWIX FundSWIX All Share7,69%622,13%9-5,26%52,45%52,60%4----17,67%70,49%10,912

Sentio General Equity FundSWIX All Share6,44%1220,08%13-8,67%102,13%71,51%96,97%410,93%216,97%43,63%80,047

Vunani Core Equity Composite SWIX All Share6,14%1320,67%11-4,48%42,40%62,47%66,73%6--17,84%83,92%90,106 SWIX All Share8,07%22,09%-6,09%2,00%2,08%7,05%10,61%17,68%

Afena Capital Moderate Equity Capped SWIX Capped SWIX All Share 4,39%1715,17%17-21,82%19-4,66%8------16,99%44,30%7-0,8910

Afena Capital Unconstrained Equity Capped SWIX Capped SWIX All Share 3,78%1913,42%19-20,91%18-4,92%10-2,12%21,43%3--16,14%25,15%8-0,808

All Weather Capped SWIX Fund Capped SWIX All Share 6,62%1021,60%7-11,27%11--------------

ALUWANI CAPPED SWIX Equity Fund Capped SWIX All Share 6,22%1320,16%11-9,79%41,24%2------16,89%32,83%30,731

Balondolozi Active Equity Fund Capped SWIX All Share 6,13%1422,42%3-10,42%7--------------

Benguela Capped SWIX Composite Capped SWIX All Share 6,50%1118,22%15-9,31%3-1,23%5------15,71%13,92%5-0,115

Excelsia Core Equity Capped SWIX All Share 8,39%428,23%1-10,75%10--------------

First Avenue Equity Capped SWIX Composite Capped SWIX All Share 4,31%1814,52%18-17,13%17--------------

Kagiso Core Equity Fund Capped SWIX All Share 9,17%222,95%2-13,45%14-2,21%6------19,15%94,11%6-0,346

Kagiso Managed Equity Fund Capped SWIX All Share 13,02%120,77%9-8,95%11,28%1------19,67%108,27%100,252

Lima Mbeu SA Equity Fund

Capped SWIX All Share 6,41%1220,26%10-9,81%5--------------

Mergence Capped SWIX Fund Capped SWIX All Share 7,66%521,66%6-13,43%13-2,37%7------17,21%51,92%1-0,819

Mianzo Tracker Equity Fund

Capped SWIX All Share 6,92%821,70%4-10,62%8-0,86%4-0,36%15,38%1--18,15%72,37%2-0,024

Ngwedi Core Equity Fund Capped SWIX All Share 7,13%618,56%14-12,57%12--------------

Perpetua True Value Equity Fund Capped SWIX All Share 8,53%317,92%16-13,58%15-4,92%9-2,13%31,58%2--18,18%85,33%9-0,777

Prescient Core Equity Capped SWIX Fund Capped SWIX All Share 6,64%921,69%5-10,23%6--------------

Sentio Capped SWIX Fund Capped SWIX All Share 5,40%1619,73%12-13,73%160,01%3------17,45%63,73%40,223

Vunani Domestic Active Equity Capped SWIX Capped SWIX All Share 5,41%1519,39%13-9,13%2--------------

Vunani Domestic Passive Equity Composite Capped SWIX Capped SWIX All Share 6,96%721,51%8-10,67%9-------------Capped SWIX All Share6,98%21,64%-10,78%-0,81%0,07%5,51%-17,45%

Afena Capital Moderate Equity CAPI CAPI ALSI4,90%317,14%4-16,23%4-0,16%40,85%34,65%26,85%216,22%23,94%3-0,994

Afena Capital Core Equity CAPI CAPI ALSI4,72%418,99%3-12,65%31,23%3------16,21%13,04%2-0,833

Cachalia Capital C Value FundCAPI ALSI6,74%224,94%10,70%17,09%14,56%1----18,31%44,37%40,761

Mergence CAPI FundCAPI ALSI7,67%122,88%2-7,55%22,62%22,89%27,21%110,48%116,38%31,77%1-0,642 CAPI ALSI7,03%22,94%-5,64%3,76%3,41%7,37%10,55%16,92%

Kagiso Top 40 Tracker FundTop 407,86%224,97%12,30%17,44%15,03%18,51%211,17%216,86%31,48%10,511

Prescient Core Equity ALSI Top 40 FundTop 408,04%123,80%3-0,33%26,89%24,89%28,74%111,41%117,06%20,66%20,322

Vunani Domestic Passive Equity Composite Top 40 Top 407,82%324,01%2-0,76%36,50%34,70%38,34%311,14%317,28%10,17%3-1,043 Top 407,85%24,18%-0,55%6,68%4,82%8,49%11,23%17,36%

Argon Core Bond

ALBI-0,84%310,11%41,79%108,87%58,40%38,33%19,08%210,14%121,21%60,635

ALUWANI Active BondALBI-1,41%118,92%82,00%78,12%97,76%87,63%68,80%39,43%100,62%20,018

Balondolozi Bond FundALBI-1,29%98,39%101,86%98,36%68,73%18,07%3--9,01%61,16%50,216

Balondolozi ALBI Tacker FundALBI-1,21%79,88%52,71%4--------------

IA Muhu Active Bond FundALBI-0,77%210,92%16,37%110,37%2------9,03%71,03%42,191

Kagiso Bond FundALBI-1,24%86,79%131,40%118,25%77,95%57,33%108,23%78,54%11,75%100,087

Makalani Core Fixed Income StartegyALBI-1,13%610,44%34,87%311,92%1------8,73%42,73%111,392

Prescient Bond Quantplus PlusALBI-1,86%138,19%12-0,49%127,00%117,59%97,52%98,38%69,17%81,39%7-0,8012

Prescient Bond Quant FundALBI-1,49%129,37%61,88%87,95%107,78%77,61%78,59%49,72%110,58%1-0,2710

Prescient Flexible Bond FundALBI-1,31%108,39%9-2,33%136,03%127,57%107,89%58,20%88,78%53,19%12-0,6511

Prowess Corporate Bond Fund ALBI-1,03%59,16%72,51%68,12%87,82%67,53%88,43%58,64%21,42%80,009

Taquanta Core Bond Fund ALBI-0,57%110,64%26,26%29,33%38,58%28,18%2--8,72%31,58%90,774

Vunani Domestic Active Bond CompositeALBI-0,99%48,29%112,55%58,93%48,40%48,03%49,22%19,25%91,02%30,803 ALBI-1,18%9,94%2,85%8,11%7,49%7,30%8,30%9,57%

SA INFLATION-LINKED BOND FUNDS

ALUWANI Active Inflation Linked Bond IGOV-1,08%44,01%5-3,61%51,09%42,46%4----7,39%30,57%20,602

Balondolozi Inflation Linked Bond CILI-0,95%34,92%2-3,21%4-------------Prescient ILB FundSAGLIB-1,17%55,03%1-3,14%31,82%23,03%24,40%16,03%27,33%29,02%30,113

Taquanta Enhanced Inflation-Linked BondSAGLIB-0,61%14,34%4-2,02%21,36%32,57%34,21%36,15%17,00%110,10%40,054

Vunani Inflation Linked Bond CompositeCILI-0,87%24,82%3-1,95%12,31%13,32%14,28%2--7,56%40,43%13,031

CILI -0,91%4,68%-2,95%1,01%2,25%3,92%6,07%7,45%

IGOV-0,94%4,75%-3,27%0,75%2,08%3,85%6,04%7,66%

SAGLIB-0,40%17,73%-2,98%0,81%2,12%3,90%6,08%15,39%

Argon Enhanced CashSTeFI0,45%101,86%38,27%48,40%78,34%77,79%57,37%50,27%70,23%85,339

ALUWANI Active Money MarketSTeFI0,44%121,62%87,90%98,57%68,62%48,08%47,75%40,24%60,15%69,057

Afena Money Market Fund

Balondolozi Cash Fund

Kagiso Money Market Fund

STeFI0,44%131,54%117,22%137,58%107,57%9----0,14%10,02%117,711

STeFI0,53%22,02%28,54%28,59%58,49%5----0,30%90,28%105,0910

STeFI0,50%51,84%48,03%88,39%88,37%67,78%67,20%60,18%30,12%410,045

Ngwedi Enhanced Yield FundSTeFI0,47%71,35%147,68%10--------------

Prescient Money Market FundSTeFI0,47%91,62%97,64%118,06%98,04%87,57%77,18%70,17%20,08%211,653

