Seen from a traditional point of view, it’s not surprising that the investment power of South Africa’s largest union pension funds with billions of rands under management are not benefiting the broader communities from which the unions draw their members.
After all, the conventional vehicles for substantial returns are the global stock exchanges and multinational companies.
And, the safe-bet institutions placing and managing the investments have always been the multinational, or, at least, corporate-sized fund management firms that are an inherent and integral part of investment tradition.
So union pension funds, quite naturally, are not keen to risk their members’ pensions with organisations or asset classes that are not tried and tested within the tradition.
There are two flaws in that sentiment.
The first is that it perpetuates an investment eco-system that bypasses the disadvantage. The consequence is that, while union pension funds are ensuring that their own members and their families have pensions after a lifetime of hard work, they are not using the financial power inherent in the billions of rands for which they are responsible to enhance the lives of the extended grassroots communities within which their members live and function.
Some part of those billions could be growing small and medium size businesses, which, as we all know by now, would create employment and generate wealth within their communities.
The second flaw in the reluctance among pension funds to venture into non-traditional investment vehicles classes is that at least one of them, private equity, is indeed tried and tested as a means of ensuring a return for stakeholders.
By nature, private equity is entrepreneurial. So its risk appetite is greater than that of traditional financial institutions. But it not only survives but prospers because it gets higher returns on investment than institutions can offer – by investing in the very organisations that traditional financial institutions feel they can’t support: small and medium enterprises (SMEs).
Private equity is a vehicle for de-risking investing in the SME sector.
Private equity thrives because it pro-actively seeks out the entrepreneurs with the best business propositions and then goes hands-on in the business to ensure that it becomes profitable and grows, delivering the returns investors expect along-side developmental impact in local communities.
Private equity can, therefore, function not only as a pension fund’s eyes and ears in the SME sector in general, identifying opportunities, but also as its hands and feet inside a given business.
Also, while private equity firms flourish among entrepreneurs, they generally bring to the investee business the financial sophistication that is normally found only within large institutions. They also impose governance and financial best practice on investees in order to ensure effective returns to their own investors.
This would give pension fund managers comfort, because there is a shared language and governance platform on which to operate and, therefore, reduce risk.
In addition, private equity firms that have been operational on the African continent for several years will have developed extensive government and commercial networks through which they both source business opportunities for themselves and build up- and down-stream relationships across multiple industries that represent market access for their investee companies. This also enables private equity firms to create synergies amongst their investees.
Investing in private equity as an asset class, therefore, enables pension fund managers to diversify their portfolios in an extremely rewarding way.
I’m not suggesting for a minute that more than a small portion of a fund should be invested in private equity. But even R500 million invested, through private equity, in entrepreneurs who serve their own communities is R500 million more than is currently available to grow SMEs.
The ripple effect on the economy would be exponentially greater than the seeding R500 million.
And, crucially, it would create wealth within the communities the unions are intended to serve – rather than adding to the wealth of the developed economies that have always been the beneficiaries of traditional, institutional investment practices.