Seven Critical Considerations for South Africa’s Next Generation Entrepreneurs and Fund Managers

Through my work within the finance industry, and as a passionate advocate for Africa’s potential development opportunities, I often speak with private equity and venture capital professionals in South Africa about how and why setting up offshore fund structures in a well-regulated jurisdiction can support the continent’s growth in terms of capital raising.

I revisited the topic recently with two leading industry experts based in South Africa, both of whom have a relationship with the offshore international finance centre of Jersey in the Channel Islands – Tanya van Lill, former SAVCA chief executive, and Andrea Böhmert, Partner at Knife Capital, which is a venture capital investment manager that accelerates the international expansion of African innovation-driven businesses.

Jersey’s contribution to the African continent is increasingly growing. In respect of capital raising, the latest Monterey Insight Jersey Fund Report found that in 2022, South Africa was the fifth largest source of origin for the total number of Jersey-domiciled funds and sub-funds. Many fund promoters are using Jersey structures to attract UK and EU capital.

As the SAVCA PE 2023 conference theme is resilience, it is timely and apt to consider the next generation of entrepreneurs and fund managers in the country. After all, just last year South Africa saw 900,000 matriculants achieve record-breaking pass rates despite the challenges brought about by the pandemic and, South Africa was found to be the highest-ranking entrepreneurial African country (according to a 2022 News and World Report).

These are the seven critical considerations and perspectives for fund managers and entrepreneurs.

By Tanya van Lill, former CEO of SAVCA and now head of investor relations and impact at Metier Investment and Advisory Services. Tanya holds a BCom Informatics and Honours degree, as well as an MBA. Her interests lie in both human and organisational development. She is a motor and fitness enthusiast and has represented South Africa at the World Powerlifting Championships.

1. Small business, big impact: The SME sector is vital to achieving economic growth in South Africa
The contribution by SMEs towards South Africa’s gross value-added, which is equal to GDP before taxes and subsidies, increased from 18% in 2010 to 40% in 2020, as per the OECD in March 2022. With this surge of new entrepreneurs entering the business world, competition to raise capital for businesses and projects will likely be more challenging. Entrepreneurs should also consider the impact they can make on creating jobs and alleviating poverty and include that as part of their narrative when fundraising.

2. Stand out: 2.6-million micro, small and medium enterprises (SMEs) in South Africa
In 2022, the OECD counted 2.6-million micro, small and medium enterprises (SMEs) in South Africa, about 37% of which are considered formal. The World Bank has noted that a Access to finance is the second most cited obstacle facing SMEs who want to grow their businesses in emerging markets and developing countries. Perfect your 30-second pitch and know what you do – what is the problem you are solving or the opportunity you are grabbing, and who is your target market? This is particularly important when it comes to attracting interest from sophisticated investors such as fund managers, who use high-quality financial services and offshore structures.

3. Build trust: Economic optimism is at an all-time low, so building trust with local communities and investors is key
The 2023 Edelman Trust Barometer revealed economic optimism is collapsing worldwide, with 24 of 28 countries seeing all-time lows in the number of people who think their families will be better off in five years. NextGen entrepreneurs should work with high-quality, trusted financial jurisdictions and experts experienced in adhering to the highest global standards. Get to know potential investors better, do your homework and attend industry events to approach investors that are aligned to your business.

4. Beware of setbacks: vulnerabilities in South Africa’s business environment
Findings from the last five years of the SAVCA annual private equity industry survey show that 50% of the capital tended to be offshore and 50% local, however, in recent years we have seen more local capital as the local pension fund industry started to invest more. We’re seeing local capital showing an interest in private equity and infrastructure asset classes. The question is, how do we get more international commercial investors comfortable with South Africa as an investment destination?

We also must consider the FATF greylisting, the weakening rand and climate change factors, such as flooding, which can all affect opportunities for South African entrepreneurs when trying to fundraise and attract investors. Additionally, South Africa competes for capital with the rest of the world. NextGen South African entrepreneurs must consider these setbacks when looking to access foreign capital; it’s vital to match up the appetite of the capital available with the right investment mandate.

Knife Capital is an independent growth equity investment firm focusing on innovation-driven ventures with proven traction. Andrea’s goal is to prove that South African founders and the companies they build can compete on a global level. Simultaneously she wants to prove that venture capital can work as an asset class in South Africa. Both goals require persistence, and an understanding of the why and the how. Andrea sees herself as a business builder and a business partner, inspired by founders who have a deeper motivation and who embrace the journey. She believes people need an ecosystem to succeed and is trying to play a part in building that.

1. Invest in yourself
After all these years in the investment space I have learned that people invest in people. It is better to know who you are dealing with before making any financial investments, to lower the risk of getting it wrong. Sourcing quality deal flow depends on your networks.

South Africa’s VC funding activity decreased by almost 47% as at 1 December 2022, from over US$1-billion in funding in 2021 to about US$500-million in 2022. A combination of factors, mainly the economic downturn and geo-political unrest that has swept through the world since the beginning of the year, appear to be the most likely culprits.

While there is a lot of willingness to invest in South Africa and its entrepreneurs, there is also much uncertainty. Fund managers will need to balance this because it is relatively difficult to raise funds of a significant size purely from South African investors.

For this reason, we tend to look to international Limited Partners (LPs) who see the investment opportunity in terms of investing in South African entrepreneurs, but they’re quite often reluctant to invest in a South African domicile fund. This is where using a credible jurisdiction which specialises in fund domiciliation – where you can find the right skills, reputation, legal and governance frameworks – can be beneficial.

2. Create a strong network
According to the venture capital tracking publication Africa: The Big Deal, Africa was the only continent to record a positive growth venture capital deal value in 2022. However, Nigeria and South Africa, the continent’s two biggest VC markets, both recorded negative growth trajectories.

This shows that you really need to understand that you are part of an ecosystem and as much as you as a fund manager have to be successful, the ecosystem also needs to be successful.

Make sure that you have a sound network of partners who can not only vouch for you, but who can also help and support you. At Knife Capital, we are normally involved in any major ecosystem initiative as we do most investments through network referrals. This is something that, as an investor, you can never stop working on. And personal integrity is a significant part of building this network.

3. Be consistent and persist to differentiate yourself
The funding landscape in South Africa normally comprises of institutional investors such as banks, definitely a very active environment currently since there are several funds that are currently capital raising. There are now more funds coming up, especially first-time funds as well as funds that are trying to raise their second or third round fund – such as Knife Capital’s case. Taking into consideration, the competitive capital-raising market, differentiating yourself and establishing a track record gives confidence to fund managers when they allocate funding.

It’s also about consistence and persistence. For example, setting up the fund through the right kind of structure, making sure that you have ticked every box from a compliance point of view, and that your investment thesis is really differentiated.