Prescient Yield QuantPlus FundSTeFI0,52%41,79%58,31%38,67%48,67%38,20%27,76%30,18%40,10%315,092

Prowess Money Market FundSTeFI0,41%141,62%77,47%12--------------

Taquanta Core Cash FundSTeFI0,47%81,60%108,23%58,96%28,97%18,32%17,97%10,28%80,19%79,476

Taquanta Pooled Cash FundSTeFI0,48%61,67%68,06%78,67%38,69%28,09%37,77%20,23%50,14%510,674

Taquanta Enhanced Core FundSTeFI0,52%31,48%128,16%69,13%1------0,34%100,26%97,458

SNN Money Market Fund (Terebinth)STeFI0,45%111,41%136,85%14--------------

Vunani Money Market CompositeSTeFI0,60%12,04%18,82%1-------------STeFI 0,44%1,46%6,86%7,17%7,20%6,81%6,48%0,12%

Argon Flexible Income FundSTeFI 110%1,30%7,75%4,36%10,27%9,78%--6,62%6,60%0,36

Balondolozi Income FundSTeFI 110%0,16%3,58%7,36%8,77%---2,16%2,14%0,40

Ngwedi Active Income FundSTeFI 110%0,69%1,27%7,81%-------

Prescient Income Provider FundSTeFI 110%0,86%4,04%6,33%8,29%8,86%9,13%9,19%2,30%2,29%0,16

Terebinth SCI Enhanced Income Fund STeFI0,36%1,87%7,37%-------

Vunani Enhanced Income CompositeSTeFI 110%0,76%3,18%8,62%10,59%10,15%9,01%-2,16%2,14%1,25

Asset manager profiles | Public markets

Name of company: Aeon Investment Management (Pty) Ltd

Date of inception:May-05

Website:www.aeonim.co.za

Address:4th Floor, The Citadel, 15 Cavendish Street, Claremont, 7708

Telephone:+27 21 204 6061

Email:funds@aeonim.co.za

Contact person:Tshego Modise

Title of contact person:Business Development Manager

Twitter:@AsiefMohamed

Facebook:Aeon Investment Management

Instagram:aeon_im_growth

LinkedIn: Aeon Investment Management (Pty) Ltd

Name of company: Afena Capital (Pty) Ltd

Date of inception:Nov-05

Website:www.afenacapital.com

Address:6th Floor, Sunclare Building, 21 Dreyer Street, Claremont, 7708

Telephone:+27 21 657 6240

Email:info@afenacapital.com

Contact person:Thabang Sengoara

Title of contact person:Business Development Manager

LinkedIn:Afena Capital Proprietary Limited

Name of company: All Weather Capital (Pty) Ltd

Date of inception:May-08

Website:www.allweather.co.za

Address:9th Floor, Katherine Towers, 1 Park Lane, Wierda Valley, Sandton, 2196

Telephone:+27 11 722 7382

Email:info@allweather.co.za

Contact person:Mark Scholefield

Title of contact person:Administrator

Name of company: ALUWANI Capital Partners (Pty) Ltd

Date of inception:Dec-15

Website:www.aluwanicapital.com

Address:EPPF Office Park, 24 Georgian Crescent East, Bryanston East, 2152

Telephone:+27 21 204 3800

Email:aluwani@aluwanicapital.co.za

Contact person:Lonwabo Dambuza

Title of contact person:Business Development Manager

Twitter:@aluwani_capital

Facebook:ALUWANI Capital Partners

LinkedIn:ALUWANI Capital Partners

Name of company: Argon Asset Management (Pty) Ltd

Date of inception:Apr-05

Website: www.argonassetmanagement.co.za

Address:1st Floor, Colinton House, The Oval, 1 Oakdale Road, Newlands, 7700

Telephone:+27 21 670 6570

Email:info@argonasset.co.za

Contact person:Luyanda Joxo

Title of contact person:Executive

Name of company: Balondolozi Investment Services (Pty) Ltd

Date of inception:Apr-10

Website:www.balondolozi.co.za

Address:1st Floor, Building 1, Glenhove Square, 71 4th Street, Houghton Estate, 2198

Telephone:+27 11 484 9023

Email:admin@balondolozi.co.za

Contact person:Yolande Mokhantso

Title of contact person:Business Development Manager

Name of company: Benguela Global Fund Managers (Pty) Ltd

Date of inception:Feb-13

Website:www.benguelaglobal.com

Address:3rd Floor, Rivonia Village, Cnr. Rivonia Boulevard and Mutual Road, Rivonia, 2191

Telephone:+27 10 596 8500

Email:info@benguelaglobal.com

Contact person:Thandi Zwambila

Title of contact person:Business Development Manager

Twitter:@benguela_global LinkedIn:Benguela Global Fund Managers

Name of company: Cachalia Capital (Pty) Ltd

Date of inception:May-12

Website:www.cachaliacapital.co.za

Address:12th Floor, Sinosteel Plaza, 159 Rivonia Road, Sandton, 2196

Telephone:+27 11 883 0146

Email:mashuda@cachaliacapital.co.za

Contact person:Mashuda Cassim

Title of contact person:Executive

Name of company: Excelsia Capital (Pty) Ltd

Date of inception:May-16

Website:www.excelsia.co.za

Address:3rd Floor, Sunclare Building, 21 Dreyer Street, Claremont, 7708

Telephone:+27 21 276 1740

Email:info@excelsia.co.za

Contact person:Rajay Ambekar

Title of contact person:Executive

LinkedIn:Excelsia Capital

Name of company: First Avenue Investment Management (Pty) Ltd

Date of inception:Sep-10

Website:www.firstavenue.co.za

Address:Ground Floor, 21 Fricker Road, Illovo, 2196

Telephone:+27 11 772 2480

Email:opsteam@firstavenue.co.za

Contact person:Neetin Govan

Title of contact person:Administrator

LinkedIn: First Avenue Investment Management

Name of company: Fortitudine Vincimus Capital Advisors (Pty) Ltd

Date of inception:Aug-14

Website:www.fvcadvisors.com

Address:12 Lover's Walk, Rondebosch, 7700

Telephone:+27 82 854 0808

Email:info@fvcadvisors.com

Contact person:Mike Kane

Title of contact person:Executive

Name of company: Idwala Capital (Pty) Ltd

Date of inception:Aug-17

Website:www.idwalacapital.co.za

Address:1st Floor, 63 St. Andrew Street, Birdhaven, 2196

Telephone:+27 11 447 1099

Email:nandi@idwala.capital

Contact person:Nandi Rodolo

Title of contact person:Executive

Name of company: Independent Alternatives Investment Managers (Pty) Ltd

Date of inception:Aug-15

Website: www.independentalternatives.co.za

Address:Jupiter House, River Park, 42 Homestead Road, Rivonia, 2191

Telephone:+27 11 234 0187

Email: info@independentalternatives.co.za

Contact person:Tatenda Chapinduka

Title of contact person:Executive

LinkedIn: Independent Alternatives Investment Managers

Name of company: Kagiso Asset Management (Pty) Ltd

Date of inception:Dec-01

Website:www.kagisoam.com

Address: 5th Floor, MontClare Place, Cnr. Main & Campground Roads, Claremont, 7708

Telephone:+27 21 673 6300

Email:info@kagisoam.com

Contact person:Tisha Powell

Title of contact person:Administrator

LinkedIn:Kagiso Asset Management

YouTube:Kagiso Asset Management

Name of company: Lima Mbeu Investment Managers (Pty) Ltd

Date of inception:Sep-17

Website:www.limambeu.co.za

Address:2nd Floor, Fredman Towers, 13 Fredman Drive, Sandton, 2196

Telephone:+27 10 023 0113

Email:invest@limambeu.co.za

Contact person:Teboho Tsotetsi

Title of contact person:Executive LinkedIn:Lima Mbeu Investment Managers (Pty) Ltd

