DIRECTS ITS SOCIOECONOMIC DEVELOPMENT INVESTMENTS TO THREE KEY AREAS: INFRASTRUCTURE DEVELOPMENT, FINANCIAL INCLUSION AND AGRICULTURE

Armed with a belief that ESG factors form important considerations in delivering risk-adjusted returns to clients, STANLIB Credit Alternatives has developed the Khanyisa Impact Investment Fund. Khanyisa aims to catalyse economic development by increasing financial inclusion, thus reducing inequality and poverty.

“We use impact investing as a strategy and ESG as a framework for assessing risks as they pertain to environmental, social and governance factors,” explains Zeyn Ismail, head of the investment team at STANLIB Credit Alternatives and portfolio manager. Khanyisa will function according to this philosophy.

STANLIB Credit Alternatives, a franchise within STANLIB, is specifically debt focused, primarily within private markets, Ismail says. “We make debt funding solutions available predominately on a bespoke and a bilateral basis. We manage several mandates on behalf of different clients, the biggest of whom is Liberty Group.” The team also manages mandates on behalf of other third parties, essentially institutional investors such as pension funds. These institutional investors are managed on a segregated mandate basis catering to each of their specific requirements. “For the most part there is consistency across these mandates,” says Ismail. “This gives us the ability to get multiple investors invested into a particular credit asset.” Khanyisa is a pooled proposition which would allow multiple investors with a common or shared interest to benefit from its objectives.

Khanyisa aims to match capital with the socioeconomic development needs of beneficiaries in three key areas: infrastructure development, financial inclusion and agriculture.

“Our impact investment approach is one where we can leverage our skillset, track record, networks and capabilities to deliver on a positive outcome for both investors and investees,” says Ismail. Khanyisa goes a step further than STANLIB Credit Alternative’s general investment vehicles in that it undertakes to monitor the impact it can generate from these investments, to measure it and to report to its stakeholders.

“The thesis behind impact investing that we’ve adopted for Khanyisa is that we shouldn’t have to make a trade-off between financial return and some kind of positive socioeconomic return,” says Ismail. “We are able to marry these two objectives and deliver on each of them.”

He says Khanyisa is designed to be a pooled proposition. It therefore won’t be specific to one beneficiary but rather to multiple beneficiaries that have a shared interest in what the fund offers and that offer investors opportunities. It has three focus areas:

1. Infrastructure

This is distilled into two segments. One is economic infrastructure, which refers to large infrastructure programmes. This includes renewable energy, an area in which STANLIB has been invested in for years. Renewable energy has become increasingly topical as companies look to explore energy solutions that reside outside of Eskom. “That’s a significant area of growth and investment with which we’re already involved and will continue to build on through Khanyisa,” says Ismail.

The fund will also invest in socioeconomic infrastructure. This specifically addresses areas pertaining to housing, health care and education – all massive needs within South Africa. The development of schools, hospitals and clinics under the education and healthcare sub-themes, while trickier to source, will be a focus here. “The benefit of infrastructure is that it will contribute significantly to GDP growth, because of fixed capital formation, because of the potential for job creation and because of the potential to introduce foreign direct investment in the economy,” Ismail adds.

Foreign investment is typically provided by developmental finance investors, the majority of whom are willing and able to provide commercial and/or concessionary finance and, in some instances grant funding. “That said,” says Ismail, “they do favour having local commercial investors alongside them. Combining commercial and concessionary finance gives rise to blended finance models.”

2. Financial inclusion

This refers to the banking or servicing of previously disadvantaged communities, the unbanked segment of the economy who are underserviced and unable to easily access finance. These communities represent a large percentage of the population and financial inclusion projects increase opportunities for both investors and investees. Such projects, for example, could address housing in terms of one’s ability to access home loans.

“It also addresses the ability to access unsecured lending, for example to cover basic costs like school fees, repaying expensive debt and so on,” says Ismail. “Couple that with the advances in technology through fintech solutions, particularly those that are scalable, within South Africa and across the African continent and in some instances globally, and the significant opportunities that exist within this space are evident.”

That’s not to discount the risks of predatory lending. This is something that Khanyisa will diligently manage by ensuring those borrowers who engage in various forms of consumer financing operate within relevant legislation, that collections policies and practices are legitimate and that humane and additional fees are reasonable.

