BRIEFING TO THE PORTFOLIO COMMITTEE ON TRADE AND INDUSTRY

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BRIEFING TO THE PORTFOLIO COMMITTEE ON TRADE AND
INDUSTRY

• Presenters
• Ms Philisiwe Buthelezi CEO
• Mr Frencel Gillion CIO
• Mr Victor Mabuza Executive Asset Management
• Mr Andrew Wright COO
• Khetiwe Tshabalala Senior Investment Associate
• 28 February 2007

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TABLE OF CONTENTS

1. MISSION, MANDATE AND OBJECTIVES
2. CURRENT STRATEGIC PLAN AND STRUCTURE
3. ASSESSMENT OF THE BEE FUNDING ENVIRONMENT
4. FUND MANAGEMENT DIVISION
5. ASSET MANAGEMENT DIVISION
6. BUDGET
7. CONCLUSION
8. CASE STUDIES

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TABLE OF CONTENTS

1. MISSION, MANDATE AND OBJECTIVES
2. CURRENT STRATEGIC PLAN AND STRUCTURE
3. ASSESSMENT OF THE BEE FUNDING ENVIRONMENT
4. FUND MANAGEMENT DIVISION
5. ASSET MANAGEMENT DIVISION
6. BUDGET
7. CONCLUSION
8. CASE STUDIES

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ACCELERATED DELIVERY
The National Empowerment Fund (NEF) is the
catalyst of broad-based Black Economic
Empowerment in South Africa. We enable, develop,
promote and implement innovative investment and
transformation solutions to advance sustainable
Black economic participation. NEF Mission
Statement
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WHAT DOES NEF DO AND WHY?
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TABLE OF CONTENTS

1. MISSION, MANDATE AND OBJECTIVES
2. CURRENT STRATEGIC PLAN AND STRUCTURE
3. ASSESSMENT OF THE BEE FUNDING ENVIRONMENT
4. FUND MANAGEMENT DIVISION
5. ASSET MANAGEMENT DIVISION
6. BUDGET
7. CONCLUSION
8. CASE STUDIES

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NEF STRATEGIC FOCUS
Broad Based Black Economic Empowerment The Codes
of Good Practice
Priority Sectors Arts Culture,
Tourism, Textiles, Agro Processing Automotive,
Chemicals, ICT, Aerospace Film Industry, Exports

• Government Aims
• . Access to Finance
• 2. Job creation
• 3. Geographic spread
• 4. Women empowerment
• 5. Integrated manufacturing economy
• 6. Efficient, fast flexible economy
• 7. Diversity of enterprise
• 8. Skills transfer development

The dti Objectives
NEF Act Objectives
Accelerated Shared Growth Initiative for SA
ASGI - SA 6 GDP Growth 10 Investment Growth
10 Export Growth 2014
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HISTORIC BUILD UP
PERIOD PLANNING ACHIEVEMENT
Years ending 31 March 2003 Established under National Empowerment Fund Act 105 of 1998 Establishment of NEF Ventures Fund with IDC
Year ending 31 March 2004 Transfer of MTN and Uthingo share set asides
30 May 2004 Strategic Plan approved by Minister and the dti prior to launch Launched current products R2 billion allocated by NT for capitalisation - 5 yrs to 2009
Year ending 31 March 2005 Strategic Plan approved by DG and DDG (dti) Business Plan approved by Acting DG (dti) First capital drawdown of cash of R150M First investments disbursed
APPOINTMENT OF CURRENT NEW EXECUTIVE MANAGEMENT AND BOARD OF TRUSTEES APPOINTMENT OF CURRENT NEW EXECUTIVE MANAGEMENT AND BOARD OF TRUSTEES
Year ending March 2006 Draft Rolling Strategic Plan Second capital drawdown of cash of R370M NEF disburses in excess of R200 million Approval of 1st retail issue
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HOW DOES THE NEF DO THIS?

