In old chapters I had examined the bing literature on passage economic systems ( see. Chapter 2 ) categorising passage economic systems in footings of the velocity of the passage procedure and in footings of the manner of the passage. In the chapter, it was posited amongst other things that the new institutional model the passage creates allows for the development of a new entrepreneurial activities and a new entrepreneurial category. In chapter 5, I so went on to demo utilizing the South African instance, how administrations within the private sector can play an of import function in set uping market type institutional environment which may ease the outgrowth of new concern activities.
However, the growing of concern activities in passage economic systems face two challenges ( Karsai et al. , 1997 ; Wright et al. , 1999 ; Filatotchev et al. , 1996 ) . First, houses in passage economic systems face the issue of finance, as the old unbarred loans which were provided by the cardinal authorities of these economic systems were no longer available station the transmutation ; as the extension of recognition to persons and administrations were transferred from authorities ‘s monobanks to a new set of fiscal establishments, the Bankss. And as these new fiscal establishments gave out loans carefully to persons and administrations an equity spread emerged due to the discrepancy between the demand and the supply of capital to enterprisers. The equity spread that emerged as a consequence of this created a support crisis because enterprisers lacked the necessary collateral to procure the financess they needed. This was the instance in South Africa as many South Africans ( largely the antecedently disadvantaged black South Africans ) had no economic record that could let them procure the needful capital. Second, administrations faced the job that was associated with corporate administration. Corporate administration is the system by which companies are directed and controlled and it involves keeping board of managers accountable for the involvements of all contracted stakeholders of the company, such as stockholders, employees, providers and clients ( Rossouw et al. , 2002 )
These jobs are inter – related, as an entree to external finance is imperative for effectual administration and effectual administration is a requirement for an easy entree to external finance ( Karsai et al. , 1997 ) . This double job of entree to external finance and equal corporate administration rules can be addressed by the debut of active investors such as venture capitalists ( Karsai et al. , 1997 ; Filaltotchev et al. , 1997 ) . Venture capitalists ‘ alone manner of funding helps to work out the job associated with the finance for enterprisers as they bring equity finance into their portfolio companies. In footings of corporate administration, the presence of venture capitalists as foreigner investors with important equity bets in their portfolio houses provides a important influence on the direction of the house ( Sapeinza et al. , 2000 ; Sapeinza and Gutpa, 1994 ) . Furthermore, … .
For the intent of this research on a transitioning economic system, I employ Karsai et Al ‘s ( 1998 ) definition of venture capital. Their definition of venture capital encompasses more than merely the classical early phase investing chances. Even as Avnimelech and Teubal ( 2006 ) argue that the definition of venture capital based on early phase puting merely is a narrow definition of venture capital. They argue that, subsequently phase investing chances such as specializer portfolio investing in little companies, proviso of subsequent unit of ammunitions of development capital for ulterior phase of concern enlargement and funding of direction buyout or purchase – Immigration and Naturalization Services ( Klonowski, 2005 ) be included in a wide definition of venture capital definition across states.
Although bookmans traditionally separate venture capital puting from ulterior phase private equity investment, a broader definition of venture capital which includes all houses of the venture capital industry ( early or ulterior phase puting ) helps supply a comprehensive description of the outgrowth of the venture capital industry/private equity industry ( Bygrave and Timmons, 1992 ; Karsai et al. , 1998 ) . Therefore, this chapter which is on the development of the venture capital industry in South Africa uses the term “ venture capital ” to mention to both venture capital/private equity investing activities as a whole.
South Africa ‘s socio – economic passage and its economic stabilization post the passage, that is, the passage from apartheid to democracy, has provided a strong foundation for the enlargement of the state ‘s fiscal services industry. The immature venture capital industry has played an instrumental function in the development of the station apartheid South African economic system, as the industry provides entree to capital to enterprisers who might hold faced troubles in pulling capital during the apartheid old ages.
The success of many states economic development has been associated with their several persons degrees of their venture capital industry ( Jengs and Wells, 2000 ; Wright et al. , 2005 ) . For case, figures show that in the US, companies backed by venture capitalists ‘ employ over 12.5 million people ( Bruton et al. , 2005 ) . In add-on, many multi national companies such as Intel, Microsoft, Apple and Starbucks may non hold existed or grown to the degree which they are today without the aid venture capital support ( Bruton et al. , 2005 ; Gompers and Lerner, 2001 ) . However, the development of a venture capital industry in these states involves a combination of variables, which includes the size of the engineering sector ( Avimelech and Teubal, 2006 ) , the being of an active fiscal market ( Black and Gibson,1998 ) and authorities inducements ( Lawton, 2002, Murray, 1995 ; Megginson, 2004 ; Lerner, 1999 ) . Since the early 1990s, the South African venture capital industry has grown and evolved over the past few old ages. However, the industry ‘s growing is non immune to the challenges that have a turning industry in a political passage economic system.
The purpose of the chapter is to look into the outgrowth of South Africa ‘s venture capital industry along the 3 era described in chapter 4, the methodological analysis chapter of this thesis. This is done with a motive of understanding the institutional issues might hold driven or restrained the growing and development of the industry and to find to what extent these factors might hold had a bearing on farther evolutionary procedure within the industry. The chapter besides shows the function played by the South African province in the outgrowth of the venture capital/private industry in South Africa. Besides, it has been argued that the outgrowth and development of a venture capital industry follows a co – evolutionary form ( Avinimelech and Teubal, 2006 ; Dossani and Kenney, 2002 ) in which the growing of the industry is influenced by the interactions between factors impacting the general cultural, legal, and institutional environment ( Dossani and Kenney, 2002 ; Avimelech and Teubal, 2006 ) . For case, Dossani and Kenney ( 2002 ) demo how the outgrowth and the development of the venture capital industry in India followed a carbon monoxide – evolutionary procedure in which the immature industry ‘s growing was extremely dependent on the development of the authorities and its establishments. Furthermore, Avimelech and Teubal ( 2006 ) showed how Israel ‘s venture capital industry evolved along side with germinating high – tech industry in Israel. Thus, analyzing the development of the South Africa venture capital industry helps us understand the carbon monoxide – evolutionary form of the development of this alone industry along side with the emeregnce of the South African province. Furthermore, analyzing the development of a venture capital industry can assist scholars to place how the value added services venture capitalists provide to their evolved ( Avimelech and Teubal, 2006 ) in passage economic systems.
