Media & News

MEDIA RELEASE: SAVCA Responds to Medium-Term Budget Policy Statement

The Southern African Venture Capital and Private Equity Association (SAVCA) agrees with the concerns raised by Finance Minister Tito Mboweni and the current economic outlook as outlined during Wednesday’s Medium-Term Budget Policy Statement (MTBPS).

While SAVCA welcomes the transparency around the long-term effects of the COVID-19 pandemic and the continued strain which the fiscus is under, it is clear that there is a long road ahead to ensure the economy recovers. The private equity and venture capital sectors stand ready to support all efforts for economic recovery through their investment and interventions in companies outside of the listed sphere, and mainly in small and medium-sized businesses seeking to grow and recover.

These sectors can provide much needed relief to ease government spending and increase job creation through attracting local investment to the asset class and foreign direct investment into the country. This will not only assist with closing the funding gap which the country currently faces, but will also allow the economy to climb out of a downward economic spiral, as investment can be directed to where it makes the largest impact.

Amendments to Regulation 28

SAVCA welcomes the announcement made that the government has initiated a process to review Regulation 28 to make it easier for retirement funds to increase their investment allocation into infrastructure. It is a step in the right direction and SAVCA and its members stand ready to serve to support government with this process.

The 2020 Private Equity Survey reported that R25.4 billion was invested by SAVCA members in 2019, with the top two sectors being infrastructure and energy. Investments made into infrastructure accounted for 34.7% of the total investments, indicating the increasing role private equity plays in infrastructure investments.

In June, SAVCA released a position paper on Regulation 28 speaking to the current restrictions in place which constrain the investments which pension funds can make into private equity as an asset class. The SAVCA paper proposed recognising private equity as a separate asset class and instead of the catch all “alternative investments” category and over time increasing the 10% allocation limit which is currently in place.

We do not view Infrastructure as a separate asset class, but rather cutting across multiple asset classes, including private equity. government’s proposed amendment may increase the allocation of funds into infrastructure, but we should not lose sight of the significant role which private equity can play when it comes to investing directly in the real economy and supporting small and medium-sized enterprises (SMEs) in their growth and recovery post COVID-19.

SMEs have been particularly hard hit during this crisis but are also fastest creators of new jobs, which could underpin the country’s much-needed economic recovery and growth. SMEs should not be excluded from the conversation about economic growth.

Loop Structure Constraints

We note that the full ‘loop structure’ restriction has been lifted to encourage inward investments into South Africa, subject to reporting to Financial Surveillance Department of the South African Reserve Bank (FinSurv) as and when the transaction is finalised.

This reform will be effective from 1 January 2021 for companies, including private equity funds, on the condition that the entity is a tax resident in South Africa.

SAVCA has for many years engaged with National Treasury and the SARB on the negative impact that restrictions on ‘loop structures’ have particularly as it relates to the ability for high growth South African companies with global growth prospects to internationalise and expand their offering and indeed to raise foreign capital.

These companies are often required by international funders to establish a foreign-domiciled holding company from which to operate their international business and through which foreign investors are prepared to fund their investments in the South African company.

We are therefore pleased to see the removal of the restrictions on ‘loop structures’ but are concerned about a requirement for the foreign holding companies to be tax resident in South Africa, if that is what is intended by the statement in the explanatory memorandum, that this “reform will be effective from 1 January 2021 for companies, including private equity funds, provided that the entity is a tax resident in South Africa”.

For most jurisdictions in which a holding company would be domiciled, such as the United States where much of the global venture capital and growth capital derives, and for most investors, this requirement is quite simply a non-starter.

In our view, there is little or no benefit to exchange control reform if this requirement is made as there will be no material take-up and the dampening effects on entrepreneurial activity in South Africa will continue.  SAVCA is fully supportive of retaining benefits to the fiscus and are of the view that tax regulations sufficiently protect South Africa in the transactions described above.

In fact, by enabling founders and their private equity or venture capital investors to remain invested through the full growth journey of South Africa’s talented entrepreneurs, the returned proceeds on an eventual realisation at full value will bring much needed flows back to South Africa for reinvestment. We also create the stories that encourage the next generation of entrepreneurs to aspire and take the risks to build businesses in our country.

We would therefore urge government to review this stumbling block which will hinder more foreign direct investments into high growth businesses with the ability to create significant capital gains, reinvestment and jobs in South Africa.

COVID-19 Loan Guarantee Scheme

Regrettably SAVCA members report that since the last regulatory changes to the Covid-19 government loan guarantee scheme, there has been little or no uptake or changed behaviour by the banks after the regulatory changes.

The intended relief and stimulus has not found its intended recipients. In many instances businesses are no longer even applying as they have little confidence of receiving the necessary support on terms suitable to the environment in which they are operating.

Personal surety remains largely required and growth businesses which invest capital for growth have been summarily excluded from the relief. Many of these businesses will survive but the stimulus and relief needed to drive an actual recovery and growth – this opportunity has been missed. We note that National Treasury intends reviewing the scheme again following consultation with the Banking Association and South African Reserve Bank.

We are however concerned that consultation has not been embraced with the intended recipients of this relief and the channels that customarily support these businesses.  Lending criteria has not changed and we see no reason why it would.

We are of the view that National Treasury should consider new approaches like alternative lenders and private equity and venture capital as a new channel, more capable of making the necessary risk-return trade-offs and focusing on the future and not just the immediate recovery of a loan.

Private Equity assisting with positioning South Africa as a Financial Centre

The MTBPS also outlined further measures to assist South Africa in becoming an investment and financial hub for Africa. SAVCA is in full support of this drive and believes private equity and venture capital could significantly contribute to the hub. The benefits that private equity and venture capital can bring to the table are as follows:

•            Job creation on the basis that the ecosystem around private equity in South Africa is extensive, with a strong legal services industry, audit and due diligence services, consulting firms and back office services. These complement other competitive factors like a low-cost business environment, English language and availability of skills domestically;

•            Providing a competitive asset holding structure in South Africa would slow down the flow of entities that are registered by South Africans in other jurisdictions by providing an attractive alternative at home, which can attract back some of the activity that currently occurs offshore. In time, South Africa can build its intermediation role in investment flows from the rest of the world into assets on the rest of the continent and beyond;

•            It represents no cost to the fiscus nor investment requirement from the government, but would result in economic growth and job creation.

SAVCA continues to make itself available for any engagements with government in order to assist with helping to uplift the economy and help mitigate the negative long-terms effects of the global Covid-19 pandemic which our country is facing.

We volunteer our time, resources and access to broad swathes of the economy beyond the listed base of companies and would be pleased to contribute to the Operation Vulindlela on fast tracking structural reforms to bring practical contributions to the forefront as it relates to the real economy and growing SMEs.

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 in excess of R185 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, providing relevant and insightful research, offering training on private equity and creating meaningful networking opportunities for industry players.

For more, visit our website:

Follow us on Twitter @SAVCAssociation and LinkedIn