Underperforming Sweden-South Africa matchmaking fund to be wound up

subscriber | 31 March, 2006

JOHANNESBURG. A risk capital fund, aimed at linking Swedish companies with black owned South African partners, will close down after only five years. The fund, The Sweden South Africa Business Partnership Fund (SSBF), has spent SEK 65 million so far, but the principals – the Swedish and South African governments - are unhappy with the outcome.

According to Africascan´ s sources the board has decided to close the fund for various reasons, one is that Sida feels that there are better ways to use the money and Sida also has changed its policy towards the private sector and it tries to avoid to fund individual companies directly.

Swedish aid agency Sida and the South African Department of Trade and Industry (DTI) are in agreement that the fund should be shot down. Negotiations, Africascan understands, are underway with the fund´s 10 existing clients about how to wind up SSBF`s participation – it should be done within the next 24 months.

There is also no clarity yet about what to do with the remaining SEK 14 million except that they will be used for partnership activities in South Africa.

The fund´s destiny, to be wound up, seems clear as it hasn´t managed to crack it in the market place.

One observation by a source is is that the fund should have had some 40 projects up and running by now, but the reality is far from that.

The chairman of the fund, Tom O´Donnell, does not want to be drawn on weather he agrees with the decision to close the fund or not.

“I do not have any comment, this is something the owners must deal with”, says Tom O`Donnell, a former Volvo representative in Southern Africa.

The head of Sida in South Africa, Lars Liljeson, who is a member of SSBF´s board and involved in the negotiations with the DTI, says that a formal decision has not yet been taken by Sida´s head office.

SSBF is the brainchild of business consultant Gabor Bruszt who came up with the idea after he had done an evaluation of Sida´s business development aid in South Africa in 1998. Bruszt also became the fund´s first chairman and set up an office in a Sandton, a northern Johannesburg business suburb.

SSBF was meant to spearhead Sweden´s development aid to the private sector, in particular to support black, young entrepreneurs by linking them up with Swedish partners.

The fund was announced in November 1999 during Prime Minister Göran Persson´s visit to South Africa. The initial funding was a healthy SEK 80 million.

SSBF soon ran into difficulty in finding suitable partners and suitable projects. To find Swedish companies that were prepared to give away equity and ultimately the control to a black joint venture partner proved to be more difficult than expected.

The way SSBF was set up, as an organization not for gain – with Sida and the South African Department of Trade and Industry as principals - also raised eyebrows among risk capital experts. Some argued that it would have been better to let an existing commercially driven fund take care of the money.

“I believe that SSBF is a very good idea and it is a pity that it is closed down as it hasn´t even tried to find a better formula. The fund also have not been marketed properly, which means that few in Sweden or South Africa even know about the possibility”, says Magnus Karlberg, a former board director at SSBF and a former CEO of Electrolux in South Africa.

Another critisism was that the fund, bent towards entrepreneurs, had little or no experience in the field. The board was populated by Swedish and South African bureaucrats. The business experience was represented by board directors from large Swedish multinationals with little entrepreneurial experience themselves.

The funds destiny has been hanging in the balance for a while, as it was clear already from start that it would be set up for a five-year period.

Only just over a month ago officials said that the fund had been given a “broader mandate”, and an extended lease on life, at least until 2008. But then, after consultations with the South African counterpart Department of Trade and Industry, it was decided to can the operation.

The remaining SEK 14 million would be used for “business enabling” activities: e g training, mentoring and sector research management up until 2008.

Sida has disbursed SEK 65 million over the five-year period, the cost over time for Sida has been between SEK 6-8 million. Sida never disbursed another SEK 14 million.

How much of the investments, at the most about SEK 40 million, that can be realised and maybe put back into other partnership activities, is not clear.

Out of the some 20 projects that have been started, ten are ongoing, others have matured and yet others have defaulted.

Officials have earlier said to Africascan that all the ten existing projects that SSBF is exposed towards are paying their dues – normally in the way of a en percent management fee on loans.

Not every project has performed, e.g. a waste-recycling company, with a Swedish minority partner, is underperforming and funds have not been used the way they should.

In another project, a few years ago, SSBF “was taken for a ride”, says a source: it was a company in Cape Town that revamped second hand computers from Sweden. The company collapsed and the funds appear to have dissappeard to pay manager´s salaries instead of plowing it into the assembly plant that had a large share of handicapped workers.

The projects that seem to perform well are the once with a direct link to large Swedish companies based in South Africa.

Two of those projects are linked to Ericsson and are involved in network sub-contracting. SSBF supplies loans and facilities.

Another is a black owned trucking company, which bought trucks from Scania. SSBF has underwritten the deal for a 10 percent fee.

For yet others, such as a tourism village project in the little town Alicedale and a tourism incentive scheme in Cape Town, it is still to early to say.

It is not clear yet what will happen with the remaining funds, except that the money will be disbursed for business development projects in South Africa in consultation with the South African government. Those project, one can expect, will not go to equity or loan arrangements with private companies.

Africascan Comment

Most business development funds, be it Swedish or from any other country, have problems in finding their feet on the ground.

SSBF was set up for failure by the way it was ring fenced by strong political directives, as well-meaning as they were, and by letting bureaucrats – without incentives – run what was in effect a risk capital fund that should be characterised by high risks and high rewards. An activity that normally is run by pumped up market driven managers.

The strong emphasis on Black Economic Empowerment (BEE) did not make it any easier. A potential partner in Sweden would not only have to make up their mind if they wanted to enter South Africa – not the first market that springs to mind for a small to medium sized company – but they also should not look for the best possible partner. That is to ask for trouble.

But it should be said that it is easier today than a few years ago to find qualified BEE companies, depending on the type of industry. Ironically that also have made SSBF´s offering obsolete – BEE is no longer a marginal activity, it is mainstreamed by the South African governments directives and there are new private funds out there that are much better equipped than SSBF for the job. That is apparently also what DTI thinks.

But the main issue is probably not BEE but that the geographical distance makes it so much more difficult to match-make companies. There must be a serious incentive for a Nordic company to spend time on it.

Add to that the unevenness in the relationship – in this case Swedish companies are supposed to come in with equity and expertise in a partnership with what is normally a new, inexperienced South African company.

There may be a point that SSBF could have done better if it had been marketed properly. That is clearly an issue.

Ultimately it has been a waste of money. The target groups were probably the right once – small and medium sized companies - as multinational corporations are finding their way on their own.

Therefore, if Sweden and South Africa should deepen a business partnership it is clear to us that the focus is fine. But instead of trying to play business angel in the treacherous field of risk capital – there is another state owned fund, Swedfund, that could do that – the money should have been spent on broaden the base through the funding of information and intelligence gathering – and facilitating business decisions.

That seems to be what was on the cards, but the proposal was deserted for, for us, unknown reasons. Maybe that SSBF was not the right platform for intelligence-, training- and facilitating activities.