• KEY OBJECTIVES OF THE NEF
• Promote and support business ventures pioneered
  and run by black people
• Promote the understanding of equity ownership
  among black people
• Provide black people with direct and indirect
  opportunities to acquire share interests in State
  Owned and private business enterprises
• Encourage and promote investments, savings and
  meaningful economic participation among black
  people.

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THE REVISED STRATEGIC PLAN

• To create a prudently and effectively managed
  fund with a time horizon of at least 10 years
• To ensure broad-based and sustainable
  empowerment
• To act as a catalyst to stimulating BB BEE and
  hence economic growth
• To avoid duplicating existing offerings by other
  operating DFIs
• To work in partnership with both public and
  private sectors
• To maximise the empowerment dividend in lieu of
  the financial dividend
• To protect the capital base of the NEF and
  provide a real return.

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NEFS PERFORMANCE CRITERIA The Empowerment
Dividend
The assessment of impact is not driven only by
financial returns but by measurement in terms of
The Empowerment Dividend made up as follows

• Broad Based Black Economic Empowerment
• Ownership, management control, employment
  equity, skills etc
• Black Women Empowerment
• Job Creation
• Growth Sectors
• Geographic Spread
• Investment Return

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TABLE OF CONTENTS

1. MISSION, MANDATE AND OBJECTIVES
2. CURRENT STRATEGIC PLAN AND STRUCTURE
3. ASSESSMENT OF THE BEE FUNDING ENVIRONMENT
4. FUND MANAGEMENT DIVISION
5. ASSET MANAGEMENT DIVISION
6. BUDGET
7. CONCLUSION
8. CASE STUDIES

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BEE MARKET CHALLENGES

• BEE market challenges include
• major funding gaps R772 billion to R2 trillion
• lack of collateral by BEE groups
• limited specific industry knowledge / management
  experience
• Lack of bankable business plans
• limited or no equity contribution
• limited knowledge of financial market, financing
  structures and financial investments

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THE BEE COMPETITIVE ENVIRONMENT

• Banks faces similar challenges as NEF when
  financing BEE
• Banks ringfence higher risk products
• Cross subsidise product offerings
• Major focus on large leveraged transactions
• Financial Sector Charter (FSC) points

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THE BEE COMPETITIVE ENVIRONMENT (Cont.)
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THE BEE COMPETITIVE ENVIRONMENT (Cont.)

• DFIs
• Transaction sizes vary greatly
• Only IDC offers a Contract Finance Product
• Khula and UYF partners with BP and Banks to
  rollout its products
• BP offers most comprehensive post investment
  support products
• BP leaders in SME financing

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THE BEE COMPETITIVE ENVIRONMENT (Cont.)

• Private Equity Fund
• Comprise captive and independent Fund Managers
• BEE is a key driver of deal flow (R3 billion in
  2005)
• Preference for later stage, buy-out funding
• Limited subsidised funding to BEE groups

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Additional R151m capital allocation
Appointment of new Board of Trustees
Appointment of CEO
Launch of funding products
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Additional R151m capital allocation
Appointment of new Board of Trustees
Appointment of CEO
Launch of funding products
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FUND MANAGEMENT PIPELINE
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FUND MANAGEMENT STRATEGY DIVISIONAL OVERVIEW
Strategy is aimed addressing the following issues Strategy is aimed addressing the following issues Strategy is aimed addressing the following issues
Internal External
Clarify focus areas and broad investment criteria Enhance risk management, thereby driving down impairments Facilitate greater efficiency and turnaround times Facilitate the deepening of skills / product specialisation in the two funds Accelerate delivery on NEF mandate Address issues of access to finance Position NEF as the pre-eminent provider of BEE financing solutions Position NEF as a catalyst for leveraging commercial banks and other DFI funding for BEE
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TABLE OF CONTENTS