Name of company: Lodestar Fund Managers (Pty) Ltd

Date of inception:Jan-15

Website:www.lodestarfunds.com

Address:2nd Floor, The Terraces, 25 Protea Road, Claremont, 7735

Telephone:+27 267 7812

Email:info@lodestarfunds.com

Contact person:Reza Khan

Title of contact person:Executive

Twitter:@lodestarfunds

LinkedIn:Lodestar Fund Managers

Name of company: Lunar Capital (Pty) Ltd

Date of inception:Jan-15

Website:www.lunarcapital.co.za

Address:29 Seventh Street, Houghton Estate, 2198

Telephone:+27 83 305 7860

Email:sabir@lunarcapital.co.za

Contact person:Sabir Mahomed Munshi

Title of contact person:Executive Twitter:@sabirmunshi

Facebook:Lunar Capital

LinkedIn:Sabir Munshi

Name of company: Makalani Management Company (Pty) Ltd

Date of inception:Aug-04

Website:www.makalani.co.za

Address:Ground Floor, 261 Oxford Road, llovo, 2196

Telephone:+27 11 428 0680

Email:enquiries@makalani.co.za

Contact person:Munier Badat

Title of contact person:Executive

Twitter:@MakalaniMC

LinkedIn:Makalani Management Company

Name of company: Meago Asset Managers (Pty) Ltd

Date of inception:Mar-06

Website:www.meago.co.za

Address:73 Oxford Road, Saxonwold, 2196

Telephone:+27 11 646 2944

Email:sanehm@meago.co.za

Contact person:Saneh Memela

Title of contact person:Administrator

Name of company: Mergence Investment Managers (Pty) Ltd

Date of inception:Oct-04

Website:www.mergence.co.za

Address:2nd Floor, Cape Town Cruise Terminal, V&A Waterfront, Duncan Road, 8001

Telephone:+27 21 433 2960

Email:info@mergence.co.za

Contact person:Ronel Bantjes

Title of contact person:Executive

Twitter:@MergenceIM

Facebook:Mergence Investment Managers

LinkedIn:Mergence Investment Managers

YouTube:Mergence Investment Managers

Name of company: Mianzo Asset Management (Pty) Ltd

Date of inception:Aug-10

Website:www.mianzo.co.za

Address:Unit EG01 Vesta House, The Forum, Northbank Lane, Century City, 8000

Telephone:+27 21 552 3555

Email:zukile@mianzo.co.za

Contact person:Zukile Nchukana

Title of contact person:Business Development Manager

Name of company: MSM Property Fund (Pty) Ltd

Date of inception:Aug-15

Website:www.msmpropertyfund.com

Address:1st Floor, 3 Exchange Square, 87 Maude Street, Johannesburg, 2196

Telephone:+27 64 097 6456

Email:musi.skosana@msmproperty.co.za

Contact person:Musi Skosana

Title of contact person:Executive

Twitter:@MSMProperty

Instagram:@MSMProperty

LinkedIn:MSM Property Fund

YouTube:MSM Property Fund

Name of company: Ngwedi Investment Managers (Pty) Ltd

Date of inception:Aug-18

Website:www.ngwedi.com

Address:Suite 4b, 1st Floor, Madison Place, Constantia, 7848

Telephone:+27 21 000 1900

Email:monei@ngwedi.com

Contact person:Monei Pudumo-Roos

Title of contact person:Executive

LinkedIn:Ngwedi Investment Managers

Name of company: Perpetua Investment Managers (Pty) Ltd

Date of inception:Oct-12

Website:www.perpetua.co.za

Address:5th Floor, The Citadel, 15 Cavendish Street, Claremont, 7708

Telephone:+27 21 674 4274

Email:info@perpetua.co.za

Contact person:Kevin Dantu

Title of contact person:Business Development Manager

Twitter:@Perpetua_Invest

LinkedIn: Perpetua Investment Managers (Pty) Ltd

Name of company: Prescient Investment Management (Pty) Ltd

Date of inception:Sep-98

Website:www.prescient.co.za

Address:Block B, Silverwood Lane, Steenberg Office Park, Tokai, 7945

Telephone:+27 21 700 3629

Email:kelly.castle@prescient.co.za

Contact person:Kelly Castle

Title of contact person:Business Development Manager

LinkedIn:Prescient Investment Management

Name of company: Prowess Investment Managers (Pty) Ltd

Date of inception:Dec-08

Website:www.prowessinvestments.com

Address:20th Floor, Thibault Square, 1 Long Street, Cape Town, 8000

Telephone:+27 21 565 0400

Email: precious@prowessinvestments.com

Contact person:Precious Buthelezi

Title of contact person:Business Development Manager

Twitter:@ProwessManagers

Facebook:ProwessInvestments

LinkedIn:ProwessInvestments

Name of company: Sentio Capital Management (Pty) Ltd

Date of inception:Jul-07

Website:www.sentio-capital.com

Address:1st Floor, Illovo Edge, Building 3, 5 Harries Road, Illovo, 2196

Telephone:+27 11 880 1994

Email:info@sentio-capital.com

Contact person:TC von Czettritz und Neuhaus

Title of contact person:Executive

Twitter:@SentioCapital

Instagram:sentio_capital

LinkedIn:Sentio Capital Management

Name of company: Taquanta Asset Managers (Pty) Ltd

Date of inception:Sep-99

Website:www.taquanta.com

Address:7th Floor, Newlands Terraces, Boundary Road, Newlands, 7700

Telephone:+27 21 659 5100

Email:crm@taquanta.com

Contact person:Ray Wallace

Title of contact person:Executive

Twitter:@AssetTaquanta

Facebook:Taquanta Asset Managers

LinkedIn:Taquanta Asset Managers

Name of company: Terebinth Capital (Pty) Ltd

Date of inception:Apr-13

Website:www.terebinthcapital.com

Address:2nd Floor, Combined HQ Building, 4 Bridal Close, Tyger Valley, 7530

Telephone:+27 21 943 4825

Email:team@terebinthcapital.com

Contact person:Nomathibana Matshoba

Title of contact person:Executive

LinkedIn:Terebinth Capital

Name of company: Value Capital Partners (Pty) Ltd

Date of inception:Jul-16

Website:www.valuecapital.co.za

Address:8th Floor, Rosebank Link, 173 Oxford Road, Rosebank, 2196

Telephone:+27 10 060 0800

Email:info@valuecapital.co.za

Contact person:Samuel Sithole

Title of contact person:Executive

Facebook:Value Capital Partners

LinkedIn:Value Capital Partners

Name of company: Volantis Capital (Pty) Ltd

Date of inception:Jun-19

Website:www.volantis.co.za

Address:The MARC, 129 Rivonia Road, Johannesburg, 2196

Telephone:+27 10 006 0035

Email:sisa.mayekiso@volantis.co.za

Contact person:Sisa Mayekiso

Title of contact person:Executive

Twitter:@Sisa_Mayekiso

Facebook:Sisa Mayekiso

LinkedIn:Sisa Mayekiso

Name of company: Vunani Fund Managers (Pty) Ltd

Date of inception:Jul-99

Website:www.vunanifm.co.za

Address:6th Floor Letterstedt House, Newlands-on-Main, Newlands, 7700

Telephone:+27 21 670 4900

Email:marketing@vunanifm.co.za

Contact person:Snowy Masakale

Title of contact person:Executive

Private markets

Introduction

Private markets investing in South Africa has enjoyed a higher profile over the past year as listed markets have continued to deliver muted returns, and investors have begun to look for diversification. In addition, the increased focus on infrastructure investments from government, and the emphasis on public-private partnerships to achieve both investment returns and social impact targets has created an important role for private markets fund managers. That said, increased allocations to unlisted investments are yet to come from South African institutional investors, and offshore investors in recent years have only been active in some niche areas of our unlisted markets.

From the perspective of black fund managers active in the private markets space, they have continued to experience the challenges of long fundraising cycles. There have been new allocations to black funds over the past year, mainly driven through specific programmes of retirement funds designed to increase the share of capital managed by black fund managers. However, the notable absence of the PIC in making new fund allocations, the continued absence of local DFIs from fund investing, and the increasing reluctance of offshore DFIs to invest in South Africa focused funds have contributed to such long fundraising cycles.

The COVID-19 environment has also affected private markets, both from the perspective of impact on deal making and portfolio companies, as well as prolonging fundraising. Managers are being asked by investors to focus on existing portfolios and delay new fundraising until portfolio companies are better positioned to ride out the economic impact of the pandemic. Practical difficulties in creating new contacts and performing due diligences have also lengthened investment cycles, in addition to the valuation uncertainty that the pandemic has created. On the positive side, many managers were quick to adapt processes, and go back to the negotiating table to structure more downside protection and revised deal pricing into their agreements.