However, prior to this, the chapter examines the literature on the development of a venture capital industry as this helps picture the outgrowth of the South African venture capital industry as a alone evolutionary narrative. Along with the interview experts presented, the industry human ecology which is derived from the industry association organic structure, SAVCA is besides presented, other informations presented in this chapter are archival informations from the modesty bank of South Africa and a from old refereed academic research. It is envisaged that SAVCA ‘s informations would be dependable and indifferent as the information is complied by an independent organic structure.
Therefore, the balance of the chapter is structured as follows: Section 6.2 examines the literature on the development and outgrowth of venture capital industries within states. However, the subdivision does non try to reexamine the whole literature on the development of venture capital industries across boundary lines as this has been adequately carried out by Wright et al. , ( 2005 ) . However, the subdivision presents the necessary institutional constituents that may ease the growing of venture capital in any state, particularly transition economic systems. Section 6.3 presents the literature on the life rhythm of venture capital industries separating from the life rhythm of a venture capital house. While an analysis of the outgrowth of a South African venture capital industry within 3 periods – terminal of apartheid ; Mandela authorities ; Mbeki authorities – is presented in subdivision 6.4. Section 6.5 examines specific South African statute laws that have had immense impact on the growing of the industry, while a decision is drawn in subdivision 6.6.
The Evolution of a Venture Capital Industry: General Overview
Multiple theoretical lenses ( e.g. institutional theory, population ecology ) have been used to look into the outgrowth of venture capital industries in many states across diverse academic watercourses ( e.g. finance, direction, entrepreneurship ) . Findingss from these surveies have increased the organic structure of cognition on how venture capital houses in states emerge and the necessary institutional demands that facilitates an outgrowth of venture capital industry in states. For case, from an institutional theoretical position, statements have been that for venture capital industry to emerge in any state an active stock market would be present ( Black and Gilson, 1998 ; Jengs and Wells, 2000 ) as this provides an issue mechanism for venture capital houses. Furthermore, Cumming and Johan ( 2007 ) postulate that a legal institutional environment strongly act upon the sum of capital available for venture capital/private equity investing, as they argue that, the presence of regulative control and revelation of venture capital/private investings helps to increase the sum of capital allocated to private equity houses by institutional investors. Similarly, Wright et al. , ( 1992 ) look intoing factors necessary for subsequently stage venture capital investing, i.e. direction buy – outs and purchase – Immigration and Naturalization Services, postulate that institutional substructures creates buy out chances and can ease the growing of the ulterior phase venture capital industry. Institutions are of great importance to the growing of a venture capital industry in any state as they shape venture capital outgrowth and explicate the differences in venture capital behavior across states ( Bruton et al. , 2005 ) . From a population ecology theoretical lens, Manigart ( 1994 ) present empirical grounds to demo that the growing of venture capital houses in neighboring states have a positive consequence on the growing of venture capital houses in any state.
However, asides from the institutional environment and the influence from neighboring venture capital markets, other elements are required before a venture capital industry can jump up in any state. For an active industry to emerge in a state, three of import elements are required ( Kara & A ; ouml ; merlioglu and Jacobbson, 2000 ) . They are: an institutional environment that would heighten the growing of a venture capital industry, favorable authorities statute laws and inducements from the authorities, the competency of the venture capital houses. First, as earlier mentioned the institutional set – up of the environment in which the industry is embedded is an of import determiner of the outgrowth of a venture capital industry. Since establishments provide the design for all organizational activities ( North, 1990 ) , therefore, the institutional environment of a state can act upon the outgrowth and the development of the venture capital industry in a figure substantial ways ( Bruton and Ahlstrom, 2003 ) . For a venture capital industry to boom, market type economic establishments are required. Market type establishments such as a well defined regulative model that provides legal protection to all stakeholders of companies ( La Porta et al. , 1998 ; 2000 ) . As a strong legal investor protection is associated with effectual corporate administration rules ( Bruton et al. , 2005 ; La Porta et al. , 2000 ) , which is besides a demand for a venture capital industry to emerge. Besides, the growing of developed venture capital industry is dependent on an active capital market ( Black and Gilson, 1998, Jengs and Wells, 2000 ; Megginson, 2004 ) as this provides the most moneymaking issue mechanism, the IPO mechanism, for venture capital houses to go out from their portfolio companies. The impact of this regulative difference can hold a major impact on the nature for issue for VC – backed houses.
Another major demand for an outgrowth of a venture capital industry is the authorities statute laws and incentives the province provide to venture capital houses in order to promote the industry ‘s growing and development. As with many states, authorities statute laws have been a cardinal accelerator that provided a spring board for the growing and the outgrowth of an active venture capital industry. For case, Avimelech and Teubal ( 2006 ) argued that the Israeli authorities ‘s plan, the Yozma plan, was the event that triggered the outgrowth of a venture capital industry in Israel. “ The Israeli authorities created a authorities – funded administration Yozma, [ which was ] meant to promote venture capital in Israel. Yozma received $ 100million from the Israeli authorities ” ( Dossani and Kenney 2002:5 ) for venture capital puting. In a similar mode, the Swedish authorities created 2 big investing companies, Atle and Bure, in order to spur venture capital activities in the state ( Isaksson et al. , 2004 ) . For the venture capital industry in the US, the authorities ‘s lowering of the top personal income revenue enhancement rate on accomplished capital additions from 35 to 28 per centum in 1978, and its acceptance of the Prudent Man Rule in 1979 which allowed farther allotments from pension financess directors to venture capital puting were arguably the major accelerator for the growing and the development of the industry ( Megginson, 2004 ) . Thus, authorities statute laws form an of import component that may convey about the growing of a venture capital industry in any state.