“In addition to the benefits we’ve outlined, consumers further benefit by having an alternative to borrowing from unregistered entities and individuals – such as loan sharks – that may engage in unethical lending practices.”

3. Agriculture

Given food security risks globally and locally and access to funding within the sector, one can't talk about an impact investment fund without having some kind of focus on agriculture, says Ismail. While STANLIB was not initially very active in agriculture, this has changed. “Over the years that we've been busy trying to raise capital for Khanyisa and the extent of activity in the agricultural sector within our business has certainly grown,” he says. “In the process we’ve been developing our track record by investing into the space. We continue to see more new and recurring investment opportunities arising in agriculture, especially in terms of developments arising from the use of technology within the sector. Over time, we anticipate agriculture growing as a theme within our impact-related strategies.”

AN EXTENSIVE CAPITAL-RAISING PROCESS

Khanyisa’s various vehicles are currently only open to institutional investors, not retail investors, largely because of the minimum investment amount which tends to be in the hundreds of millions. “That said, we are working on solutions by which we can grant access to Khanyisa to retail investors, albeit via large discretionary fund manager platforms,” says Ismail.

While the fund was established in 2020, it is only now concluding its capital-raising activities before becoming officially operational. Having officially launched Khanyisa during the Covid pandemic, STANLIB Credit Alternatives had to contend with the implications, including the resultant economic slowdown.

The time it’s taken to raise fund capital has not been for lack of interest, says Ismail. “The economic cycle and pension fund trustees having to manage retrenchments and resultant withdrawals from pension funds has delayed and slowed their activity with investment into this type of vehicle.” Without growth in the economy and employment, trustees have also had to be more circumspect about where to place the capital they provide in this context.

Yet now the cycle is reaching the point where alternative investments and the benefits they offer are becoming more relevant. Investment into private debt or private credit is something that has piqued local investors’ interest, in line with global trends seen over the past four to five years.

This is something that Louise Gardiner, co-founder and CEO of Vukani Impact Collective, which helps investors and businesses innovate through better measurement and management of ESG performance and impact, has observed. In addition to running Vukani, she works with the International Finance Corporation (IFC), which is part of the World Bank Group, to develop national enabling frameworks for sustainable finance.

Through the IFC, she has participated in studies that have found that companies that achieve strong ESG performance in terms of risk management and improving efficiencies significantly financially outperform those that do not run ESG initiatives, a finding echoed by other studies.

Reflecting on Khanyisa’s lengthy capital-raising process, Gardiner says that anywhere between a year and three years of capital raising for such funds is the norm. “The impact space is evolving so investors might have had other due diligence requirements or questions that come with this changing space. Many companies around the world are having to put in place new policies and procedures that arise with their changing impact strategy.”

Investment risk assessments have formed a significant part of investors’ due diligence process, which can stretch over several months. “For example, they look at our track record as fund managers, individuals’ experience, our operational capabilities and our process and philosophy,” says Ismail. “This talks to how long our business has been in existence and how we’ve performed. From an impact fund perspective, investors are keen to understand our underlying pipeline of investments. There have been questions around the type of impact we think we can achieve, or we ought to be able to deliver on, what our ability to monitor and measure those is, and whether we will be reporting on them.”

The Khanyisa Fund works to mitigate both financial and impact risks. STANLIB has a proven track record in managing financial risk and in investing in sustainable businesses that can meet repayment and return requirements. Ismail says the in-house legal team conducts rigorous due diligence because “we must be comfortable that we are protected from a downside risk perspective”. Gardiner notes that this is something investors look for – a due diligence process that will both capture and manage ESG risks.

Ismail outlines further risk management processes: “We meet with management teams on the ground and dedicate time to getting to know our beneficiaries and to understand the risks that they perceive to exist in their business. We also assess industry risk as a whole, asking what could impact them, and how they stack up against those risks. All applications also have to be presented to an investment committee and we may only proceed based on an approval from committee members.”

Impact-related risks are also assessed in terms of what outcomes Khanyisa looks to achieve and whether an investee can measure and report on such outcomes. “In managing an impact investment fund and staying honest, we need to give our investors and our stakeholders the necessary comfort that we are truly delivering on some of those impact objectives, so that we don’t run the risk of impact washing or greenwashing,” says Ismail. For that reason, STANLIB will procure a third-party impact specialist to independently monitor and measure the initiatives and report back on activities and deliverables. “We’ve identified a preferred provider with more than a decade’s worth of experience in this space, who will formally come on board once Khanyisa capital is secured.”