SAVCA now counts 49 full members as black fund managers, with a total of R53 Billion of reported commitments. This continues the positive trend of transformation within the private markets investment industry, which has made great strides in recent years.

Twenty firms completed our survey this year, which have raised a total of R19.3 Billion across 30 funds, representing both an increase in participation and AUM from last year. While the overall asset size is encouraging, it is important to note that the universe of participating firms’ AUM is highly skewed, with a long tail of managers currently subscale.

We view the post-COVID-19 environment as a favourable one for private markets investing as a result of the scarcity of capital in the market. Companies with strong financial backing and access to good strategic thinking will be well positioned to gain market share and prosper in this environment. In our engagement with appointed and prospective black managers, we continue to be excited by the opportunities identified and deals executed. In general, we are pleased with the way that managers are adapting to incorporate the current risk environment, and to include more earnings protection into their deal structuring.

While there are certainly challenges for black private markets managers, as a cohort they continue to do deals, build track record and find opportunities to invest. We are proud to partner with many of them to achieve good outcomes for our clients and the economy.

Section highlights

91%

Of capital raised is from local sources, with the balance split between North America and Europe

90%

Of firms integrate and contract ESG and transformation approaches with investors and portfolio companies

82%

Of all staff employed are black South Africans

15%

Of managers see the current regulations as supportive to new black entrants

81%

Of black staff are at partner/principal level, 74% at associate level and 90% at analyst level

COVID-19 impact

60%

Of firms implemented cost containment measures such as cancelling bonuses or reducing salaries

PAYE DEFERRAL

Top relief measure used by firms

FINANCIAL IMPACT

Biggest concern raised by 75% of firms

90%

Of firms believe that investors will be more focused on the SDGs in a post COVID-19 environment

There were twenty participants in this year’s

markets segment of the survey, a good increase on the fifteen participants in the previous year’s. The proportion of private markets respondents has been increasing in recent years and now makes up 39% of all respondents (20 out of 51), up from 30% in 2019. The greater participation has also reflected an increase in the size of capital under management, up to R19.3 Billion from R15.2 Billion previously reported in 2019.

Those surveyed manage funds that invest across a wide range of unlisted investments, including private equity, infrastructure and private debt. They also invest across all sectors and are mainly focused on South African investments with a strong focus on the mid-market, as well as facilitating black ownership of existing companies.

Private markets share of total participating firms

There is a trend towards more participants coming into private markets, particularly black managed funds. This has meant that such funds are starting to make up a greater proportion of the market but still represent a small fraction of total industry assets. The latest SAVCA industry report reflects the size of AUM in South African private markets as R184 Billion, meaning black-owned managers manage approximately 10% of AUM based on the respondents to the survey,

Based on an analysis of the SAVCA membership directory, SAVCA considers 49 of its members to be black fund managers, with total reported AUM of R53 Billion, or 28.8% of industry AUM. There are four large fund managers on SAVCA’s list which did not participate in this survey, accounting for R26.8 Billion. The rest of the difference is largely explained through the exclusion of funds of funds, while the remainder of smaller managers make up the rest. The results set out in this report have been presented on the basis of the managers that completed the survey.

b. Distribution

Fundraising is a perpetual issue in private markets in South Africa, and particularly for black fund managers who tend to have shorter track records than other managers. With institutional allocations to private markets at such low levels compared to international norms, there are certainly more managers than can sustainably be funded. This is beginning to change with the prominence of private markets investments increasing, if only as a result of the poor performance of listed markets.

While we have not measured this, fundraising cycles for black fund managers tend to be measured in several years, and many managers cannot sustain themselves over this period. Even the most experienced black

Generation of funds currently under management or capital raising

managers may be subject to these long cycles, and some even more so as they fall between the allocations for “incubation” as new managers and the more regular allocations to well established managers.

Three-quarters of respondents are currently fundraising, most of these for their first fund. Thirty funds are currently or have been historically managed by the twenty respondents. In total, across these funds, R19.3 Billion had been raised, with R13 Billion of this across seventeen first-generation funds. While thirteen of the twenty respondents are currently raising or managing their first funds, six firms have already managed to raise capital for subsequent funds, in all cases raising more capital in each subsequent fund than the previous one.

Level of engagement of potential investors

Currently

2 years ago

Participants were asked to rank the level of engagement from different categories of potential investors currently compared to two years ago. The ranking was on a scale of 1 to 5, where 5 was most engaged and 1 least engaged.

The participants did notice a small positive change in overall engagement from potential investors over the past two years. This was largely driven by more positive engagement with local pension funds, funds of funds and asset consultants, all of which showed notable positive shifts. There was a relatively low level of interest

from life companies, wealth managers and offshore investors, although respondents did reflect positive changes in most categories. It was interesting to note the relatively high level of engagement reflected from local DFIs, despite the lack of any meaningful capital coming from this channel.

Eighty percent of respondents have raised their capital exclusively from South African investors, with only 9% of total capital raised from non South African investors. It is also interesting to note that of this 9%, almost all of this was raised more than 5 years ago, indicating that almost no capital has been raised offshore in recent times.

In a similar vein, the role of development finance institutions, which were so instrumental in developing the industry in the past, has diminished considerably. Only three respondents of the twenty had been recipients of funding from local DFIs and only two from offshore DFIs (only one in the past 5 years). Local DFIs allocations have also been very small in comparison to total funds raised.

Sixty percent (2019:54%) of capital raised for black private equity funds came from pension funds and a

further 19% and 11% from wealth managers and multimanagers respectively. Only 6% of actual capital raised was raised from DFIs with the remaining 4% from other offshore investors.

This clearly indicates that retirement savings pools are by far the largest source of capital for black private markets funds. The relatively large portion from wealth managers is not widely spread, with 80% of this allocation going to two fund managers. As noted above, DFIs and offshore investors have not been significant sources of capital for black private markets fund managers.

Managers

Sixty-five percent of managers surveyed has previously raised capital from local retirement funds. Managers largely target local institutional capital by approaching asset consultants, multi-managers and pension funds. This is where capital has historically mostly come from

for these funds. To a lesser extent, managers are also looking to DFIs and offshore investors, despite the much lower historical number of commitments from these parties.

Seventeen of the thirty funds that have been raised are first generation funds of the managers, while six second funds and five third or further funds have been raised. A further two fund vehicles have also been raised that do not fall into these categories, in that they were raised to invest alongside other fund vehicles rather than full funds in their own right.

Total capital by size quartiles of funds raised

It must be noted that there is a large dispersion in fund sizes, with the smallest 50% of managers having a total of R1.8 Billion (9%) of capital, with 3 having no capital raised to date. The largest 20% have R10.2 Billion (53%) of total capital. This does call into question the viability of some managers in the market.

For independent fund managers without a tie to a single large investor, median commitments are between R100-

c. Bottlenecks and barriers

A big question in the transformation efforts of the industry is the exact nature of the challenges to achieving a more transformed private markets industry, and whether the market interventions being made are the right ones to help black managers to overcome these challenges. The view historically has been that difficulties related to creating the confidence in investors and the trust required for large allocations of capital to be

Current regulations encourage new black private markets fund entrants and

200 Million per LP, while some managers choose to tie up with a single large investor to supply the majority of their capital.

The median fund manager had R850 Million (2019: R635 Million) under management from three LPs, and 25% of firms had just one LP making up more than 80% of their capital.

committed to black managers has been the single largest challenge.

Several questions were asked of fund managers relating to bottlenecks and barriers to their creation of successful fund management businesses. Their answers reflected some positive developments and policy assistance but also highlighted some key challenges.

The regulatory environment around black private markets fund managers do provide significant advantages, such as the ability to confer black ownership onto investee companies if certain criteria are met. In theory, this should assist portfolio companies to prosper through better B-BBEE ratings and an increased ability to do business with customers sensitive to B-BBEE ratings such as corporates and government entities.

In a significant change since the previous survey, only 15% of managers felt that private equity fund regulations were appropriate to encourage new entrants and build skills. This was in contrast to the previous survey where a majority thought that these regulations were appropriate. It is unclear why there has been such a reversal of opinion in the current year, but we can postulate that the crowded fundraising environment is a significant contributing factor.

have a view

The South African private markets industry is fairly well established, with R184 Billion in AUM according to the most recent SAVCA industry report. Within this established industry there are several larger players which have built up capacity, networks, track record and investor relationships over long periods of time. Newer entrants (which most black firms are) are naturally going to be at an earlier stage in their life cycle, and may not have advanced all of these components of their businesses to the same extent.