The 3rd component is the competency of the venture capital house – that is, the sum of the value added services venture capital can supply to their portfolio houses. In add-on to the capital provided to entrepreneurs, venture capital houses besides provide some “ competency capital ” which is the value added services they provide to their portfolio companies ( Timmons and Bygrave, 1986 ) . These value added services that venture capital houses provide is a chief separating factor between the venture capital industries other fund suppliers such as Bankss. The value added could come in from the networking assistantship, supportive functions or strategic assistantship ( Gorman and Sahlam, 1990 ; Sapienza et al. , 1996 ; Sapienza 1992 ; Sapienza and Timmons, 1989 ) . The extent to which venture capital houses can supply these services to their portfolio companies and the extent which these services increases the possible success of these administrations is straight related to the growing of a venture capital industry as fund searchers would instead seek capital from venture capital houses would supply other services that can increase their house value than seeking finance signifier administrations such as Bankss who provide debt finance merely.
A chief ground for the venture capital engagement with their portfolio houses through the value added service they provide is to better the profitableness result of the house and to heighten a co – operation between the enterprisers and the fund suppliers ( Knocknaert et al. , 2006 ) . The extent of venture capital houses ‘ engagement with their portfolio companies varies from venture capitalists to venture capitalists, depending on the public presentation of the portfolio company, the phase of investing and the experience of the venture capital house ( Macmillian et al. , 1988 ) .
In add-on, when compared with venture capitalists in the West, the nature of the value added services rendered by venture capitalists differs from venture capitalists in the passage economic systems ( Bruton et al. , 2004 ) . Bruton and Ahlstom ( 2003 ) postulate that this difference is because there is a low managerial edification in passage economic systems. Furthermore, with an scrutiny of the venture capital in passage economic system, China, Bruton and Ahlstrom ( 2003 ) postulate that the differences in cognitive civilization establishments of states allow for differences in the value added services provided by venture capitalists between states as venture capital houses runing in passage economic systems cultural perceptual experiences of enterprisers in that state.
In amount, market type institutional environment ; favorable authorities statute laws and inducements ; the competency of venture capital via the nature of their value added are elements that facilitate the outgrowth, growing and development of a venture capital industry.
The Life Cycle of a Venture Capital Industry In Transition Economies
The development of the emerging industries particularly in passage economic systems follows a life rhythm form ( Jargic 2003 ; Klonowski 2005 ) . The life rhythm theoretical account paperss that emerging industries growing rate follows a typical form of an initial exponential growing rate, below a crisp diminution which precedes the natural province of the industry ( Klepper and Graddy, 1990 ) . During the growing phases of the new industry, the little figure of houses and the limited sum of production encourages new entrants into the industry ( Jovanovic and MacDonald, 1994 ) as the industry still as adequate carrying capacity and resources to suit new entrants. However, at some point new industries reach a stage in which the industry growing stabilizes and some houses within the industry are selected out. This stableness point is triggered by ‘chance events ‘ and other exogenic factors that restrict the figure of new entrants and the growing rate of houses already in the industry ( Klepper and Graddy, 1990 ) . Using the venture capital industry, Manigart ( 1994 ) besides present similar findings to demo that development waies of the venture capital industry in three states, Netherlands, France and the UK, follow evolutionary form described in which she showed that when the figure of houses in an emerging industry is low, the industry experiences an increased initiation rate. However, as size of the industry increases, the battle for limited resources reduces the establishing rate of new houses in that industry.
The development way for an rising venture capital industry follows a 5 phase theoretical account ( Avinimeclech and Teubal, 2006 ) while Klonowski ( 2006 ) suggest a 3 phase theoretical account for the development tract of an emerging venture capital industry. Avimelech and Teubal ( 2006 ) five phase theoretical account comprises of: background conditions, pre – outgrowth, outgrowth, crisis and restructuring, and consolidation. The first and 2nd phases of Avimelech and Tuebal ‘s venture capital life rhythm theoretical account creates the stipulation necessary ( such as the enabling institutional environment ) for the outgrowth of a venture capital industry. The crisis and restructuring phase allows for the smoothing of the industry as non – acting venture capital houses are selected out this leting for an industry consolidation in phase 5. Similarly, Klonowski ‘s ( 2005 ) three – phase venture capital life rhythm theoretical account of: Development, Expansion and Correction – argues that after initial development and enlargement of the venture capital industry, a rectification stage occurs in which the sum of the capital raised diminutions aggressively as the investing chances within the industry declines. However, as with most new industries, it normally takes clip for new venture capital industry to come in into the rectification ( Klonowski, 2005 ; Klepper and Graddy, 1990 ) or the crisis and restructuring ( Avinimelech and Teubal, 2006 ) stage. This length of clip is known as the acquisition period ( Kara & A ; ouml ; merlioglu and Jacobbson, 2000 ) . Baldwin ( 1969 ) defines the learning period for emerging industries as a period where the industry ‘s production cost of goods and services is higher than the tantamount cost of importing such goods and services. The learning period cost is normally incurred at the early old ages of the industries, nevertheless, there is a gradual decrease of this cost as the new industry grows ( Jacobbson, 1993 ) . The length of the learning period varies from industry to industry ( Klepper and Graddy, 1990 ) , runing between 2 to 50 old ages ( Aldrich and Fiol, 2005 ) . For a service industry like the venture capital industry, the learning period could be defined as a period in which the immature industry battles for legitimacy, a period where professional behavior is formed and is by and large accepted. It is besides a period where allows for the formation of a venture capital association that would stand for the industry.
