Our work

This workstream is focused on enabling onshore listings of non-ZAR denominated instruments on public capital markets, and the holding of non-ZAR currencies as collateral for investors exposed to derivatives.

Context

Four issues have motivated this workstream:

• South Africa has the most sophisticated financial ecosystem in Africa. This positions it well to intermediate in financial flows into and out of the region.

• At the same time, South African investors aim to diversify their portfolios to obtain better risk adjusted returns by incorporated foreign exposure. In line with regulatory reform undertaken since 1994, this has occurred through foreign allowances which allow both institutional and retail investors to transfer money abroad for investment purposes subject to limits. The effect of this approach has been to disintermediate the onshore investment industry.

• South African companies (and others) have raised finance on South African capital markets for investment abroad. Such foreign investment is usually denominated in other currencies, particularly US dollars. This means companies must take on ZAR liabilities for USD assets, creating currency risks on their balance sheets. This encourages South African issuers to raise capital abroad, while discouraging foreign issuers from raising funding on South African capital markets when they require USD.

• Foreign portfolio investors often use derivatives to obtain exposure to South African listed assets. To do so, they are currently required to convert currency, usually US dollars, to ZAR to post as collateral for such positions. On closing out the positions, they are then required to convert the collateral back into USD to repatriate. These two conversions add a layer of costs that damages the competitiveness of South African capital markets. In contrast, many foreign markets allow foreign currency as collateral for derivatives positions.

Objectives:

These four issues appear to be imminently resolvable with the right regulatory reforms and capacity development on shore. Success would enable:

• South African companies to derisk their balance sheets by asset/liability currency matching for foreign investments.

• South African investors and savers to have an onshore mechanism to obtain foreign currency exposure in their portfolios (potentially subject to existing limits).

• Foreign issuers (both debt and equity) to use South African markets as a venue for raising non-ZAR currencies, potentially enabling South Africa to become a hub for regional investment exposures.

• Foreign investors to have cheaper access to South African markets via derivatives improving flows into South African assets.

Ultimately these changes would enable South Africa to be a much more competitive intermediator for issuers and investors with exposure across the Africa, including those within South African and those in the rest of the region.

The workstream is assessing the requirements to enable these changes, including financial institutional infrastructure and regulations.

This workstream is focused on enabling an attractive environment for fund managers in South Africa to manage portfolios of foreign instruments. The main impediment currently is that fund managers are generally required to hold at last 55% of their assets in domestic instruments, and to operate with ZAR as their functional currency. This means that specialist offshore fund managers cannot easily operate from South Africa and choose to domicile elsewhere.

Context

Five issues have motivated this workstream:

• South Africa has the most sophisticated financial ecosystem in Africa. This positions it well to intermediate in financial flows into and out of the region and to host funds that manage assets.

• At the same time, South African investors aim to diversify their portfolios to obtain better risk adjusted returns by incorporating foreign exposure. In line with regulatory reform undertaken since 1994, this has occurred through foreign allowances which allow both institutional and retail investors to transfer money abroad for investment purposes subject to limits. The effect of this approach has been to disintermediate the onshore investment industry.

• The evolution of institutional limits has focused on allowing fund managers to hold a certain proportion of their assets as foreign assets (and conversely hold a minimum percentage as domestic assets). This has meant that it was not possible to operate from South Africa as a 100% foreign assets manager, losing the opportunity to attract fund managers to domicile management of their international portfolios in South Africa.

• Several other jurisdictions have created attractive regimes for fund managers to domicile their activities, attracting both South African fund managers for their offshore activities and other firms intermediating in the global cross-border investment industry.

• The approach of institutional and individual limits has also meant that South African fund managers were compelled to turn away clients when their institutional limits were reached, even though clients had foreign exposure capacity in terms of their limits. Such clients were then compelled to seek out offshore providers to manage their assets, further disintermediating the onshore industry as a result.

Objectives:

These issues appear to be imminently resolvable with the right regulatory reforms and capacity development on shore. Success would enable:

• Fund managers to domicile their managing infrastructure for global fund management in South Africa, including collective investment schemes mancos, general partner private equity fund managers, funds, life offices, LISPs.

• South Africa domiciled funds will be able to intermediate in global capital flows into assets in the rest of Africa and further afield, offering equivalence to competitive funds jurisdictions such as Mauritius, Dubai, London, etc.