Opinion was divided on whether black private equity funds were able to compete effectively with more established firms, and was more negative than the previous year. In analysing the responses, those black managers with more extensive investor relationships felt more able to compete with the wider universe of fund managers.

Is there a need for formal incubation of new GPs?

There was continued overwhelming support for further interventions to assist black private equity managers, including making the B-BBEE Scorecard for Retirement Funds compulsory; for the SAVCA Fund Manager Development Programme which aims to build skills in new management teams, and for incubating new fund managers. Most respondents, but not all, felt that there was a need for formal incubation of new private markets managers. It is interesting to note that even of those managers which had successfully raised capital, most said there was a need for incubation of new GPs. From our understanding of the market and the origins of the various black managers, many have benefitted from elements of incubation even if they have not formally been incubated.

Have LPs played an incubation role in your fund?

Only one in five respondents have had an LP who has played a significant incubation role to assist the manager to navigate some of the early challenges of fund management. From the responses received, there has been no single active LP providing this assistance across the market, but it has rather been individual LPs assisting particular managers.

There does also seem to be a wide range of different interpretations of what constitutes incubation from manager to manager, depending on their needs. What is clearly required from any incubation approach, is a greater collaboration from potential LPs to accelerate time taken to get a new fund to first close.

As in prior years, fundraising was clearly flagged as the biggest challenge for black managers. Seventeen of the twenty respondents cited this as their top challenge, while the other three ranked this as the second biggest challenge. Hand in hand with fundraising goes the challenge of demonstrating a track record to prospective investors. This is not only a challenge for first time fund managers, but also in the raising of subsequent funds, if the manager has not yet exited a number of fund I deals to demonstrate full deal cycles and realised returns.

A consistent message in the surveys over the years has also been the struggle to meet working capital needs and maintain a team through a fundraising period. Managers complain of the “chicken and egg” situation of needing capital to earn fees to pay for a team, but needing a team in order to raise capital.

Part of this is also the challenge of obtaining a licence, but in the current survey, only one respondent flagged this as a challenge in their top three.

While it was lower rated than other challenges, maintaining a pipeline while going through a fundraise of indeterminate length is a point of significant stress for managers and their teams.

d. Investment philosophy

Investment strategies followed by respondents

Survey respondents were asked to indicate which strategies formed part of their approach to investing, with similar results to last year. Almost three-quarters of firms indicated that their investment strategy was focused on the mid-market with 55% targeting B-BBEE transactions where the primary driver of the deal is to bring empowerment to the investee company. There

Target fund size

were smaller focuses on infrastructure and turnaround opportunities, with some focus on early-stage investing.

Interestingly there is still a low focus on infrastructure, despite the attention this is getting from government through the infrastructure investment office set up in the presidency.

The target fund size of respondents has fluctuated over time with the current target sizes split between funds over R1 Billion and those between R500 Million and R1 Billion. The managers targeting lower fund sizes (under R500 Million) are doing so under specialist strategies including SME funding and turnaround strategies, while those in the R500 Million - R1 Billion category are typically raising their first fund, or had small first funds with relatively few LPs.

Those targeting over R1 Billion either have track record and strong investor bases behind them, or are putting significant resources into investor relations in order to make these targets a reality.

Thirty percent of managers had not yet raised any significant capital in the current fundraising, while only 35% had raised over R500 Million. This threshold of R500 Million is seen in many cases as a minimum for a viable fund size to enable the manager to support a team based on the fees earned on this capital base at standard fee rates.

These findings take some interpretation, as R500 Million raised by one manager may mean that their target has been reached, but for another, it may not be enough for a first close. In their current fundraising, 30% of managers indicated that they had not yet raised any of

e. Establishment of track records

Over R500 Million

R200 Million - R500 Million

R100 Million - R200 Million

R50 Million - R100 Million

Less than R50 Million

their targeted capital, down from 53% in the prior year. A further 30% had raised totals within their target range. Overall the picture looks more positive than the previous year, with a better mix of progression towards fundraising targets.

It must be noted that a number of managers who are at an early stage in their fundraising, or those who are struggling to raise capital have decided not to participate in the survey. It is likely that the apparent success of targeted fundraising has an element of survivorship bias to it and should be interpreted as such.

Each year, there is a steady progression of deals done across the managers responding. Eleven managers (2019:9) have now done at least five deals. This points to the growing maturity of the space, indicating that the median manager is now approaching the end of their first fund, looking to raise a subsequent fund, rather than the median manager being in the early stages of their first fund.

The other side of this coin is that the median manager has not yet exited any of its investments, with 70% of the managers indicating this in their responses. However, at least three managers have now done more than ten exits, and a further three who have at least done some exits.

Funds sucessfully exited

Four managers have fully exited at least one fund, while seven managers have more than one active fund currently operating.

When it comes to active funds, ten of the respondents had one active fund, a significant increase from the prior

Classification of Limited Partners

year. While this looks encouraging, it is at least partly explained by a higher participation in the survey in the current year. It also counts smaller funding vehicles formed by some managers to build track record before launching fully formed institutional funds later on.

There has been a continuing shift towards local pension funds, including deals done through their asset consultants. Conversely, DFIs that at one stage played an anchor role in many private markets funds, have allocated very little to black private equity funds. This shift from DFIs has been most pronounced from the offshore DFIs, which now mostly regard South Africa as middle income, or have steered away from single country private markets funds, and Rand denominated funds in particular.

On the local DFI front, the large DFIs have not been making commitments to funds for many years now,

preferring to build teams within their own organisations to better fit their own mandates.

The fundraising market has also noted the absence of the PIC, which has been busy with an extended due diligence process for new fund managers since 2018, without new commitments being made over this time.

It has been clear, since the initiation of this survey, that black private markets funds are overwhelmingly funded by local investors, with more than 90% of the LP base in any given year coming from South Africa.

f. Brand building

Building a brand is an important part of the creation of any business, including fund management businesses. We asked the respondents several questions around their brand building activities including their participation

in industry bodies, market presence and advertising. Overall it must be said that these activities were at a low level, but an overall improvement was noted from the previous year.

Eighty-five percent of respondents are members of SAVCA as required by the Conditions for Private Equity Investment under Regulation 28. Those that are not yet registered are expected to be registered before they can manage pension fund capital according to these regulations. The next biggest representation is with ABSIP, where 45% of respondents are members. There

is limited representation across the other business and pro-fessional bodies present in the market.

Only three respondents are members of the IRF, despite retirement funds being easily the largest source of capital for black private markets funds.

on SAVCA (or any other industry body)

Black private markets funds are well represented on the boards of SAVCA and other industry bodies, with almost half of respondents confirming that they have representation at this level. This is an improvement from last year when 40% of respondents said that they had representation at this level.

This improvement in transformation is also reflected within the main industry body, SAVCA, which has continued to transform at both its board level as well as the makeup of its executive team.

There has been an increase in the brand development activities of the respondents, with more saying that they exhibit at industry conferences, speak at industry events,

the company exhibit at or sponsor industry conferences?

run their own webinars and publish research. While many are coming from a low base of activity, it is pleasing to see the positive momentum in progress.

Regular speakers at industry events/webinars?

Publishing research articles or case studies is perhaps an area where more could be done to gain valuable exposure, but doing so is time consuming, making it difficult for teams who are already stretched. We have seen this strategy used effectively to gain exposure and to demonstrate the principles behind the approach of particular managers.

Has the firm participated as a speaker in webinars in 2020?

Has the firm published research?

Has the firm received an award for investment performance?

There are not many awards programmes focused on South African private equity, with the notable exception of the relatively new SAVCA industry awards. The long investment cycles of private markets investing also make awards much more subjective, but we do expect to see more awards in place in future years. In the current survey we started to see some awards come through in the responses for the first time.

Advertising

As in prior years, it is evident that very little is spent on marketing activities - there are two likely reasons. Firstly, black managers tend to be newer and have tighter budgets than more established players. Secondly, the marketing spend that is incurred is directed towards

fundraising, where there are relatively few parties being marketed to, and where this happens directly. This suits a relationship-building style of marketing much better than a broadcasting strategy of advertising and brand building.