1. MISSION, MANDATE AND OBJECTIVES
2. CURRENT STRATEGIC PLAN AND STRUCTURE
3. ASSESSMENT OF THE BEE FUNDING ENVIRONMENT
4. FUND MANAGEMENT DIVISION
5. ASSET MANAGEMENT DIVISION
6. BUDGET
7. CONCLUSION
8. CASE STUDIES

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FUND MANAGEMENT DIVISION

• As a facilitator of the Codes of Good Practice
  of the Broad-Based Black Economic Empowerment Act
  (the Codes), to support the pillars of black
  enterprise by providing finance and financial
  solutions through the Fund Management Division
  across a range of sectors and stages of business

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PRODUCTS TO FACILITATE BUSINESS GROWTH
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NEF FUND MANAGEMENT STRUCTURED INTO FOCUSED FUNDS
Chief Investment Officer

• NEF iMBEWU FUND
• Entrepreneur support
• (ltR3m)
• Rural Community
• Proc. Contracts

• NEF CORPORATE FUND
• Entrepreneur support
• (gtR3m)
• Capital Markets
• Liquidity Warehousing

• iMBEWU FUND
• Entrepreneur support
• Rural Community
• Proc. Contracts

• CORPORATE FUND
• Entrepreneur support
• Capital Markets
• Liquidity Warehousing

Legal Services
Pre-Investment Management
Post-Investment Management
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NEF STRUCTURED INTO FOCUSED FUNDS

• The NEF iMbewu Fund
• provides debt finance from R250 000 to R3 million
  (in exceptional cases up to R20 million for
  Procurement Contracts and Rural Community
  Development) for start-up, expansion and equity
  transformation products
• The NEF Corporate Fund
• provides complex investment debt and equity
  solutions from R3m to R50m for all products

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INVESTED PORTFOLIO BY PRODUCT 31 Dec 2006
(R) Value By Number
(R) Value By Value By Number By Number
Transformer R 180m 41.6 10 12.7
Capital Market R 74m 17.0 4 5.1
Start-Up R 61m 14.1 39 49.4
Liquidity Warehousing R 60m 13.8 3 3.8
Expansion R 38m 8.8 17 21.5
Contracts R 19m 4.3 5 6.3
Rural Community R 1m 0.3 1 1.3
R 433m 100 79 100
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INVESTED PORTFOLIO BY REGION 31 Dec 2006
  (R) Value By Value By Number By Number
Gauteng R 222 m 51.3 46 58.2
Western Cape R95 m 22.0 14 17.7
Eastern Cape R78 m 18.0 7 8.9
Kwa Zulu Natal R 34 m 7.8 7 8.9
Limpopo R3 m 0.7 3 3.8
Mpumalanga R 0.4 m 0.1 1 1.3
Free State R 0.25 m 0.1 1 1.3
Northern Cape 0 0.0 0 0.0
North West 0 0.0 0 0.0
R433 m 100 79 100
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INVESTED PORTFOLIO BY SECTOR 31 Dec 2006
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INVESTED PORTFOLIO BY SECTOR 31 Dec 2006
SECTOR (R) Value By Value By Number By Number
Construction R 85 m 19.5 9 11.4
ICT Media R 74 m 17.0 10 12.7
Food Agri Processing R 51 m 11.9 15 19.0
Tourism Entertainment R 47 m 10.8 4 5.1
Mining Services R 45 m 10.5 2 2.5
Manufacturing R 45 m 10.4 6 7.6
Printing Services R 14 m 3.3 5 6.3
Wood Paper Industry R 13 m 2.9 4 5.1
Textile Industry R 11 m 2.6 3 3.8
Motor Industry R 11 m 2.5 3 3.8
Engineering R 10 m 2.2 4 5.1
Note Only main invested sectors above 2 by
value are reflected above
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INVESTED PORTFOLIO BY INVESTMENT STRUCTURE
(Rm) Value By Value By Number By Number
Associate Investment (Loan Equity) 309 71 22 28
Loan 112 26 54 68
Equity 13 3 3 4
433 100 79 100
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IMPAIRMENTS BY STAGE OF INVESTMENT31 Dec 2006
Total Invested (Rm) Total Impairment (Rm)
Start-up 61 36 50
Expansion 38 23 61
Transformer 180 2.5 0
Contracts 19 5.5 29
Rural Community 1 1 100
Capital Market 74 1 0
Liquidity Warehousing 60 30 50
433 98 23
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FUND MANAGEMENT RESERVES - 2007/2008
Total FMD iMbewu Fund Corporate Fund