• South African-owned assets currently managed by offshore providers could be attracted back to onshore service providers.

• Associated funds services such as administration, call centres, etc, could be developed locally alongside the capacity of funds management.

Ultimately these changes would enable South Africa to be a much more competitive domicile for fund managers overseeing assets around the world on behalf of both onshore and offshore clients, creating jobs and growth.

The workstream is assessing the requirements to enable these changes, including financial institutional infrastructure and regulations.

This workstream aims to make South Africa an attractive location for private markets investment intermediaries, both those investing in domestic South African small and medium-sized companies and those investing into companies in the rest of the region. As a second order objective, the working group is considering how costs can also be reduced for direct investment into small and medium-sized companies.

Context

The following issues have motivated this workstream:

• South Africa has an active private markets industry (which includes venture capital, private equity and private debt). Together with the wider ecosystem, this should be attractive for investors and fund managers alike, but currently there are several points of friction that constrain attractiveness.

• The opportunity to build South Africa’s capacity by increased intermediation in global flows and private markets fund management, would increase scale and improve the cost of capital for domestic and foreign companies alike.

• However, several other jurisdictions have established themselves as competitive hosts for private market funds and fund managers by developing legal, tax and regulatory investment landscapes that are more attractive. As a result, South Africa has relatively limited market share as a domicile for regional funds. These factors also contribute to making South Africa less attractive to foreign investors who invest in private market instruments.

• A focused effort to improve the attractiveness of South Africa as a domicile for investors and private market fund managers, would leverage its existing strengths to build the industry, creating jobs and tax revenue on shore.
• Several other factors increase the cost of investment into small and medium-sized companies within South Africa. Some efforts have been made to address these including progress toward a Start Up Act, however these could be coordinated with efforts to reduce the cost of intermediation.

Objectives:

The primary objective of the workstream is to reduce the cost of capital for small and medium sized companies. To achieve this, the workstream should develop proposals that would improve the attractiveness of South Africa as a domicile for private equity and venture capital funds. As part of this, it should consider ways to make it attractive for investors into such funds. These can be motivated by achieving equivalence to other attractive domiciles and leveraging South Africa’s other advantages. Secondly, direct investment into South African companies is currently affected by several regulatory and other factors which increase the cost of investment. The workstream will consider how these other factors can also be addressed in synergy with improving the attractiveness of South Africa for funds intermediation.

This workstream aims to make it more attractive for small and medium-sized companies to list on South African capital markets. This group of companies are much more prevalent in the African region and South African markets should be able to offer an attractive opportunity for listing and raising capital.

Context

The following issues have motivated this workstream:

• While South Africa has deep and liquid capital markets, these markets have experienced many delistings of particularly small and medium-sized companies. While this experience is common internationally, in South Africa several factors have contributed to increasing the relative costs of raising capital in a listed environment.

• These include the switch of pension funds from defined benefit to defined contribution which has increased their requirements for liquidity, despite the long time horizons that such investors usually have. Collective investment schemes also have liquidity requirements in order to meet redemption obligations to customers which can make investing in small and medium market capitalisation companies expensive.

• The lack of liquidity results in an increased cost of capital for such companies.

• On the issuer side there has been an increase in the costs of being listed, including indirect costs such as governance and disclosure requirements that are not faced by companies in the unlisted environment.

• There are clear public benefits from listings including improved tax and other regulatory compliance, improved price discovery for the whole economy, creation of easily available investment opportunities.

Many other jurisdictions have acted to improve liquidity for smaller listed companies through a variety of interventions, motivated by the important public benefits from liquid capital markets.

Objectives:

The primary objective of the workstream is to develop proposals that would improve the cost of capital for small and medium market capitalisation companies. In large part this can be achieved by improving liquidity for small and mid-cap companies.

Structural interventions to support liquidity in small and mid-cap companies could include:

• Structures that will enable institutional capital to flow toward mid- and small-caps.

• Mechanisms to support the long-term nature of investment for mid- and small-caps.

• Mechanisms that stimulate liquidity such as through indexation.

• Mechanisms that support direct retail participation in small and mid-caps, on the view that retail participation supports liquidity.

International examples show the use of tax incentives and other measures that could be considered for application in South Africa.

Achieving the primary objective would support the positioning of South African capital markets as a competitive opportunity for companies across the region to raise funding, with clear domestic capital raising benefits too.