Helping start-ups
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Sir Bob Geldof said “Aid isn’t the answer. Africa must be allowed to trade its way out of poverty.”
Sir Bob Geldof said “Aid isn’t the answer. Africa must be allowed to trade its way out of poverty.”
His 8 Miles fund raised some $250m during a period of significant private equity funding growth into the region which today now stands at around $200bn.
Other Initiatives have gone a long way towards the creation of the ideal expressed by Geldof. These include, in South Africa, changes to Regulation 28, government commitment to a broad-based investment manager exemption to ensure foreign investment funds are not inadvertently subject to worldwide taxation by virtue of activities of South African based investment managers, and black economic empowerment (BEE) legislation.
Indeed South Africa has benefitted from the global trend toward recognising private equity as an attractive investment vehicle for investors. It has been said more than once that South Africa has one of the most sophisticated private equity industries among the emerging and developed markets.
The impact of the industry on BEE is far reaching and has contributed immeasurably to socio-economic progress.
Investments by private equity funds into companies hold great benefits besides the mere cash injection to develop business. Investments have a great impact in terms of job creation and skills development in that they also ensure the transfer of knowledge.
It therefore goes without saying that private equity investment managers have an active and important role to play as they seek value from their investments.
However since the global financial crisis, global tax authorities have reached further afield in their bid to raise revenues. They have challenged tax structures, questioned “substance” in certain countries and specific jurisdictions and have added a plethora of new legislation and regulatory requirements which for first-time private equity managers are not only impediments to growth but actually put at risk getting that first all-important fund launched.
Globally, the host of new requirements includes but is not limited to the Foreign Account Tax Compliance Act (FATCA), the Common Reporting Standard (CRS), the Alternative Investment Fund Managers Directive (AIFMD), the OECD guidelines and Dodd Frank. Many private equity firms, particularly new entrants to the market such as BBE first-time managers, are buckling under the additional weight of extensive regulatory and market change with mounting pressure from more sophisticated investors to deliver greater transparent, timely and independent performance analytics in the post financial crisis environment, where in all likelihood the funds are of a more complex nature.
Meeting growing investor and regulatory demands is challenging for private equity investment managers particularly if they elect to retain fund administration in-house. Significant investment in people, process and technology is out of reach for most first-time fund managers and is a distraction to running a profitable business as fee pressures grow.
It is no exaggeration to say that the additional burden represents a massive obstacle to the success and growth of new BEE fund managers in the industry, particularly in emerging markets such as Africa.
Outsourcing steps in
This is where outsourcing functions such as reporting to a third-party administrator can save time and money for investment managers and diminish the risk of operational errors. Leveraging a service provider who is well-versed in these regulatory requirements and can offer a market-leading technological infrastructure such as Investran, skilled personnel and expertise, reduces managers’ reliance on outdated systems and substantially reduces the risk of errors.
Another significant requirement for investors is a separation of duties and built-in transparency to the accounting and reporting process. This helps to protect investors’ interests within the framework of the limited partnership agreement and allows private equity firms to focus on their core competencies – the effective management of investments and safeguarding of capital.
Those leading administrators who have invested heavily in advanced technology and reporting platforms help create and improve service and efficiency across both traditional and alternative asset classes and allow investment managers to focus on creating alpha.
Institutional investors are reassured by the independence and quality of reports that a third- party administrator provides, particularly in light of the number of financial scandals over the past decade. We only have to look at Madoff to see the issues associated with lack of transparent and independent input to fund administration.
Private equity investment is integral to the continued development of South Africa and for BEE investment managers to succeed in the global private equity environment they would be advised to seek out and partner with a third-party administrator to deliver fund growth and meet the extensive regulatory and investor demands.