Rm Rm Rm
2006/2007 Allocation 459 205 254
Projected 2006/2007 performance 352 94 258
Disbursed up to 31/12/2006 156 26 130
Projected disbursements (4th Quarter) 196 68 128
Undrawn Surplus 107 111 (4)
2007/2008 Budget allocation 450 150 300
Total available capital 557 261 296
Less Approved / potential transactions in current pipeline to be invested in 2007/2008 (214) (120) (94)
Available for other deals in 2007/2008 332 136 195
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TABLE OF CONTENTS

1. MISSION, MANDATE AND OBJECTIVES
2. CURRENT STRATEGIC PLAN AND STRUCTURE
3. ASSESSMENT OF THE BEE FUNDING ENVIRONMENT
4. FUND MANAGEMENT DIVISION
5. ASSET MANAGEMENT DIVISION
6. BUDGET
7. CONCLUSION
8. CASE STUDIES

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ASSET MANAGEMENT DIVISION

• By structuring accessible retail savings
  products for black people through the Asset
  Management Division, which is a custodian of
  certain equity allocations in State Allocated
  Investments (SAIs), the NEF aims to foster a
  culture of savings and investment amongst its
  beneficiaries.

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The South African consumer challenges

Intimidating locations Complex products Non
conducive markets
Use of accessible channels and Media Access to
retail brokers Timeous announcements
Distrust formal institutions No financial
planning Prefer holding cash e.g. storing money
under the bed
Environment
Distribution and access
Culture
Very little education and financial
Intimidated by financial jargon
Medical costs eats up disposable
income Reduces pool of targeted
investors Disillusioned and disgruntled Nation,
that do not see a need to save,
Affordability, Minimum subscription Diver
sity
Education
HIV/AIDS
Costs
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2006 Survey of Financial
usage
2005 2006 people with bank accounts increased
by 1,5 m to 15.9m
2 invest in a savings or investment policies
Savings investment knowledge is limited
67 do not understand how interest rates work
Emergency
Funeral Costs
Food
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2006 Survey of Financial usage
Overall people prefer having safe investment and
Earning a low return
On average, whites invest more and use formal
investment structures
Blacks are twice as likely to belong to a Stokvel
than a retirement or annuity fund
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Gaps Identified

• Over subscription in the case studies
  demonstrates growing appetite for
  non-conventional retail financial products
• Savings and investment diversification invites
  for more products targeted at the individual
  consumer
• There is an increasing need for inflation beating
  products by all segments
• Information irregularity between consumers
  product providers, the underlying problem is
  financial illiteracy
• Distribution of financial services and products
  is a key problem
• The backlog and gaps in broad based empowerment
  dictates that more focused retail offers be made
  to Black people

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Interventions to be explored

• Continuous Education - Providing focused higher
  quality information
• Accessible institutions and access to brokers,
  service providers - Monitor distribution channels
  more effectively at a high level - Distributors
  encouraged to take a closer look at the
  information they receive from product providers
• Customer focused solutions less complex
  products - Designing products that are client
  focused
• Channeling increasing consumer expenditure
  towards savings and investment
• Acceleration of Broad Based Empowerment
• Designing innovative products
• Undertake better post-sale analysis of the
  performance of products

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Designated State Allocated Investments