Scholars have suggested a figure of standards for mensurating the growing and the development degree of emerging venture capital industries. Kara & A ; ouml ; merlioglu and Jacobbson ( 2000 ) suggested that the size of the venture capital industry ( in footings of the entire cumulative financess raised for investings ) ; the diverseness of the state ( in footings of the figure of the houses covering all phases of venture capital funding ) and the competency of the venture capital houses as the techniques to be used to mensurate the adulthood of the venture capital industry. Murray ( 1995 ) posits that the existent and the possible growing of venture capital can be measured in footings of the entire investings committed by the venture capitalists to portfolio companies and by the sum of external finance raised for future investing activity by the industry. However, the 3 most used steps for analyzing the growing of a venture capital are: the figure of the venture capital companies, the figure of professionals in the industry and the sum under direction ( Bruton et al. , 2004 ) . The predating subdivision maps out the development of the venture capital industry along the 3 periods described in the methodological analysis chapter.
The Development of South Africa ‘s Venture Capital Industry:
Unlike many states ‘ venture capital outgrowth narratives, where authorities enterprises were the initiating triggers for the growing and the development of a venture capital industry ; the outgrowth of the venture capital industry in South Africa was slightly different. The South African venture capital industry emerged as a consequence of the many disinvestment the state faced by many multinationals companies during this period.
These transnational corporations faced with an increasing force per unit area from the place citizens who questioned their continued being in an apartheid South Africa where human rights misdemeanor was at an culmination. Their citizens argued the multinationals continued being in South Africa signified an indirect support to the apartheid province. The authorities and the citizens of multinationals companies runing in South Africa argued for a disinvestment by the multinationals off from South Africa. As they argued that such economic countenance via the backdown of trade operation from South Africa would set force per unit area on the apartheid led South African authorities that might convey about socio – political alteration in the signifier of stoping apartheid ( Malone and Gooding, 1997 ; Lansing and Kuruvilla, 1998 ) .
With these disinvestments, multinationals sold off their interest either to white South African investors or to their local direction, all at price reductions as their purchasers could non afford to purchase at the companies ‘ intrinsic value. For case, Barclays Bank in November 1984 withdrew 40 % of its investings by selling it off to their staff for R166 million instead than its original value of R200million, a price reduction of 17 % ( Jenkins, 1990 ) . Besides, General Motors sold its involvement to Delta Motor Corporation ( Malone and Gooding, 1997 ) . These minutess represent one of the industry foremost quasi private equity investings. However, other administrations such as Eastman Kodak disinvested wholly, retreating all its physical assets from South Africa.
The South African economic system suffered vastly during this period as it was the period in which apartheid was still entrenched the socio – political system of the South African province. The state experienced diverse disinvestments, backdown of loans by international fiscal establishments which had a negative consequence on the South African economic system ( see Table 6.1 ) . For case, Table 6.2 below shows South Africa ‘s outstanding with major fiscal establishments as at 1985, this shows the extent to which the South African economic system was on foreign capital for their economic development. And with this non extension of these loans after 1985, the South African economic system collapsed.
The Comprehensive Anti – Apartheid Act passed by the US in 1986 played an instrumental function on the death of apartheid as it non merely limit US trade with South Africa, the jurisprudence instigated dialogues with the opinion apartheid South Africa province and the antecedently regarded terrorist group, the ANC. The statute law stated that:
The United States shall promote the ANC to:
- Suspend terrorist activities so that dialogues with the authorities of South will be possible
- The US shall promote the ANC to do Known their committedness to liberate and democratic station – apartheid South Africa.
- The US shall promote the ANC to re – analyze their ties to the South African Communist party
- The United States authorities will back up dialogues between the representatives of all communities in the South Africa and the South African authorities agrees to come in into dialogues without stipulations, wantonnesss unprovoked force against its oppositions, commits itself to liberate and democratic station – apartheid South Africa, and the ANC refuses to take part or to 1 ) wantonness unproven force, or 2 ) to perpetrate themselves to liberate and democratic station – apartheid South during such dialogues, so the United States will back up dialogues that do non include the ANC. ( The Helms Amendement,1984 Sections 102 – 311, in Redden, 1988 )
This statute law changed the socio political landscape of the South African province, as the statute law gave international legitimacy to the ANC party, it would be no longer seen as a terrorist motion by the US and the international community if it was willing to come in into dialogues for passage with the governing apartheid authorities. Besides, in order to avoid farther economic countenances, the governing apartheid authorities was compelled to come in to dialogues with their long term enemies. These institutional events via dialogues, disinvestments, passage and transmutation created the institutional background that paved manner for a development of a venture capital industry in South Africa.
Specifically, with regard to the venture capital during this period, its investing activity was low. The South African venture capital industry had non been established, and merely one capital venture capital/private equity house, Ethos private equity which was established in 1984 was in being. This is instead unusual sing that a market type establishment such as a feasible capital market ( the Johannesburg Stock Market ) ; good defined corporate administration rules were entrenched in the regulative construction that govern concern patterns ( Rossow et al. , 2002 ) . However, merely one venture capital/ private equity signifier was registered during this period. One intuitive statement for the low figure venture capital houses during this era was that although a market type institutional environment that might hold facilitated the outgrowth, growing and development of a venture capital industry was in topographic point in South Africa, the political uncertainness that the state faced restricted investors ( both local and foreign investors ) to perpetrate their monies to venture capital investing in South Africa. On the issue of raising financess, my respondent at Ethos stated this about Fund 1, their first fund which was raised in 1984:
“ We are on our 5th fund. Our 1st fund was off a bank ‘s balance sheet, it was a confined fund and our fund 2 started in 1992 that was a 3rd party fund. Fund 3 was a 1996 fund and that was the first fund with non – occupant investors, US investors and 1998 we raised fund 4. The fund in 96 was about 760 million rand, fund four was 1998 vintage and that was approximately 2.4 billion rand. In that one, we had about 50 % foreign investors. In fund 3, in the old fund we had about 38 % foreign investors. Then we raised fund 5 in 2005, that was 5.5 billion and we have about 75 % foreign investors ” .