% of revenue spent on advertising, branding and marketing

Where advertising spend is incurred, the vast majority is spent on print and social media advertising, where costs are manageable. The high cost and wide reach of TV, radio and outdoor campaigns is not seen as effective spend given the very niche target audiences of private equity funds.

Paid medium used for advertising

What is disappointing from a brand building point of view, is that managers do not fully use the opportunities available to them to build their brands. Press releases at key milestones are low cost and effort, but over time build the prominence of the brand in the market.

What is also perhaps often overlooked by managers is the positive deal flow that can be created by having a more public profile.

Events for which the firm issues press releases

While marketing budgets are tight, it is concerning to see that 70% of black fund managers do not have a fully functioning website. While some point to regulatory reasons for keeping a lower profile, we do consider this a limitation for those fund managers choosing not to manage their presence online effectively. As private markets funds get closer to being included in regulations and become more commoditised investment products, managers will need to do better on this front if they are to compete for capital effectively.

Drivers of brand recognition as ranked by managers

Managers consistently rank investment performance as the biggest driver of brand recognition, and 2020 continues this view. The impact created through investments is also seen as an important driver of brand, along with the name recognition of key investment professionals.

Surprisingly, having a differentiated product was ranked as only the 6th most important driver of brand recog-

nition, with low fees seen as least important. Creating lower fee products and creating specialisation for investors are two trends of global investment markets and it is interesting to note that the respondents did not see these areas as important. This is particularly true in an increasingly crowded market, and suggest that managers should spend the time to understand the needs of their LP universe.

Measures of success as ranked by managers

Predictably, investment performance and growth in assets are the two biggest measures of success cited by managers, followed by client satisfaction. Employee

and shareholder satisfaction ranked quite low, and may explain some of the regular staff movements that occur in the sector below the partner/principal level.

g. Team

The median team is made up of 3 principals, 1 associate and 3 support staff. Given the varying life stage of black managers, there is a large degree of variation around this, with teams as large as 12 or as small as 2. Each

Managing a private equity fund typically requires at least five people but this number can vary according to a firm’s investment style. The more actively involved the manager is in the operations of the underlying companies, and the more deals it does, the more resources are required. Less active managers may be able to get away with fewer than five investment team members but most need more than five to enable them to properly build and work through a pipeline of opportunities. As teams grow, more support staff are often added.

manager has to balance the build-out of the team to enable it to prove its capacity to deploy capital, as well as managing its ability to pay salaries and maintain sufficient working capital for sustainability.

All of the 47 partners and principals of the firms responding to the survey had at least 10 years of experience. This demonstrates one of the truths of private markets investing, in that it is learned over a long period of time, and only experienced individuals have a realistic chance of success at both capital raising and deal making. This statistic also points to the fact that the partners and principals get their experience elsewhere, mainly in investment banks and other private equity firms, before deciding to start their own firms.

Investment team demographics across all respondents

Of the 143 people employed, black staff made up 82%, with black women representing 45% of all staff employed. The racial makeup mirrors the demographics of the country much more closely than the broader private equity market.

44 of 54 partners/principals (81%) were black, and 10 (19%) white or non-South African. This demonstrates that the vast majority of senior staff at black private equity firms are, in fact, black. Partners/principals are 69% male.

Only 19 associates were employed, less than half the number of partners/principals. On average, there was one associate per fund and some of the respondents had no associates. One reason for the low number of associates may be their cost relative to the development stage of most firms. People with sufficient experience to be at associate level are instead looking to be at partner/principal level while those that are not may be too expensive for the firms relative to what associatelevel staff can earn elsewhere.

Alignment of interests

The median GP commitment to committed capital is 1%, with half of respondents reporting this level of commitment alongside LPs. More experienced managers tend to commit a bit more than this level, depending on their particular circumstances.

GP

by staff category

The vast majority of the GP commitment normally comes from the house and the principals, with smaller amounts in certain circumstances coming from associates.

Similarly, the carry split tends to go along similar lines, with a significant part going to the house and principals,

with smaller shares to next level staff. The house share may also be allocated through other share schemes in the manager or be retained for commitments to successor funds.

Employees other than partners that have equity in the firm or share of carry

It is interesting to note that the current year shows lower allocations to shares and carry outside of the principal/founder level compared to the prior year. This may be a result of the early stage of many of the managers responding to the survey, as many firms

How firms are financed at start-up

allocate carry and equity over time. If this is the case we can expect to see greater allocations to broader staff going forward as the average age of the respondee firms increases and staff earn these incentives.

Founders mostly finance the start-up of their firms, these individuals having often earned and saved capital from their previous jobs. Several firms have taken working capital facilities from private equity investors or have been privately assisted with other forms of finance. The long fundraising cycles have a clear impact on these financing arrangements, which become stretched if managers are not able to raise capital within their envisaged timeframes.

h. ESG and transformation

ESG and transformation are well entrenched concepts within private equity funds, and these are almost uniformly in place. Almost all managers responded that they contract for these processes with their investors, and that they formalise these processes with investee companies. These are typcially implemented through ESG+Transformation reviews during the due diligence

phase of deal making, with critical items included in 100 day plans post deal completion, and medium term items implemented over time. It is now common to see transformation plans put in place at the time the deal is concluded, in order to properly implement this over the investment period.

Number of respondents integrated ESG+Transformation

Transformation agreed with portfolio companies

ESG agreed with portfolio companies

Transformation agreed with investors

ESG agreed with investors

B-BBEE contribution level of respondents

All participants are rated either level one or two as they are all majority black owned. They also all meet the definition of Black Private Equity funds set out in the Financial Sector Code. These criteria are that:

• At least 51% of exercisable voting rights associated with the equity instruments through which the private equity fund holds rights of ownership are held by black people;

• At least 51% of executive management and senior management are black people;

• At least 51% of the profits made by the private equity fund manager after realising any investment made by it, by written agreement, accrue to black people; and

• Over the term of the fund, the private equity fund manager must invest at least 51% of the value of the South African funds under management in companies that have at least a 25% direct black shareholding, post investment of the investment by the private equity fund, using the modified flow-through principle.

i. Compliance

Is your firm a juristic representative on another FSP’s licence?

% of firms that would allow others to act as juristic representatives under their licence

All respondents are operating under a FSCA licence, with 90% of firms taking part in the survey operating under their own licence, slightly down from the previous year’s reported number, but on a larger base of respondents. This demonstrates that securing a licence is certainly possible if the applicants have the appropriate experience. This was also shown in the bottlenecks

section of the report, where only one respondent flagged this as a significant issue to overcome.

Perhaps because of the relative success in securing their own licences, two thirds of respondents indicated that they would not allow other firms to act as a juristic representative on their own licences.

Number of Key Individuals registered with FSCA

Most firms have one or two key individuals on their licences, but this year’s survey has also shown three firms with three key individuals on their licences. This is consistent with the early stage of most of these firms,

and the relatively small quantity of assets. Firms typically start with one or two key individuals before expanding this as their firms grow.

j. Socio-economic impact

The sustainability of the managers as reported is broadly in line with the prior year, marginally more positive in terms of profitability. It is important for firms to be sustainable in order to retain staff and maintain focus on investment outcomes for their investors.

% of firms with net profit after tax over the last three years

That said, there is typically little wiggle room for spending, and firms do not tend to spend more than 0.5% of revenue on CSI initiatives.

Income tax paid in the last financial year

The majority of respondents had not made a profit consistently for the past three years, but 75% had paid income tax in the past year, indicating that the most recent year was more likely to have been profitable.

Given the mix of respondents at different stages in the fundraising and deployment cycle, it is not unexpected to see such a mix.

Corporate social investment as a % of revenue

The sustainability section above shows that there is a mix of respondents that are profitable and sustainable and those that are not. It is therefore unsurprising to see a mix of CSI spend from the respondents. Eighty percent of respondents spend less than 0.5% of turnover on CSI, while one respondent spent over 5%. It is perhaps in light of the COVID-19 pandemic and the related economic hardship that we are seeing a higher level of contributions this year than last year.

k. Service providers

Most firms have internal administration capability with 35% of firms opting for external administration. This seems to come down to personal preference and is similar to the broader market and internationally. When

The only Big 4 firm that appears to have gained traction across a number of managers is Deloitte, which is only servicing firms which are fully operational. Mid-tier firms are being used extensively and normally offer more value for money while still being accepted by investors. The use of very small firms could be a cause for concern for investors, who may question their ability to provide assurance on private markets investment valuations.

it comes to choice of external administrator, there is no clear market leader, with each of the providers having one or two respondents as clients.

