Private equity industry asks Government to ensure COVID-19 Guarantee Scheme gets relief and stimulus to where it is needed most.

Many small and medium-sized enterprises (SMEs) breathed a brief sigh of relief in April, when President Cyril Ramaphosa announced a R200 billion Government COVID-19 loan guarantee scheme intended to support businesses with an annual turnover of less than R300 million, as part of efforts intended to help keep the economy afloat.

Growing evidence, however, suggests this relief was short-lived, as many businesses in need were turned away or granted loans on onerous unworkable terms. The Supplementary Budget announcement indicated revisions would be made to make the relief more accessible, but the only change specified was that the turnover threshold will be lifted.

In response to this, CEO of the Southern African Private Equity and Venture Capital Association (SAVCA), Tanya van Lill notes that while COVID-19 relief is also needed for companies with a turnover in excess of R300m, it is vital that a mechanism is put in place to ensure funding is still allocated to SMEs – those with a turnover of less than R300m. 

“SAVCA surveyed members and found that although 43% of portfolio companies with revenues less than R300 million were in need of the COVID-19 loan facility, only 28% of those that applied for funding were granted and drew down on a facility – and many did not apply at all, given the onerous eligibility criteria.

“For the remaining 72% of companies that required funding, but have not yet been granted these facilities, the top reasons provided included the company not being profitable prior to COVID-19 due to a growth strategy, or not meeting the personal suretyship requirements for directors and shareholders.”

CEO of private equity firm, Sanari Capital, Samantha Pokroy adds that the lenders and lending criteria are far too risk-averse to be effective in saving businesses and jobs in this COVID-19-induced economic crisis.

“Although banks have extensive distribution, their inflexible credit models and conservative lending culture means they may not be best suited to the task at hand. This has been compounded by requirements of the Reserve Bank, in which the guarantee scheme backing can be pulled where credit processes have not been followed by the banks in their ordinary course.”

Pokroy states that, in her experience, there has been no difference between a normal loan and a COVID-19 Government-guaranteed loan, which defeats the object entirely. “The argument for personal surety in credit application processes is to test for alignment and commitment of owner managers. The philosophy is that owner management will know better than a bank, what the prospects are for their business and whether the loan can be repaid. But in these volatile times, this argument holds less water. Owner managers are unable to anticipate the market conditions any better than the rest of us, and therefore personal surety does not provide the type of reassurance it may have under other conditions.

“In fact, it requires individuals to decide between the risk of losing their homes and trying to keep their businesses open and staff employed. They would have to make this unviable trade-off based on conditions that are completely out of their control.

“Rather, the purpose of the guarantee scheme should be to underwrite this risk with the full knowledge of the likely costs arising from the fact that, notwithstanding best efforts by all parties, not every business will survive and not every loan will be recoverable. But jobs will be saved, families will be provided for, consumer and business expenditure will continue, and this will play a critical role in the recovery of our economy,” says Pokroy.

SAVCA recommends the following amendments to the loan guarantee scheme:

1.           Dedicate a minimum amount of loan funding deployment under the guarantee scheme for companies with turnover less than R300 million and implement targets and incentives for bank deployment;

2.           Include growth companies that are not yet profitable in the scheme;

3.           Remove the requirement for personal suretyships / guarantees; and

4.           Consider alternative lending channels and blended finance options, which may include first loss funding for private equity funding in businesses with turnover less than R300 million.

In order for South Africa to weather the COVID-19 economic crisis, and be able to create growth and jobs in the future, van Lill says that the country needs all the financial stimulus mechanisms that Government has put in place to be successful. “SAVCA urges Government to review the conditions and requirements included in the guarantee scheme, as set out above, to ensure that it provides the necessary relief to businesses in desperate need of assistance.”

“It is critical that this be done urgently as we believe a serious secondary impact is likely to be experienced across a wider spectrum of sectors in the coming months,” Pokroy concludes.

-ENDS-

About SAVCA:

The Southern African Venture Capital and Private Equity Association (SAVCA) is the industry body and public policy advocate for private equity and venture capital in Southern Africa. SAVCA represents about R184 billion in assets under management through 170 members that form part of the private equity and venture capital ecosystem. SAVCA promotes the Southern Africa venture capital and private equity asset classes on a range of matters affecting the industry.

SAVCA also provides relevant and insightful research, offers training on private equity and creates meaningful networking opportunities for industry players.

For more, visit our website: https://www.savca.co.za/

Follow us on Twitter @SAVCAssociation and LinkedIn

About Sanari Capital:

Sanari Capital is a private equity firm focused on high growth lower- and mid-market investments emanating mainly from South Africa with regional and global scalability. Founded in 2013, Sanari specialises in founder-run, owner-managed and family-owned businesses, bringing an emphasis on digital and human enablement to unlock business potential. Sanari is a Profit with Purpose firm, promoting inclusive growth whilst delivering superior returns to investors.

Visit www.sanari.co.za and follow us on LinkedIn and Twitter.