This statement does non merely demo the immense addition in the sum of capital committed over clip as the passage procedure began. Interestingly, it besides shows the alteration in beginning of finance committed to venture capital houses over clip in South Africa. Merely after the political passage procedure was to the full under manner, in which Mr. Mandela had spent two old ages of his 5 twelvemonth term in office, merely so did foreign investors began to demo involvement in the South Africa venture capital/private equity market. Therefore, proposing that the market of a market type institutional environment is non plenty to entice investors to perpetrate capital to venture capital houses into passage economic system. Rather, for investors to be interested in the venture capital industry in passage economic systems, market type establishments must be in topographic point, but besides the political environment of the state must be seen as been stable.
In 1991, Brait private equity joined the private equity infinite in South Africa. This besides suggests that with the release of Nelson Mandela in 1990 and the dialogues that began about instantly after between the opposing political parties signified a birth of a new political South Africa which instilled concern assurance that allow for the outgrowth of a venture capital industry.
This 2nd period represents ANC ‘s first term of office with governmental power. In the eyes of the private sector the Mandela authorities was a authorities with a rapprochement authorization. It was besides a authorities that was meant to set up the economic policies of the ANC party. During this period the economic system of the South African province improved ( see, Table 6.3 ) ; economically, this was the period in which the ANC authorities changed its policy on the function of the province from a RDP policy to the GEAR economic policy. It had changed its policy from that of a socialist province through the nationalization of houses back to the known market type economic policy as it embarked on denationalization of many SOEs. This denationalization scheme was arguably adopted from the White Paper released by the opinion apartheid party in 1987, the White Paper on Privatisation and Restructuring, which the antecedently governing party had attempted to ship upon but failed because of the huge force per unit area from the ANC and its Alliess who had argued that it was a secret plan by the National Party to deny the ANC party the “ household gem ” by the clip they came into power ( Jerome, 2004 ) .
The Mandela led ANC authorities was non able to accomplish much in the country of the denationalization of SOEs as it fought unfavorable judgments from the concern corporate and the trade brotherhoods. On the one manus, the trade brotherhoods like COSATU kicked against the ‘restructuring of assets programme ‘ ( as the authorities did non name it denationalization in order to debar possible industrial actions ) as they argued that the restructuring was against the RDP economic policy which was the platform on which the ANC based its socialist economic policies. On the other manus, the concern corporate criticised the authorities on the slow gait of the denationalization programme. The ANC party responded with a statement which stated that:
The ANC is convinced and satisfied that the authorities programme of reconstituting province assets is continuing with the scope the of the ANC policy as adopted in the Reconstruction and Development Programme and elucidated in legion other paperss.
As the motions, we have found nil untoward in the restructuring programme by the authorities. Its focal point and aims are within the parametric quantities of the ANC economic policy. ( www.anc.co.za assessed on
In February 18, 1995, the National Framework Agreement ( NFA ) was setup under the National Economic Development and Labour Council ( NEDLAC ) to turn to the issue of restructuring, the commission consisting representatives from the authorities, the labor and the corporate agreed that:
The enterprise to reconstitute province assets is portion of the procedure of implementing RDP. Government has concretised some of these aims in its so called “ six battalion ” programme viz. : belt tightening: reprioritisation of province outgo ; restructuring of province assets and endeavors ; restructuring of the public service ; constructing new inter – governmental dealingss ; developing an internal monitoring capacity for the above programmes.
The intent of reconstituting province assets is to re – orientate and ( vitamin E ) inhance the populace sector ‘s ability to run into the challenges and demands identified by the RDP. In this context, it is the function which the endeavor can play in accomplishing transmutation and passage ends as set out in the RDP which should inform determination – devising. This requires new constructions, new authorizations and alteration direction. ( www.nedlac.co.za assessed on
During this period, many venture capital/private equity houses were established with an increased size of financess committed to the industry. However, no statistical information is available to back up this but the constitution of a venture capital association in 1998 arguably showed that there was a considerable addition in the size of venture capital houses during this period. SAVCA was chiefly established to buttonhole authorities in order to advance ordinances that would heighten a farther growing of the industry. SAVCA objectives include some of the followers:
- Promote the venture capital and private equity profession in Southern Africa
- Represent the profession at the national and international degree
- Develop and stimulate professional and transactional venture capital and private equity investings throughout Southern Africa
- Collect information from markets and from members
- Supply the relevant governments with proposals for betterment in the corporate, financial and legal environment for venture capital and private equity in Southern Africa
- Maintain ethical and professional criterion
On the constitution of SAVA, the respondent from SAVCA stated that:
SAVCA “ ” was chiefly built of a demand that this industry was get downing to turn… , and it needed an industry organic structure to stand for its involvement. The aims all set up on our web site is chiefly to buttonhole, stand for the industry, do research on the industry and seek to believe about the hereafter of the industry and where should it be traveling and the likes. [ The industry has ] grown to today 65 full members, pull offing merely on 86 billion Rand of capital and 30 associate members which are service suppliers, advisers etc stakeholders such as brooders, attorneies comptrollers and the likes ” .
This statement and the aims that was culled from SAVCA ‘s web sites on the issue of ‘lobbying ‘ seems to be the association ‘s enterprise of deriving legitimacy for the venture capital houses with the South African authorities in order to let the authorities enact Torahs that would let for a farther growing and development if the industry. Besides, with the constitution of SAVCA in 1998, one can arguably state that the learning period for the industry was period 1, prior to the formation of SAVCA, in which the industry ‘s norms and patterns were yet to be established.