The only significant change this year has been the increase in respondents taking PI cover and D&O cover at a level between 2% and 4% of target commitments.

Cyber cover

It is interesting to note the significant increase in the take-up of cyber insurance, which went from being in place in only one manager last year, to seven in the current year. Firms primarily see this risk in external service providers.

This may simply result from a different respondent mix, or may be a result of different insurers.

Cost containment measures applied

The impact of COVID-19 on black private markets managers have largely been in the form of delays to their various processes, including fundraising and completion of deals, be they entry or exit transactions. Managers did flag some risk of decrease in profitability and liquidity in their operations, and most implemented some form of cost containment as a buffer against this. However, most did not consider it necessary to use any of the various relief schemes offered in the market, with a minority opting for the PAYE deferral relief option.

Predictably, managers expect less air travel, more working from home, more focus on digital communications and employee well-being in the COVID-19 recovery period and beyond. However there was a minority of respondents who expected some aspects of previous business such as in person meetings and conferences

to resume. This speaks to the people side of private markets investing, which involves trust building, often in person over periods of time, with investors, investee company management and other partners and stakeholders.

Do you expect an increase in investor appetite for impact investment aligned to meeting SDGS in a post-COVID-19 world?

There was a high degree of consensus that investors would be more focused on SDGs going forward. This is the continuation of a long trend in private markets investing of full integration of ESG and transformation considerations into investment processes. Despite the very small share of DFI investment into black private markets funds, institutional investors have taken up the baton and are seen to be likely to place more emphasis on the impact of investments in future.

It was very interesting to see that black private markets fund managers considered policy uncertainty and the macroeconomic situation of the country to be the biggest risks to their businesses. Outside of these factors, there was a wide spread of risks cited that were rated at least medium by the majority of managers.The only risk flagged as low by the majority of managers was the risk that the investment style of the manager is out of favour.

This is very encouraging to see that the managers themselves see their own investment style as one which has relevance in the current economy.

An investment consultant’s take on Regulation 28 and unlisted investments

An interview with Shainal Sukha, investment consultant to Consolidated Retirement Fund for Local Government (”CRF”)

CRF, a large defined contribution scheme, has allocated significant capital to unlisted investments when compared to industry average allocations. Why have they done so and how can we get more pension funds making larger capital allocations within Regulation 28 limits, to private markets and the real economy?

The following are some of the factors that led to CRF’s large allocation to unlisted assets:

• The preamble of Regulation 28 of the Pension Funds Act states that funds should follow a risk-based approach to their investment strategy by targeting “adequate risk adjusted” returns. It goes further to state that environmental, social and governance factors should be considered as part of a “responsible investment” approach. CRF therefore integrated ESG factors into their decision-making and adopted a holistic approach to risk management. The result was that CRF not only targeted good risk-adjusted commercial returns, but also sought to make a positive environmental and social impact with its assets, so that its members could retire in prosperous communities and sustainable environments.

• In 2015, when the industry debated the concentration of Naspers in our equity benchmarks, we noticed that our clients’ capital kept going into a relatively expensive and concentrated local stock market that was becoming increasingly global in its exposure. Companies were raising money locally to invest offshore, often with poor outcomes. Our clients were not actually allocating a large portion of their capital locally and into the real economy. An abundance of capital within domestic listed equity seemed to be

generating complacency and poor capital allocation decisions by local companies. On the other hand, other areas of the economy, where capital was scarce offered attractive return potential and better diversification benefits. So basic risk-management practice and taking a prospective view resulted in CRF investing into the local real economy, largely through alternative asset classes.

• With Government fiscally constrained and Corporates seeking certainty and confidence to invest, CRF felt frustrated with the lack of progress and constant “circle of blame”. It therefore sought to use its influence, as a large asset owner, to take action to reduce ESG risks for its members.

• CRF seeded an unlisted credit fund in 2015, which not only targeted commercial returns, but being a blended finance fund, targeted job creation as well. The experience with this fund showed that it was possible to generate good risk-adjusted returns, while also have a positive social impact, and this event enabled further investment into unlisted assets.

• Currently, CRF has allocated more than 18% to unlisted assets, all of which have performed in line with expectations after all fees and costs. Of this, 12% has a relatively high ESG impact.

It is important for Trustees to understand the flexibility that Regulation 28 provides and the benefits and disadvantages of unlisted assets. Consider what will be appropriate for your fund. Do not be obsessed with daily liquidity if your member profile is relatively young and stable. Obtain a second opinion on complex issues and make sure that your asset consultant is being proactive and bringing suitable opportunities to the table.

In your experience, what do you see as the key benefits and risks of your clients investing in private markets?

Private markets allow one to exploit the illiquidity premium and gain exposure to other risk premia. This helps to diversify risks for asset owners and provide more consistent and stable returns, depending on the nature of the investment. It generally channels capital into the real economy and can help to reduce negative

externalities or create positive externalities. However, private markets are not without risk and require greater due diligence and scrutiny. Private market funds generally have lock-up periods, charge higher fees and have higher cost structures. Concentration, liquidity and credit risks can be quite high, and most funds are closely correlated to the economic and business cycle.

In light of the current economic environment, SAVCA have proposed two amendments to Regulation 28: separating hedge funds and private equity into independent asset classes, each with their own caps and increasing the private equity cap from 10% to 15%. Do you think these proposed changes to Regulation 28 will unlock additional capital or, in your view, what will?

We support SAVCA’s proposal to split out hedge funds and private equity into separate categories as well as increase the private equity limit to 15%. We do not see a need to make further changes to Regulation 28, as we have shown through a case study of CRF that Regulation 28 is not prescriptive and provides sufficient flexibility. While these changes may unlock additional capital from retirement funds, the biggest stumbling block is not Regulation 28. What is lacking is the implementation of Regulation 28 and application of its principles by asset consultants and Trustees. If the structural shortcomings in the industry (as per Rob Rusconi’s 2008 paper “Whose money is it anyway?”) are addressed, particularly in asset consulting, it will allow for better capital allocation into the real economy and application of Regulation 28. We should be thinking about making it easier for retirement funds to allocate to illiquid assets by offering some kind of liquidity facility or perhaps offering open-ended funds. To address high fees, the industry could play a role in coming up with better-aligned fee structures, which are often cited by asset consultants as a huge stumbling block.

In light of the current economic environment and COVID19 crisis, what in your experience does private market investing deliver in terms of broader social benefit and impact goals in the real economy? And will larger allocations be supportive in confronting the current economic challenges being experienced in South Africa?

Climate change will amplify our social risks of high unemployment, poverty and inequality in South Africa. In my opinion, we have around ten years to urgently transition to a low carbon economy in a just manner. We also have ten years to achieve the United Nations Sustainable Development Goals. The COVID-19 pandemic has highlighted the weaknesses of our system but given us an opportunity to “build back better”.

The next ten years will be a massive opportunity for the private markets industry. Given the lock-up periods, private market fund managers can take long-term views and invest in solutions that address long-term risks. The private markets industry were early adopters of ESG integration and generally invest in the real economy. The mainstreaming of impact investing will be the next evolution of Responsible Investing, and the private markets industry therefore has a critical role in supporting this move.

CRF has invested in a number of blended finance solutions where government agencies provide some form of downside protection to catalyse investment from other sources. These blended finance solutions aim to provide commercial returns and social impact outcomes for investors. What has been your client’s experience of these partnerships in terms of returns and impact?

CRF has invested in three blended finance funds, all of which have delivered a positive experience thus far, in terms of both risk and return. All three funds target job creation, which is an important part of CRF’s Responsible Investing Policy. The funds are run by professional asset managers who also measure and report on the number of jobs that are created. The Jobs Fund has been an excellent partner in the process through their technical input and being receptive to investor concerns. Their involvement has lowered risks for both investors and asset managers and we hope that Government will create a “second” Jobs Fund or equivalent.

