The amount of venture capital available within the South African tech ecosystem is set to increase in the coming years as innovative de-risking models attract more institutional investment into the space.
That is according to investors talking on a panel at last week’s SA Innovation Summit, who all agreed that institutional investors such as pension funds have historically avoided the VC asset class in South Africa given its inherent risks.
This has made raising a venture capital fund in the country a challenging endeavor, said Rory Ord, head of private markets at 27four Investment Managers.
“It is tough going in South Africa, there are special mandates from funders, and those that are approaching the pension fund market will know there is no familiarity with what it means to be an investor in the early stage space,” he said.
“Pension funds will raise issues around J-curves, and the risks. Those who are taking vanilla offerings to the market will struggle. You need to think about who is sitting on the other side of the table and what their concerns are, and how we might mitigate those concerns. You need to take away the risk from the institutional investors, and smooth the path.”
There is a need, then, to create tailored offerings to “smooth the path”, and a few funds are just doing that. The likes of the SA SME Fund and Fireball Capital have adopted a “fund of funds” model, disbursing capital into multiple VC firms with multiple approaches in order to spread risk. The latter is set to close its ZAR1 billion (US$57 million) round fund soon, said investment manager Justin James, and he said plenty of money will soon be flowing into the ecosystem.
“In South Africa, it is very different to what is happening overseas, where the allure of risk taking is different. In South Africa it is not the case. There is a lack of liquidity and due diligence takes longer,” James said.
With firms such as Fireball doing their bit to de-risk venture capital to make it more similar to the private equity asset class, and therefore attract more institutional investment, however, liquidity is improving.
“From a PE perspective, the mandates are changing. Institutional investors are coming. It is taking a bit longer, but the money is coming,” James said.