This period represents another stage of South Africa ‘s political passage with the election of Mr. Thabo Mbeki ( the former South African Vice President ) as the new South African president who late as the South African president in 2008, few months before the terminal of his 2nd term in office
The Mbeki authorities was face with two major duties ( Southall, 2007 ) – the duties of restructuring and transmutation. With the GEAR economic policy, the Mbeki authorities canvassed for a reconstituting plan of province owned endeavors ( SOE ) as a necessary tool for an economic growing, an addition in foreign investings and as a beginning of financess for the state to refund its international debt ( Gumede, 2005 ) . The ANC authorities had inherited over 300 SOEs which employed over 300,000 South Africans ( Southall, 2007 ) . However, SOEs were dominated by 4 administrations – Transnet, Denel, Telkom, and Eskom – which controlled about 91 % of the estimated entire assets of the 30 largest SOEs and provided 86 % of their turnover and 94 % of the net income and employed 77 % of their employees ( Financial Mail 26.06. 99 in Southall 2007 ) .
However, although the Mbeki authorities argued otherwise, its reconstituting plan was more or less a partial denationalization plan. The South African authorities in its papers released by the Ministry of Public Enterprises titled “ An Accelerated Agenda Towards the Restructuring of State Owned Enterprises ” stated that:
“ In drumhead, [ the ] Government ‘s policy with respect to province owned endeavors is more decently referred to as a restructuring programme and non in the more simplistic footings of denationalization. The programme was and remains designed around a multiple array of schemes, or mixes of options, that are designed to guarantee the maximization of stockholder involvements defined in economic, societal and development footings. Therefore reconstituting refers to [ a ] matrix of options that include the redesign of concern direction rules within endeavors, the attractive force of strategic equity partnerships, the disinvestment of equity either in whole or in portion where appropriate and the employment of assorted immediate turnaround enterprises ” ( pg. 4 )
One statement for the alteration of name from “ denationalization ” to “ reconstituting ” was to lenify the trade brotherhoods like COSATU who saw a denationalization by the authorities to imply mass retrenchment. For case, at the beginning of the denationalization program in 1996, COSATU had threatened a one – twenty-four hours anti denationalization work stoppage. The authorities went on with its denationalization programme in 1999, for case, 20 % of South African Airways was sold to Swissair for R1.4 billion.
On the issue of transmutation, the authorities transmutation docket centred around two aims ( Southall, 2007 ) . 1 ) to increase the figure of black South African employed in SOEs 2 ) to increase the sum of procurance contracts awarded to black concern ventures and endeavors. With the staffing objective the Mbeki authorities achieved this by naming black South Africans to middle degree and senior degree places within the SOEs. For case, table 6.1 shows the current composing of the executives of the 4 largest SOEs in South Africa. This raised tensenesss among white South Africans who argued that free market rules was being jeopardised for the issue of political rightness ( Southall 2007: 211 ) . Besides on the issue of procurance, the Mbeki authorities was criticised for the issue of authorising black South Africans to conflict with profitableness. However, the authorities maintained that old NP authorities ; the apartheid authorities had besides used province parastatals to authorise Afrikaners in the yesteryear ( Southall, 2007 ) .
With regard to the growing and the development of the South African venture capital industry during this period, the industry experienced an increased growing: in footings of the sum of financess committed by investors for venture capital/private equity puting ; in the figure of venture capital houses and in the figure of professionals within the industry.
Figure 6.1 above clearly maps on this growing footings of the increased in financess under direction by the venture capital/private equity houses. The industry experienced an addition from R35.9 billion in 2001 to R103.1 billion in 2008, an annualised addition of 121.88 % . This constantly increased the figure of venture capital/private equity trades. One the issue of alteration within the industry, 2 interview respondents commented that the industry has experienced an increased in the sums of financess committed for venture capital investment by investors, as one mentioned that:
“ I think the alteration is [ in ] the weight of capital… . We [ now ] have the weight of capital to keep in many instances bulk or commanding places in really big companies. Back in those early yearss, we were making little buyouts, still in most instances keeping bulk but they were little investings. So truly that has been the existent quantum spring in the growing of the industry ” .
The other respondent mentioned:
“ Ok, a figure of things [ have changed ] , allow us interrupt this down. In footings of financess raising, evidently financess have increased significantly to 86billion ( figures as at twelvemonth terminal 2007 ) , you ‘ve seen the graphs and where they go. The profile of the people or establishments supplying capital has changed slightly. Initially, [ there was ] a batch of local capital, so a batch of international capital and now [ there is ] a sort of equilibrating act in footings of that, so you know [ from ] all financess raised, some 25 % is South African capital, 34 % is US, 27 is UK and so some other you know Canada, Asia etc ” .
In add-on to the addition in financess under direction by venture capitalists, the 2nd respondent besides commented on alterations in the beginning of financess that has occurred over the old ages. During this era, particularly, with the economic stableness that the Mbeki authorities provided to the private sector, the South African venture capital industry experienced an increased in involvement shown towards the industry by foreign investors, particularly investors from the US and the UK, the topmost venture capital/private equity industries in the universe. However, as at 2008 no known foreign venture capital house was in operation in South Africa.
The industry besides experienced growing in the figure of professionals within the industry. For case, in 2001, “ the figure of professionals grew to 322 from 294 in 2000 ” ( SAVCA Annual Report, 2001:10 ) . With regard to the figure of venture capital houses, the industry has under gone a ample addition in figure from 34 houses in 2000 to 74 houses as at March 2009 ( see figure 6.2 ) . These houses consist of confined venture capital houses, authorities venture capital houses and mugwumps that normally exist within a venture capital industry. The chiefly difference in this classification is the of venture capital houses is their beginning of financess. For confined venture capital houses, they are subordinates of fiscal establishments like Bankss, while capital for authorities venture capital is houses provided by the province. Independent venture capital houses managed financess for their limited spouses while they act as general spouses for the financess they managed ( Megginson, 2004 ) .
Table 6.1 below nowadayss the financess under direction for this era in the proportion of categories of venture capital houses in South Africa. One interesting thing about the tabular array is that since 2002, confined venture capital houses in South Africa seem to command about half of the entire financess under direction. However, many of these houses who have subordinates of South African Bankss manage their financess off their bank balance sheet.
