dtic, J.P. Morgan announce first equity equivalent investment programme in South Africa
20-08-2021 08:59:00 | by: Pie Kamau | hits: 1259 | Tags:

The Department of Trade, Industry and Competition (the dtic) and financial services firm, J.P. Morgan announced an investment programme that will result in J.P. Morgan becoming the first international investment bank in South Africa to launch a dtic-approved Equity Equivalent Investment Programme (EEIP).

The programme, called the Abadali EEIP, consists of The Abadali Fund, a black business growth fund, and the Abadali Grant. The deployment of J.P. Morgan’s initial R300 million through the Fund and R40 million through the Grant is expected to result in R2 billion worth of financing transactions and create a minimum of 1 000 jobs over the eight-year period of the Abadali EEIP.

The Abadali EEIP intends to generate a positive economic and social impact in South Africa by addressing a critical funding gap for small and medium enterprises that do not meet the traditional underwriting criteria of general commercial banking requirements. It will provide not only funding, but also business and mentorship support to early-stage businesses. The sectors targeted will mainly be the industrial and green economy sectors.

“The funding is intended to support small and medium-sized businesses in sectors of significant public importance, ranging from transactions in the green economy to funding for firms with manufacturing operations. South Africa needs more jobs for young people and deeper levels of industrialisation. This transaction will give a boost to the country’s localisation efforts, creating employment and helping to strengthen economic output. I welcome the commitment to the creation of 1 000 new jobs and the focus on supporting a segment of the market that is not adequately served by the financial system,” said Ebrahim Patel, South Africa’s Minister of Trade, Industry and Competition.

The Abadali EEIP is unique because: 

(a) It addresses the funding gaps experienced across the early-stage business lifecycle of majority black-owned and controlled enterprises. Short- term financing will be provided for businesses with limited track records and no financials and medium to long term financing for businesses that are scaling up and require growth capital or acquisition finance.

(b) It will use debt instruments with flexible terms and conditions that are tailored to the typical needs of early-stage businesses. Examples of these concessionary terms include loan repayment holidays and minimum to no security. These are crucial requirements for early-stage South African businesses that often experience a lead time from initial investment until their revenue and cash flows can ramp up to service loan repayments. These businesses also traditionally have capital-light balance sheets which prevent them from providing sufficient security for traditional finance.

(c) dJP. Morgan has already committed and made the funds available to the Abadali EEIP, which will allow for applications to be accepted immediately. The Abadali EEIP is therefore not exposed to the risks and delays relating to securing and raising of a fund, which may be difficult in the current economic climate.

(d) These businesses will be provided with business support and linked to corporates and potentially J.P. Morgan’s clients for business flow.

(e) The Abadali EEIP will provide wraparound business support, including business case development, legal advice and tender negotiation support that will assist at least 500 early-stage businesses to scale their service and product offering.

J.P. Morgan’s Senior Country Officer in South Africa, Kevin Latter, said: “Today’s announcement is a key milestone for us at J.P. Morgan after more than two years of constructive engagement with the dtic. What was an aspirational concept at the start of our thinking in 2017 has developed into a structured programme focused on creating sustainable and inclusive economic growth. The South African private sector has great capacity to multiply impact through partnerships, as we are aiming to do with the dtic. Although the current growth rate in South Africa is low and the impediments in the economy well known, now is the time to reinforce and increase our commitment to equality and inclusive growth and work harder across our business to better serve our people, our clients and the communities of South Africa.”

Short-term finance will be provided to businesses with minimal or no initial revenue, with capital requirement of at least R250,000 over one to 12 months. The applications will be efficiently processed, with turnaround of about a week from application to payment. Businesses with no trading history, financials or security will also be considered if they are in the supply chain of large corporates or government. The aim is to develop these SMEs into sustainable business and transfer them into the traditional commercial funding sector.

Medium- to long-term finance will be offered at significantly subsidised rates to businesses with revenue starting from R1 million that require funding for two to five years. The eligible, selected businesses will be majority black owned and managed enterprises with a track record of at least 12 months of trading.

The Abadali Grant will also extend grants of R40 million towards developing black enterprises into sustainable and successful businesses, with a focus on supporting entrepreneurship, and advancing jobs and skills for in-demand sectors like digital and the green economy.

The Abadali Fund will be overseen by J.P. Morgan and will be administered by Masakhe Partners, a joint venture between Edge Ventures, an established fund manager, and ProfitShare Partners, a successful fintech short-term capital solutions partner, both of which are majority black owned and controlled. J.P. Morgan will manage the Abadali Grant.