Concessional capital, often provided by the Government or an entity like the Jobs Fund, does serve to make it easier for retirement funds to invest in alternative asset classes. The concessional capital can either reduce downside risks by offering a first loss guarantee or it can act as a return enhancer, or both. We feel that blended finance could help mobilise the finance industry to invest more in the real economy, to crowd in longterm asset owners and to create positive environmental and social impact in our country. Blended finance funds could also help meet our National Development Plan targets and address the United Nations Sustainable Development Goals.

Asset manager profiles | Private markets

Name of company: Ascension Capital Partners (Pty) Ltd

Date of inception:Feb-18

Website:www.ascensioncapital.co.za

Address: Die Groenhuis, 38 Garsfontein Road, Pretoria, 0145

Telephone:+27 87 357 9750

Email:kabelo@ascensioncapital.co.za

Contact person:Kabelo Moja

Title of contact person:Executive/Principal

Name of company: Ata Capital (Pty) Ltd

Date of inception:Feb-12

Website:www.atacapital.co.za

Address:9th Floor, 90 Grayston Drive, Sandton, 2196

Telephone:+27 11 321 1629

Email:info@atacapital.co.za

Contact person:Maredi Mampuru

Title of contact person:Executive/Principal

LinkedIn:Ata Capital

YouTube:Ata Capital

Name of company: Bopa Moruo Private Equity Fund Managers (Pty) Ltd

Date of inception:Jan-12

Website:www.bopamoruo.co.za

Address: 3 Exchange Square, 87 Maude Street, Sandton, 2196

Telephone:+27 84 909 9999

Email:info@bopamoruo.co.za

Contact person:Nthime Khoele

Title of contact person:Executive/Principal

LinkedIn:Bopa Moruo Private Equity

Name of company: Crede Capital Partners (Pty) Ltd

Date of inception:Jun-15

Website:www.credecapital.co.za

Address:Ground Floor, Vdara Office Park, 41 Rivonia Road, 2196

Telephone:+27 11 268 6900

Email: sandile.sokhela@credepartners.co.za

Contact person:Sandile Sokhela

Title of contact person:Executive/Principal

Name of company: Eklavya Asset Managers (Pty) Ltd

Date of inception:Jan-16

Website:www.eklavyaam.com

Address: 2nd Floor, Suite 2.3, Open Workspace, 138 West Street, Sandton, 2195

Telephone:+27 10 592 1867

Email:sbhala@eklavyaam.com

Contact person:Satish Bhala

Title of contact person:Executive/Principal

Name of company: Ethos Mid Market Fund I (Pty) Ltd

Date of inception:Oct-15

Website:www.ethos.co.za

Address:35 Fricker Road, Johannesburg, 2196

Telephone:+27 11 328 7400

Email:tmatheolane@ethos.co.za

Contact person:Tabane Matheolane

Title of contact person:Executive/Principal

Twitter:@ethosmidmarket

LinkedIn:Ethos Private Equity

Name of company: FyreFem Fund Managers (Pty) Ltd

Date of inception:Sep-17

Website:www.fyrefem.com

Address: 10 Harrier Crescent, Douglasdale, 2191

Telephone:+27 83 266 8125

Email:cathy@fyrefem.com

Contact person:Cathy Goddard

Title of contact person:Executive/Principal

Name of company: Khumovest (Pty) Ltd

Date of inception:Sep-15

Website:www.khumovest.com

Address:2nd Floor, Building A, Silverpoint Office Park, 22 Ealing Crescent, 2191

Telephone:+27 11 883 2274

Email:info@khumovest.com

Contact person:Priyan Padayichie

Title of contact person:Executive/Principal

Twitter:@Khmovest_SA

Facebook:Khumovest

LinkedIn:Khumovest South Africa

Name of company: Kleoss Capital (Pty) Ltd

Date of inception:Jun-14

Website:www.kleosscapital.com

Address:One Vdara, 41 Rivonia Road, Sandhurst, 2146

Telephone:+27 11 666 1660

Email:zain.laher@kleosscapital.com

Contact person:Zain Laher

Title of contact person:Executive/Principal

LinkedIn:Zain Laher

Name of company: Makalani Management Company (Pty) Ltd

Date of inception:Aug-04

Website:www.makalani.co.za

Address:261 Oxford Road, Illovo, 2196

Telephone:+27 11 428 0680

Email:enquiries@makalani.co.za

Contact person:Keshan Pillay

Title of contact person:Executive/Principal

Twitter:@MakalaniMC

LinkedIn:Makalani Management Company

Name of company: Medu Capital (Pty) Ltd

Date of inception:Jan-02

Website:www.meducapital.co.za

Address:4th Floor, 35 Ferguson Road, Sandton, 2196

Telephone:+27 11 268 9140

Email:lboshoff@meducapital.co.za

Contact person:Leone Boshoff

Title of contact person:Administrator

LinkedIn:Medu Capital

Name of company: Moshe Capital (Pty) Ltd

Date of inception:Dec-13

Website:www.moshecapital.com

Address:2nd Floor, The Place, 1 Sandton Drive, Sandton, 2196

Telephone:+27 11 326 9733

Email:info@moshecapital.com

Contact person:Pauli van Greunen

Title of contact person:Administrator

Name of company: PAPE Fund Managers (Pty) Ltd

Date of inception:Mar-15

Website:www.papefunds.co.za

Address:222a Grosvenor Road, Sandton, 2191

Telephone:+27 82 653 8669

Email:guy@papefunds.co.za

Contact person:Guy Baxter

Title of contact person:Executive/Principal Twitter:@papefunds

Name of company: RH Managers (Pty) Ltd

Date of inception:May-13

Website:www.rhmanagers.co.za

Address:3rd Floor, 18 Melrose Boulevard, Melrose Arch, 2076

Telephone:+27 10 007 2171

Email:quinton@rhmanagers.co.za

Contact person:Quinton Zunga

Title of contact person:Executive/Principal

Name of company: Sanari Capital (Pty) Ltd

Date of inception:Nov-13

Website:www.sanari.co.za

Address:7th Floor, 90 Grayston Drive, Sandton, 2196

Telephone:+27 76 456 3339

Email:spokroy@sanari.co.za

Contact person:Sipho Sibeko

Title of contact person:Business Development Manager/Investor Relations

Twitter:@SanariCapital

Facebook:SanariCapital LinkedIn:SanariCapital

Name of company: Senatla Capital (Pty) Ltd

Date of inception:Jun-10

Website:www.senatlacapital.com

Address:9th Floor, The Forum, 2 Maude Street, Sandton, 2196

Telephone:+27 11 784 5929

Email:owen@senatlacapital.com

Contact person:Owen Maubane

Title of contact person:Executive/Principal

Name of company: Summit PE Investment Managers (Pty) Ltd

Date of inception:Aug-16

Website:www.summitafrica.com

Address:3rd Floor, Vdara Building, 41 Rivonia Road, Sandhurst, 2196

Telephone:+27 82 486 1928

Email:langa@summitafrica.com

Contact person:Langa Madonko

Title of contact person:Business Development Manager/Investor Relations

Twitter:@SummitAfr

Instagram:@SummitAfrica

LinkedIn:Summit Africa

Name of company: Tamela Capital Partners (Pty) Ltd

Date of inception:Sep-16

Website:www.tamela.co.za

Address:Ground Floor, Golden Oak House Ballyoaks OfficePark, 35 Ballyclare Drive, Bryanston, 2021

Telephone:+27 10 443 4615

Email:info@tamela.co.za

Contact person:Beena Morar

Title of contact person:Administrator

LinkedIn:Tamela Group

Name of company: Third Way Investment Partners (Pty) Ltd

Date of inception:Jul-15

Website:www.thirdway.co.za

Address:9th Floor, Katherine Towers, 39 Wierda Road West, Wierda Valley, Sandton, 2196

Telephone:+27 11 684 1192

Email:info@thirdway.co.za

Contact person:Fulu Makwetla

Title of contact person:Executive/Principal

Twitter:@ThirdWayZA

Name of company: Vuna Partners (Pty) Ltd

Date of inception:Jun-19

Website:www.vunapartners.co.za

Address:3rd Floor, 28 Sturdee Avenue, Rosebank, 2196

Telephone:+27 10 595 4990

Email:siya@vunapartners.co.za

Contact person:Siya Nhlumayo

Title of contact person:Executive/Principal

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