Like with many venture capital industries round the universe the venture capital industry in South Africa is predominately focused on subsequently phase investment ( see table 6.2 ) . While on the issue mechanism for venture capital houses, although the state has an active capital market in topographic point, houses in the industry seem to be by and large geared towards go outing through trade sale and recently sale to another private equity house ( see table 6.3 ) .
The South African Government Legislations and its consequence on the Growth of a Venture Capital Industry in South Africa
As earlier mentioned, favorable governmental statute laws is cardinal to the success of any venture capital industry in any economic system. As these statute laws lay institutional models and supply industry inducement that may ease the growing and development of an emerging industry. For the emerging venture capital industry in South Africa, three authorities statute laws have had an impacting influence on the growing of the industry. They are: the Exchange Control statute laws, the Regulation 28 of the Pension Act of 1991, the Broad Based Economic Empowerment Act of 2003.
The South African province introduced the exchange control ordinance in 1961 during the thick old ages of the apartheid in order to “ look into a impairment of [ the ] capital history balance of payments ” ( South African Reserve Bank, 2001 ) which was caused by the immense sum of disinvestments the South African economic system experienced. Among other things, the exchange control regulated the repatriation of capital off from South Africa as a parallel exchange rate system for the Rand was introduced. Companies were merely allowed to repatriate financess at the “ fiscal rand ” rate which was a 40 % price reduction to the commercial rate ( Levy, 1990 ) . However, although the South African authorities has since relaxed this ordinance with the abolishment of the fiscal rand rate, however, the current exchange control Torahs still monitors the flow of financess in and out of the South African economic system.
At present, outward investing for a South African single outside the Southern African Common ( CMA ) ( i.e. Lesotho, Namibia, South Africa, and Swaziland ) is restricted to 2 million Rand. While for companies seeking outward investings which exceeds R50 million per calendar twelvemonth must seek blessing from the Department of Financial Surveillance. Other bureaucratic processs for outward investings by South African houses include the entry of:
- Full inside informations of the longer term pecuniary benefits to be derived by the Republic ( i.e. South Africa ) on uninterrupted footing, substantiated by hard currency flow prognosiss.
- A pro forma balance sheet of the offshore entity reflecting the fiscal place instantly anterior to and after the investing from the Republic.
- The proposed fiscal construction of the entity to be acquired or to be established.
- Where applicable, an estimation of the one-year running disbursals of the offshore entity ( South African Reserve Bank ) .
The manner this ordinance affects the venture capital in South Africa is on the issue of the internationalization of local venture capital houses puting outside Southern Africa as the ruddy tape that comes with puting aboard bounds venture capital houses deal structuring outside the part. The part besides limits the possibility of an international issue as the authorities maintains that at least a 50 % interest most must be maintained with international subordinates at any point in clip. A respondent mentioned on the issue of exchange control and how it affects in the industry that:
“ In kernel what is says is that exchange control does n’t let what they [ the authorities ] refer to as a cringle construction. Where [ a ] South African Entity can non keep portions in a company that is offshore that holds assets in South Africa. So what happens is that when a VC fund looks to go out or acquire into planetary type of market which is where the bigger type of returns are made… , [ the exchange control Torahs ] leads to premature [ international ] issues by VC fund directors.
Another source knocking the being of the statute law and its consequence on the venture capital industry, particularly venture capital international issue mentioned that:
“ … so issues are enormously affected by exchange control. We are non allowed to keep… , if we held an seaward entity, it had to be more than 50 % … , and the sort of issue we are speaking about we would keep 5 % – 10 % of the offshore entity and we are merely non allowed to make that, you ‘ve got to repatriate [ therefore ] we go forthing much on the tabular array. [ When you ] finally acquire to the modesty bank [ for certification ] . You [ are ] paying attorneies and you paying bankers a batch of money to work the procedure for you, non merely that it takes clip. Now if you are a US pharmaceutical company and you have a pick of three compounds, three paid compounds, one that happens to be South African, one Israeli and one French. You like the South African one and you go for that first. But now this is taking months, you say cats you know truly I ‘m non gon na acquire that one, its non worth it. So it truly does impact issue in a large manner, that ‘s pure exchange control ” .
One said vehemently:
“ You know South Africans is one of the really few states in the universe who have exchange control, it bizarre, everything else we ‘ve modernized, in some facets we are in front of the developed universe but we still have exchange, and no 1 is giving me a good ground for it. No 1 has given me a good ground why we still have it… . It one of Trevor Manuel ‘s large weakness that he did n’t acquire rid of it and do n’t inquire me why he is maintaining it, I ‘ve ne’er heard a good ground for maintaining it, ne’er ”
The ordinance 28 of the Pension of Act of 1991 is another statute law that has influenced the growing of the venture capital industry in South Africa. The bounds the sums of exposure pension fund directors have to “ alternate concern ” . At the minute, “ no more than 15 % may be invested in a big capitalization listed equity, and 10 % in any individual other equity.
How this ordinance affects the venture capital industry is that, with the present threshold, the sum that can be committed for venture capitalists investings is limited to merely 10 % of their pension. An addition in this threshold would increase the entire sum of financess pension fund directors can perpetrate to venture capital puting. As one venture capitalist said:
“ … I do n’t cognize the precise Numberss but I know that they are immense, that [ the ] pension fund industry has x billion/trillion under direction. Take [ an excess ] 5 % of that… , so its even [ an ] hindrance at the macro degree. ”
The 3rd statute law that has influenced the growing and the development of the venture capital industry in South Africa has been the Black Economic Empowerment ( BEE ) plan. The BEE strategy which is aimed at furthering the outgrowth of a black capital category, requires that by 2014 administrations within the private sector should hold handed between 25 – 50 % of their ownership to black South Africans ( Iheduru, 2008 ) . The plan itself has promoted the transition of of import steps such as the Employment Equity Act of 1998 and the Promotion of Equality and Prevention of Unfair Discrimination Act of 2000 in jurisprudence. These statute laws have imposed of import duty upon administrations to do their workplace demographically representative ( Southall, 2007 ) . However, the authorities had to get down to the execution of its BEE rules with the SOEs as it lacked the power to mandate the private sector to encompass this statute law ( Iheduru, 2008 ) which the private sector saw as a command to resuscitate some signifier of province socialism under a free market environment and since BEE was easier to prosecute with the province SOEs ( Southall, 2007 ) the authorities started its BEE plan with them.
