Investing for generational impact

Abdu-Rahman Abrahams Co-Head: Hybrid Equity, a division of Old Mutual Alternative Investments, shares his experience of a funding model that leaves a legacy for future generations.

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Abdu-Rahman Abrahams, CO-Head, Hybrid Equity

The socio-economic challenges facing South Africa remain stark. According to StatsSA, South Africa’s youth continues to bear the burden of unemployment, with more than 60% of those aged 15-24 currently unemployed and more than 40% of those aged 25-34 years.

Over the last two decades, global and local economic shocks have put the South African economy on the back foot. The 2008/09 global financial crisis caused our first recession in 20 years, and ever since, economic growth has been meagre to moderate at best.

Notwithstanding our emergence from the 2021 recession caused by the Covid-19 crisis, South Africa’s economy still isn’t growing fast enough. The significant challenges we face are the energy crisis, rising inflation, rising interest rates and a weakening domestic exchange rate.

In this context, fortunately, investors are no longer only concerned about the profit motive but also about the impact their investments can make in addressing socio-economic challenges that continue to affect the youth. This realisation has led to investors’ commitment to impact investing, which focuses on generating measurable, beneficial social or environmental effects, such as job creation and a financial return.

Taking the idea further is the need for generational impact investing, which focuses on long-term, sustainable changes that will benefit future generations. Generational impact investing takes a longer view, focusing on investments that will have a lasting, positive impact over multiple generations, such as infrastructure and job creation. One of the investment vehicles proving its impact capability to address challenges such as economic transformation, youth job creation and access to information, for example, are alternative investments such as hybrid equity.

Heeding the lessons learned

This success over the past two decades is testimony that the hybrid equity funding model works and shows that B-BBEE can be done effectively and profitably for all stakeholders. The achievements are critical to creating sustained impact.

Many of our investments are B-BBEE transactions where black industrialists or woman groupings have been funded to buy equity in established businesses. Alternatively, we have supported black-owned enterprises to grow through acquisitions or capital to grow the existing business to a much bigger scale. Below are some of the lessons we have learned over the past two decades that can be applied to the next decade, to invest for generational impact.

Lesson 1: Mitigate risk

With volatility and risk always present in markets, it is crucial that downside protection is incorporated into the investment strategy to protect investors from capital loss. To reduce risk, we have developed the expertise and capacity to select investments with excellent cash flow predictability in very defensive industries. Among the preferred sectors are infrastructure, telecommunications, food processing and financial services, as well as others which have proven resilient in the face of volatile economic cycles.

Hybrid Equity has sourced, structured, invested, managed and exited transactions across multiple sectors and capital structures through various economic cycles.

Lesson 2: Robust business selection

Having an integrated environmental, social and governance (ESG) unit that’s embedded in the team and part of the decision-making process, our due diligence process goes beyond just financial diligence, lending itself to a far more robust due diligence and selection process. Among our various criteria, a key requirement is that the businesses we choose must have been operating successfully for several years; have an experienced management team in place; have a good performance record; have a high demand for products that are good for the environment; and be sustainable in the communities that they operate in.

Our R150-million investment into Enable Capital, a short-term funder that uses innovative technology as a distribution platform, is a good example. It provides short-term funding solutions to small subcontractors who operate in the fibre Internet industry and have contracts with fibre companies like Vumatel or Metrofibre.

In considering Enable Capital, Hybrid Equity identified that it had a sound business model; its team had adopted a hands-on approach and deeply entrenched relationships with its client base.

Often these contractors needed help accessing funding from traditional sources to fund their execution of capital and labour-intensive infrastructure projects for their clients. However, through this investment, Enable has funded many small black subcontractors to ensure they have the necessary cash flow to run and grow their businesses. Many of these are young entrepreneurs.

Lesson 3: Add value

As a shareholder, we play an indirect advisory role to the company’s management on how to grow the business, which assists in driving a return on investment. This sets the model apart from traditional loan funding. Our advice provides insights into other industries on capital structure and lending, bolt-on investments and how to manage their treasury. We also contribute to elements such as governance and human resources strategy and formalise ESG data collection, analysis and continuous monitoring, helping make companies better.

An example of this success is evident in the deal concluded in 2021 to fund the empowerment partner in the telecoms group MetroFibre Networks. This deal expanded MetroFibre’s empowerment credentials and assisted in its R3-billion capital expansion plan, allowing it to roll out fibre Internet infrastructure to more parts of the country. It increased access to more affordable broadband services to more South African households.

Lesson 4: Focus on impact

Once the investment is secured, we focus on its impact. Shareholders that we’ve funded would sit on the boards of these companies. They would also drive transformation on the ground in that business from a board level. We can therefore track the status around gender equality, job creation and demographics of staff, governance and social responsibility in the businesses that we have invested in over set timeframes. The Enable Capital transaction, for example, has fast-tracked the delivery of tangible fibre Internet access to low-income households. It also resulted in job creation across the board, helped to build sustainable businesses and economic transformation.

Impactful enterprises combine their passion with good ideas that empower the nation through technological advancement, job creation, infrastructure, critical goods and services, and social and environmental benefits. The South African and international and local investment community would do well to heed similar lessons to leave a legacy for future generations.