A stagnant economy has made raising capital for BEE deals a big challenge. What makes it even worse for first-time investors is that most do not have the required collateral (security). In addition, funders, who are typically conservative, have a put a low valuation of target assets.
The conclusion of Black Economic Empowerment (BEE) deals, or most commonly BBBEE (Broad Based Black Economic Empowerment), is not complete without the customary media fanfare, punctuated by the new partners shaking hands and smiling or some would say, grinning for the cameras. And the partners would go on about how the ‘ground-breaking deal’ would transform the lot of previously disadvantaged communities and shows how the big company is committed to the transformation project, and other platitudes. This is a good ending for the previleged few BEE acquirers who have the luxury of access to funding. In most cases, more especially, in this COVID-ravaged economy, which was already in a recession prior to the ravage of COVID-19, first-time investors, have failed to realise their dream of owning a stake in a big blue chip.
Third party funding challenges
In an article on BEE deals, Andrew Bahlmann, CEO of corporate advisory firm, Deal Leaders International, laments that it remains extremely difficult for BEE acquirers to raise funding for deals, confirming that many such parties are failing to acquire debt in current times. The common challenges have been observed in the third-party funding area for first time investors and funder’s reservations (disagreements) about the valuation of the target business.
- First-time investors
If securing funding for established acquirers is a big challenge, for first time investors it is even more complicated. The most convenient option for BEE acquirers is borrowing money against the balance sheet of their target company. The alternative, if this fails, is borrowing from their own balance sheet as security. Unfortunately, most fist-time investors would have no the required security to qualify. Thus, Bahlmann deduces, it is not surprising that there is a only limited number of BEE investors who continue, to grow defeating the whole objective of Broad-based Black Economic Empowerment (BBBEE), which is ensuring that distribution of wealth to so-called previously disadvantaged.
2. What is the ‘real’ valuation?
Before committing their resources towards a deal, funders, as part of their due diligence, have to evaluate the real valuation of the target business. Funders are less charitable, and are not given to sentiments. “A funder is bound to be much more conservative in its valuation, creating a valuation gap which the seller would rarely accept,” says Bahlmann.
International funding?
Where local funders are risk averse, seeking funding from international markets would be another option. However, the challenge that is often encountered is that South African’s BEE is perceived as the arbitrary land grabs, which have driven Zimbabwe’s economy to the doldrums. Inexplicably, South Africa’s BEE finds is tarred with the same brush. Hence, says: “Much work needs to be done to educate global markets that BEE adds value to a business and that deals are done at fair value rather than at deep discounts.”
What lies ahead
Perhaps, we could be guilty of the problem of expecting an underfed cow to continue to be producing milk. Bahlmann sees nothing odd that BEE are few and far between and funders seem risk averse. “Most of these challenges arise because BEE deals are being done in the context of a stagnant economy, thereby simply redistributing what already exists rather than stimulating growth. As SA urgently needs foreign investment there must be mitigation of these perceived risks.”