Under the BEE Act No. 53 of 2003, BEE is defined as:
- increasing the figure if black people that manage, ain and control endeavors and productive assets ;
- easing ownership and managing of endeavors and productive assets communities, workers, co-ops and other corporate endeavors ;
- human resource and accomplishments development ;
- accomplishing just representation in all occupational classs and degrees in the workplace ;
- discriminatory procurance ; and
- investings in endeavors that are owned or managed by black people ( Department of Trade and Industry, South Africa, 2004 )
To supervise the conformity of BEE by administrations, the authorities enacted A BEE codification of Good Practice and an Empowerment Scorecard in 2004 on which it allocates BEE points to administrations based on their ownership composing, accomplishments development for black South Africans, discriminatory procurance, endeavor development and residuary development ( BEE Act, 2003 ) . This is caused what Iheduru ( 2008:343 ) calls a “ cascading consequence ” , in which all administrations with direct or indirect dealingss with the authorities have embraced the BEE plan as BEE donees from SOE activities besides demand BEE conformity from their ain clients every bit good. Iherduru ( 2008:343 ) noted that “ holding a good BEE mark becomes about every bit necessary as holding a concern card. ” However, ab initio the private sector the non embrace the thought of a BEE plan as they termed it as “ sin revenue enhancement ” ( Iheduru 2008 ) even as the black South Africans lacked equal capital to buy equity from the private sector. Nonetheless, the South African authorities used province power to coercive administration conformance with regard to the BEE docket. For case, the energy and excavation sector were told to either embracing the BEE plan or face economic liberalization and the remotion of authorities protection and authorities subsidies.
On how the BEE plan as influenced the growing and development of a venture capital/private equity industry in South Africa, the BEE plan as influenced the sum of capital committed by the authorities for venture capital/private equity investings, as the authorities would non fund any company that is non BEE ailment. A respondent noted:
I ‘ll state you the manner it affects me or the manner its affects our company. Because biovenutures is the lone beginning for support for biotech the merely other beginning is authorities. There you ‘ve got little to people three people company who pre gross and because you go to authorities for money they say you need a BEE spouse and you need black spouses. I mean it ‘s a deficiency of understanding once more of the concern, the nature of the concern, and merely where BEE plays a function. Even one of our companies that is now profitable, they say why has n’t this company got a local spouse because they are selling to the local infirmaries need a BEE program.
The manner BEE trades are done is you come along you like the company so you, we want to be portion of this company you can add value, you are a echt concern individual, you want to be portion of it, you non merely like an outside individual. But you do n’t hold money you do n’t hold that sort of money needed to purchase a interest in the company. So you go to a bank and a bank lends you money to purchase into the concern you pay the money back by the concern paying dividends to you and so you paying the bank. Biotechs paying dividends? It does n’t go on. So the lone manner to really acquire black participants in is to really give up shareholding. But so you ‘ve built a concern, and we are investors we got to give our money back.. , its non even our money. So that ‘s the job with seeking to implement BEE to a sector like ours.
Now the act does n’t make that, the act says really clearly, if this is a little concern that does n’t fall within the act or if it ‘s a concern of this size it merely needs to look at two or three constituents of the Act, it does n’t necessitate to look at all of it. So Act itself is all right but it ‘s the people using the act, its these imbeciles in authoritiess, some of whom where at that place yesterday. You sit with these authorities funders, if you say you are using for authorities support therefore you have to make this. And I ‘m similar expression at the Act, this Act is all right you know it ‘s the application. And its because the people who work in these organisations have no concern experience and do n’t truly understand what its like, they do n’t cognize how large trades are done, you know the assume you know, that you coming along you pay and that ‘s all
At the micro degree, the codifications of good pattern in relation to the venture capital/private equity industry contain four demands before venture capital portfolio houses can be required to as a black sceptered house. The conditions are:
- More than 50 % of any exercisable vote rights associated with the equity instruments through which the private equity fund director holds rights of ownership must be held by black people
- More than 50 % of the net incomes made by the private equity fund director after gaining any investing made by it, must by written understanding, accrue to black people
- The private equity fund director must be a BEE – owned company, as defined in the BEE Codes
- Over a 10 – twelvemonth period, the private equity fund must hold more 50 % of the value of financess invested, invested in black – owned endeavors that have at least 25 % direct ownership
Private equity houses that have portfolio companies who meet these demands enjoy some discriminatory intervention from the authorities. As one respondent commented:
“ Specifically, in the private equity infinite, people say that because you, if you are a private equity fund that meets those four standards, you might acquire some type of price reduction on reasoning minutess and the likes. Well, that ‘s likely true, if you are a fund director that does n’t run into those certificates, 9 out of 10 large minutess that are concluded have some type of BEE continuum into it anyhow ”
This chapter investigated the development of the venture capital industry in a passage economic system, South Africa. Findingss from the chapter shows that the outgrowth of the venture capital industry in South Africa is slightly different as the disinvestments the state experienced during the dusky old ages of apartheid was the event that triggered an outgrowth of the industry. Besides, it was besides argued from the chapter that in add-on to a market type institutional environment, for venture capital to boom in any state the state should be seen as politically stable, merely so would investors will be willing to perpetrate financess for venture capital puting. Furthermore, the chapter besides has shown how some statute law by the South African authorities has influenced the growing of the industry. One interesting subject that emanated from this joint development narrative is the demand for legitimacy both by the authorities and the venture capital industry which would be discussed in the following chapter, chapter 7.
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