• Asset Shareholding Status
• MTN Group 1.5 received by NEF
• Telkom 5 not yet received
• SAA 5 not yet received
• ACSA 10 not yet received
• Connex Travel 10 not yet received
• Viamax 10 not yet received
• Syncat 10 not yet received
• Transwerk Perway 10 not yet received
• Sentech 10 not yet received
• Uthingo 5 received by NEF
• SAFCOL 10 not yet received

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BEE RETAIL PRODUCTS

• Current BEE Retail Product Initiatives

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TABLE OF CONTENTS

1. MISSION, MANDATE AND OBJECTIVES
2. CURRENT STRATEGIC PLAN AND STRUCTURE
3. ASSESSMENT OF THE BEE FUNDING ENVIRONMENT
4. FUND MANAGEMENT DIVISION
5. ASSET MANAGEMENT DIVISION
6. BUDGET
7. CONCLUSION
8. CASE STUDIES

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OVERVIEW OF CAPITALISATION
millions Fund Management Operations TOTAL
2003/4 R35 R25 R60
2004/5 R150 R15 R165
2005/6 R371 R40 R411
2006/7 R495 R66 R561
TOTAL R1 051 R146 R1 197
R1 035
INVESTED COMMITTED R635 R400
BUDGET BUDGET BUDGET BUDGET
2007/8 R646 R143 R789
2008/9 R965 R107 R1 072
2009/10 R978 R116 R1 094
TOTAL MTEF R2 589 R366 R2 955
MTEF YTD R3 640 R512 R4 152
R151 m
R380 m

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Budget v MTEF Operating Costs
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Budget v MTEF Operating Costs and Investment
Capital
2006/7 2007/8 2007/8   2008/9 2008/9   2009/10 2009/10
Budget Budget MTEF   Budget MTEF   Budget MTEF
  R'm R'm   R'm R'm   R'm R'm
Operating budget 66 125 102 134 109 145 117
Capex 1 18 6 - - - -
Operating budget 67 143 108 134 109 145 117
Investment capital              
Imbewu Fund investment budget 200 150 244 250 355 350 368
Corporate Fund investment budget 247 300 357 365 430 475 430
Post Investment Support - 8 - 8 - 9 -
Strategic Projects 36 73 120 250 150 211 150
BEE Retail 45 115 40 - 30 - 30
Total Capital 528 646 761 873 965 1,045 978
TOTAL FUNDING REQUIREMENTS 595 789 869 1,007 1,074 1,190 1,094
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TABLE OF CONTENTS

1. MISSION, MANDATE AND OBJECTIVES
2. CURRENT STRATEGIC PLAN AND STRUCTURE
3. ASSESSMENT OF THE BEE FUNDING ENVIRONMENT
4. FUND MANAGEMENT DIVISION
5. ASSET MANAGEMENT DIVISION
6. BUDGET
7. CONCLUSION
8. CASE STUDIES

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CONCLUSION

• The board of trustees and management are clear on
  and committed to the mandate of the NEF
• The NEF has an important mandate which is to
  drive the transformation of the South African
  economy through the implementation and funding of
  government BB BEE policy
• The new board of trustees and management team has
  successfully advanced the NEF to a positive
  position in terms of track record, delivery and
  obtaining overall stakeholder support from the
  dti, National Treasury and business in general
• Having achieved all of this, management and the
  board of trustees continue to drive the NEF to
  become a most credible and strategic DFI in South
  Africa, an example and an authority in the
  effective implementation of transformation
  policy, beyond the Republic of South Africa.

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TABLE OF CONTENTS

1. MISSION, MANDATE AND OBJECTIVES
2. CURRENT STRATEGIC PLAN AND STRUCTURE
3. ASSESSMENT OF THE BEE FUNDING ENVIRONMENT
4. FUND MANAGEMENT DIVISION
5. ASSET MANAGEMENT DIVISION
6. BUDGET
7. CONCLUSION
8. CASE STUDIES

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