The Eskom Pension and Provident Fund (EPPF) launched a debt fund designed for South African Small Medium Enterprises (SMEs). The South African SME Debt Fund will be managed by Sanlam Investments, following its appointment as the external fund manager.
South African SMEs represent most businesses and employ most of our workforce. The debt fund therefore seeks to help SMEs with high growth potential and stable business strategies through loans priced at a maximum interest rate of prime with an equity upside to yield a further 5% return. The loans can be repaid within a maximum period of 60 months.
The Eskom Pension and Provident Fund established the SME debt fund and committed R350 million to the investment pool while Sanlam made a co-investment of R50 million.
“The EPPF recognises that it operates within an environment with many social challenges. We believe the EPPF has a role to play in social and economic transformation in the country. In line with the EPPF’s purpose to help prepare our members – and the South African economy at large – for a better financial future, we are pleased to launch this debt fund to assist SMEs,” explains Shafeeq Abrahams, Chief Executive and Principal Officer at the EPPF.
The debt fund will prioritise businesses that have been in existence for at least three years and have shown signs of profitability before the COVID-19 pandemic. It will also prioritise businesses in the manufacturing and agro-processing sectors, among other criteria.
“We want to focus on the manufacturing and agro-processing sectors because it has the potential to employ so many people, creating a multiplier effect that strengthens the economy. With South Africa’s current unemployment rate at 35.3 percent in the fourth quarter of 2021, we need to do better collectively as a nation. We need to reduce our reliance on imports, spur the growth of the economy and ensure food security for all. At the same time, it provides the required investment returns to enable the Fund to pay benefits to its members,” says Abrahams.
According to Nersan Naidoo, CEO of Sanlam Investments, the fund aims to help businesses that traditional lending institutions currently underserve. “We have seen time and again that the traditional methods of providing debt financing to SMEs are ineffective in a struggling economy. Most lenders are geared towards the needs and risk profiles of larger companies. This often excludes smaller businesses – and especially black-owned companies. That is why we believe there is a need to take a more flexible approach.”
“In order to manage risk, the loans will be amortised and each company will be requested to provide security for the loans. Once the loan is fully repaid, the fund will participate in the profits of the SME to achieve the envisaged return,” adds Abrahams.
Commenting on Sanlam Investment’s appointment as the external fund manager, Abrahams notes that Sanlam Investments already has extensive experience managing debt funds for the SME market. “Sanlam has a 10-year track record in SME direct lending in South Africa, and currently manages around R2.3 billion in SME debt strategies. We believe their deep understanding of the local SME sector will be instrumental in growing this endeavour.”
SMEs are undeniably the lifeblood of the South African economy, which is why it is vital to offer funding options that cater to their specific challenges. “If our economy is going to recover, a large part is going to be because of our country’s small businesses. By offering them the kind of support they truly need right now, we can ensure a better future for our whole country,” adds Naidoo.