The story of Futuregrowth’s Structured Empowerment Fund (SEF) is inextricably linked to the story of the new South Africa. It is also a tale of persistence and determination - leaving no stone unturned to realise value for the investors in this trailblazing portfolio.
Striving to change history with finance
Those who were around in the 1990s will remember the inception of Black Economic Empowerment (BEE) as a central pillar of the then Reconstruction and Development Programme (RDP), aimed at addressing the economic imbalances of the apartheid era.
Futuregrowth was launched as a product within Southern Asset Management in 1994 with a small suite of investment funds focused on social development and empowerment. The vision (in line with the RDP) was to create a channel for pension funds to invest in disadvantaged communities and national development. As such, it was the first socially-oriented fund to be launched in South Africa.
Against this backdrop, the SEF was launched in 1995, as one of the earliest initiatives by the private sector to facilitate the transfer of equity from white-owned companies to black people or black-owned entities.
The life, achievements and demise of the SEF
When the SEF was set up, BEE equity funding was an unknown arena. Nonetheless, within 18 months of its inception the fund had attracted investor contributions of more than R1 billion (in 1995 money) - and after 30 months it held assets valued at R1.5 billion.
Between 1995 and 2000, the SEF funded 46 special purpose vehicles and eight direct equity investments in emerging empowerment groups. Of these, 28 different empowerment groups were beneficiaries of the funding. More than 100 emerging black entrepreneurs were directly empowered - and were put in a position to benefit from the second and subsequent rounds of South African empowerment deals.
Just as the concept of BEE inevitably evolved, so did the nature of the new “first wave” BEE investment models and instruments. By 2001, the SEF had made good returns, meeting the benchmark for the investors who had invested at inception and had held on to their full investment until then. However, as the participants in the BEE deals were given options that only had value if the purchased shares appreciated above the debt used (plus interest) – and with the stock market crash in 1998 and faltering economic growth - this debt-funding model proved unsuccessful in the end. Because there was usually no purchase by the BEE groups, there was also insufficient risk sharing, and, in many cases, there was ultimately no actual, permanent black ownership.
In keeping with many of the funding vehicles set up during the first wave of BEE, the SEF was put into wind-down early in 2001. This made way for a more robust fund model with more participative deal structures, namely, the Futuregrowth Development Equity Fund (DEF), which many of the SEF investors chose to move into. The lessons learned during the first wave were put to good use, and the DEF continues to thrive to this day.
It must be noted, although many first wave BEE deals failed, many prominent black-controlled companies and black tycoons emerged from these transactions, leading to the rapid growth and success of new black corporations – making this a significant chapter in the history of the new South Africa.
Actively adding value during the SEF liquidation and beyond
Futuregrowth had created the SEF for a specific purpose and was in it for the long term. It was something new and a lot of value was created for the original shareholders. The change in the environment demanded that a new model be developed. Thus, the SEF was closed to new investments in February 2001, after which the unwinding of the complex funding structures and subsequent disposal of the underlying assets began.
Active management of the fund’s investments continued, and, in some instances, this involved taking control of investee companies’ business operations. Every avenue, no matter how complex, was pursued to extract maximum value from each asset during the winding down process. Litigation in certain specific cases also resulted in additional value being recovered for the fund’s investors.
Regular repayments of investors’ capital were made between 2001 and 2008, resulting in the fund achieving an internal rate of return of 26% over the liquidation period, with the final payment made to unit holders in January 2008. This outcome was achieved by staying in the process for the long haul and putting in the effort, while remaining true to the BEE mandate of the SEF.
Even after liquidation and fund closure, Futuregrowth continued to administer the remaining assets in the portfolio, which were marked down to zero value at that time. This was done for no fee, but as part of our fiduciary responsibilities as an asset manager. All possible opportunities were pursued: some assets were unwound and liquidated, and some were repositioned and sold. This was a slow and uncertain process – but further value was recovered for the clients in the end.
The final chapter closes
Now, more than 13 years later, it has finally been decided that there is no reasonable prospect of retrieving any further value from the few remaining assets, particularly given the current economic climate. Therefore, the final payment to the SEF investors is currently under way. Futuregrowth has made all diligent efforts to track down the original SEF investor funds – which has been complicated by the mergers of entities and funds over the 20 years since the fund closed. Nevertheless, this final distribution will bring closure to a significant chapter in South Africa’s financial history, as well as Futuregrowth’s own founding story. The SEF was one of Futuregrowth’s founding products, and its story is one we are honoured to share.
PDF version, Perseverance pays: The Futuregrowth Structured Empowerment Fund