An Engaging Esg Philosophy

STANLIB’s ESG philosophy is characterised by one of engagement as opposed to exclusion, says Ismail. ESG has in fact become an important risk assessment tool that forms part of every due diligence that the company undertakes and presents on. “When we make an investment application, there’s a dedicated section to how we’ve assessed ESG concerns and risks. We tend to score that and report on it.”

There has therefore been a strong integration of ESG factors into STANLIB’s overall investment process. “Once we’ve identified the risks, we then go through a process of engagement.” This, he says, is “a constructive way of allowing borrowers and the economy, particularly as it pertains to South Africa, to evolve and transform”. Therefore, instead of simply discounting an ESG investment opportunity that doesn’t tick all the predetermined boxes, which is an almost exclusionary practice, investments are selected based on an engagement process. “Given the size of our economy and the fact that we are, in many respects, still a developing nation, a tick box exercise is not constructive. A basis of engagement and an ability to inform and encourage borrowers and management to evolve is more sustainable and constructive for the economy in the longer term.”

Once they have identified and debated the risks, the STANLIB Credit Alternatives team will decide how to proceed. “Following successful engagement with management, oversight is done in respect of how things have developed or will be developing over time, and in terms of how we as investors have managed the engagement with investing companies and borrowers.”

To measure impact there are regular check-ins with at least one full review annually on each of the underlying investments with reflection on performance against predetermined milestones.

Both quantitative and qualitative principles are applied in measuring impact. STANLIB Credit Alternatives has a R2bn target for impact-related investments over the course of this year of which R500m is reserved for Khanyisa in the short term. “For Khanyisa, over the medium term we’d like to get to about R1.5bn with the ultimate goal of exceeding R3bn.”

Impact measurement is determined in conjunction with investors, with outputs measured over the long term. “There is now a very strong focus on being able to report back to our various stakeholders around ESG initiatives, around progress that’s been made, as well as a need to be honest in instances where we haven’t been able to make progress and what our response has been,” he adds. Making ESG and stewardship reports available has therefore become a big talking point.

Conceptually, social return on investment would be applied with respect to the specific objectives that Khanyisa sets itself and the borrower, and tracking how and whether they have delivered against those objectives. “We are engaging with some of our borrowers on how we can actually track the improvement in quality of life when it comes to qualitative analysis.”

Gardiner endorses this approach, especially when it comes to measuring ESG impact. “I would prioritise stakeholder engagement more than anything else,” she says. “Make sure that you’re designing the ESG goals appropriately for those who will benefit, and then make sure that the benefit actually happened. Lastly, you have to make sure that the benefit wouldn’t have happened without your intervention.”

While in rare cases STANLIB Credit Alternatives has divested from particular investments that have not made necessary long-term progress in moving towards objectives, working with borrowers to understand and address challenges is always the first step. Yet they will make tough decisions when warranted.

Applying Additionality

Khanyisa believes in the importance of applying additionality criteria when selecting investments. “Our investors apply additionality criteria when they think about where to place their funds,” says Ismail. “They ask what we are going to achieve that is going to be more beneficial than if they’d placed it somewhere else.”

Additionality is also one of the chief considerations around a particular investment opportunity in terms of Khanyisa’s impact objectives. “We are very alive to the risk that should we not make funding available, a particular borrower may not be able to access the funding out of the market,” say Ismail. “Assuming that we are comfortable with the risk profile, and we’ve done the necessary checks, I think it’s so much more meaningful to us and our investors if we are the party that can enable some of the growth that could come by funding a particular borrower.”

From an impact perspective, one would also consider whether because of not providing funding, a particular deliverable will not be achieved. “That can have serious ramifications for that particular socioeconomic need,” says Ismail.

A good example comes under the financial inclusion banner where Khanyisa has grown its footprint into the SMME financing space, an area where banks are hitting credit limits because of the size of some of these borrowers. “The banks can’t necessarily support further growth with respect to the borrowers and so they need to approach a non-bank financial institution, which is an opportunity for us to invest in SMMEs that are primed for growth and to help enable such growth.”

SANLAM FOCUS