Data from Mergermarket indicates, however, that despite the country’s edge, the overall number of completed FDI deals with South Africa as the target market declined from 163 in 2015 to just 79 in 2017. “While South African-based fund managers have great ideas and deal flow, many are struggling to attract investment from large European institutional investors and pension funds. For this reason, many are turning to expert financial hubs like Jersey to help them raise capital efficiently, safely and securely”, says Allan Wood, Jersey Finance’s Business Development Director – Africa.
Understanding the South African FDI landscape
According to the National Treasury, the country’s economic outlook has improved with gross domestic product (GDP) growth of 2.1 percent projected in 2020, buoyed by a stable macroeconomic environment that provides a strong platform to attract much-needed foreign savings that can fund additional investment. However, in order to create a significant volume of jobs, build an inclusive and transformed economy and reduce inequality, South Africa needs strong, sustained expansion. To achieve this expansion, a greater influx of FDI is required.
South Africa’s score in the World Economic Forum (WEF) Global Competitiveness Index (GCI) was constant at 4.4 (on a scale of one to seven) in the annual publications dated from 2012–2013 to 2015–2016, and actually edged higher to 4.5 in the 2016–2017 edition.
The country’s macro-economic policies, its currency and its well-developed and well-regulated financial markets are highly regarded by international investors. These factors contributed to its stability on the WEF’s GCI Index, and to South Africa maintaining its second-place position on Rand Merchant Bank’s (RMB) ‘Where to Invest in Africa 2019’ report released in September 2018. The report’s co-author Celeste Fauconnier stated that South Africa is currently a hot spot for FDI, with President Ramaphosa’s efforts to build a $100 billion (R1.38 trillion) book of foreign and domestic investments project remaining on track.
The state of FDI in South Africa
South Africa has many attractive assets for investors, and an ease of doing business that saw it rank 82nd out of 190 economies in the World Bank 2018 Doing Business ranking. But how have these factors affected FDI into the country?
Unctad’s World Investment Report 2018, reported that FDI inflows into South Africa contracted by 41 percent between 2016 and 2017, reaching $1.3 billion. Domestic demand, which was lower than investor expectations, was among the key reasons for this decline, which saw the country drop 13 places to fill 68th spot as recipient of FDI in 2017. Additional contributing factors included a lack of clarity around policy and structural reforms, and legal uncertainties.
It is within this environment that fund managers in South Africa are attempting to secure necessary infrastructure investment in order to bolster growth. As they seek out European institutional investors, who have recently accumulated record amounts of investable capital, they will need to keep ahead of other attractive countries such as Egypt, Morocco, Ethiopia, Ghana and Kenya.
Ideal fund locations for South African managers
Jersey, with its strong corporate governance framework, offers a certain funds domicile for South African fund managers looking to raise funds from European, US and Asian investors. It offers flexible regulatory solutions that are ideally suited for global capital raising because Jersey’s regulatory framework focusses on the substance, governance and operational risk requirements of those investors. It is a jurisdiction for high net worth, professional and institutional investors, and is a well-trodden path for SA asset managers, such as Standard Bank, Asburton and Novare, among others.
Many Jersey-based investment managers have FAIS Cat I licences to offer their services to South African investors, and the fact that Jersey is very well regulated makes it particularly attractive for the institutional investors, who will have a very robust due diligence process before they invest.
Rob Hersov, entrepreneur and founder of Invest Africa, a leading business and investment platform, believes that having Jersey as the location for your international fund is beneficial to South-African fund managers, “Not only does Jersey have the right expertise and regulatory framework to support high-quality in-bound FDI, it also shares a time zone, and provides easy access via international flights from Johannesburg and Cape Town for quarterly board meetings and due diligence visits. In addition, the FSB and the JFSC are equivalent regulatory boards, and have a good working relationship.”
In terms of the high-end investor market, there are two specific solutions that could work well in the South African context. The Jersey Private Fund (JPF) offers a quick and cost-effective route to market, and the Expert Fund that has the lightest form of regulation, but is still very robust from an investor perspective.
The ability to connect with investors from around the world, and a strong understanding of the local market, makes Jersey an ideal jurisdiction for South African based managers looking to fundraise.