BRIEFING TO THE PORTFOLIO COMMITTEE ON TRADE AND INDUSTRY

Presenters: Ms Philisiwe Buthelezi: CEOMr Frencel Gillion: CIOMr Victor Mabuza: Executive – Asset ManagementMr Andrew Wright: COOKhetiwe Tshabalala: Senior Investment Associate

28 February 2007

TABLE OF CONTENTS

1. MISSION, MANDATE AND OBJECTIVES

2. CURRENT STRATEGIC PLAN AND STRUCTURE

3. ASSESSMENT OF THE BEE FUNDING ENVIRONMENT

4. FUND MANAGEMENT DIVISION

5. ASSET MANAGEMENT DIVISION

6. BUDGET

7. CONCLUSION

8. CASE STUDIES

TABLE OF CONTENTS

1. MISSION, MANDATE AND OBJECTIVES

2. CURRENT STRATEGIC PLAN AND STRUCTURE

3. ASSESSMENT OF THE BEE FUNDING ENVIRONMENT

4. FUND MANAGEMENT DIVISION

5. ASSET MANAGEMENT DIVISION

6. BUDGET

7. CONCLUSION

8. CASE STUDIES

ACCELERATED DELIVERY

“The National Empowerment Fund (NEF) is the catalyst of broad-based Black Economic Empowerment in South Africa.

We enable, develop, promote and implement innovative investment and transformation solutions to advance sustainable Black economic participation.”

NEF Mission Statement

Main objective To be a catalyst in facilitating economic equality and transformation

Development focus

Maximise the empowerment dividend

Driven by

- Current market needs- Broad-based empowerment charter- Government policy and other sectoral

charters- Addressing past failures of BEE structures- BB BEE Codes of Good Practice

WHAT DOES NEF DO AND WHY?

TABLE OF CONTENTS

1. MISSION, MANDATE AND OBJECTIVES

2. CURRENT STRATEGIC PLAN AND STRUCTURE

3. ASSESSMENT OF THE BEE FUNDING ENVIRONMENT

4. FUND MANAGEMENT DIVISION

5. ASSET MANAGEMENT DIVISION

6. BUDGET

7. CONCLUSION

8. CASE STUDIES

NEF STRATEGIC FOCUS

Broad Based Black Economic EmpowermentThe Codes of Good Practice

Accelerated & Shared Growth Initiative for SA ASGI - SA

6% GDP Growth 10% Investment Growth 10% Export Growth 2014

Government Aims:1. Access to Finance2. Job creation3. Geographic spread4. Women empowerment5. Integrated manufacturing economy6. Efficient, fast & flexible economy7. Diversity of enterprise8. Skills transfer & development

NEF Act:Objectives

The dti Objectives

Priority

Sectors

Arts & Culture,

Tourism,

Textiles,

Agro Processing

Automotive,

Chemicals,

ICT, Aerospace

Film Industry,

Exports

HISTORIC BUILD UP

PERIOD PLANNING ACHIEVEMENT

Years ending 31 March 2003

Established under National Empowerment Fund Act 105 of 1998

Establishment of NEF Ventures Fund with IDC

Year ending 31 March 2004

Transfer of MTN and Uthingo share set asides

30 May 2004

Strategic Plan approved by Minister and the dti prior to launch

Launched current products

R2 billion allocated by NT for capitalisation - 5 yrs to 2009

Year ending 31 March 2005

Strategic Plan approved by DG and DDG (dti)

Business Plan approved by Acting DG (dti)

First capital drawdown of cash of R150M

First investments disbursed

APPOINTMENT OF CURRENT NEW EXECUTIVE MANAGEMENT AND BOARD OF TRUSTEES

Year ending March 2006

Draft Rolling Strategic Plan Second capital drawdown of cash of R370M

NEF disburses in excess of R200 million

Approval of 1st retail issue

HOW DOES THE NEF DO THIS?

KEY OBJECTIVES OF THE NEF:

• Promote and support business ventures pioneered and run by black people;

• Promote the understanding of equity ownership among black people;

• Provide black people with direct and indirect opportunities to acquire share interests in State Owned and private business enterprises;

• Encourage and promote investments, savings and meaningful economic participation among black people.

THE REVISED STRATEGIC PLAN

• To create a prudently and effectively managed fund with a time horizon of at least 10 years;

• To ensure broad-based and sustainable empowerment;• To act as a catalyst to stimulating BB BEE and hence economic

growth;• To avoid duplicating existing offerings by other operating DFIs;• To work in partnership with both public and private sectors;• To maximise the empowerment dividend in lieu of the financial

dividend;• To protect the capital base of the NEF and provide a real return.

NEF’S PERFORMANCE CRITERIA – “The Empowerment Dividend”

• Broad Based Black Economic EmpowermentOwnership, management control, employment equity, skills etc

• Black Women Empowerment

• Job Creation

• Growth Sectors

• Geographic Spread

• Investment Return

The assessment of impact is not driven only by financial returns but by measurement in terms of “The Empowerment Dividend” made up as follows:

TABLE OF CONTENTS

1. MISSION, MANDATE AND OBJECTIVES

2. CURRENT STRATEGIC PLAN AND STRUCTURE

3. ASSESSMENT OF THE BEE FUNDING ENVIRONMENT

4. FUND MANAGEMENT DIVISION

5. ASSET MANAGEMENT DIVISION

6. BUDGET

7. CONCLUSION

8. CASE STUDIES

BEE MARKET CHALLENGES

BEE market challenges include

• major funding gaps – R772 billion to R2 trillion

• lack of collateral by BEE groups

• limited specific industry knowledge / management experience

• Lack of bankable business plans

• limited or no equity contribution

• limited knowledge of financial market, financing structures and financial investments

2

Banks faces similar challenges as NEF when financing BEE

Banks ringfence higher risk products

Cross subsidise product offerings

Major focus on large leveraged transactions

Financial Sector Charter (FSC) points

0

20,000

40,000

60,000

80,000

100,000

120,000

Rand Merchant Bank ABSA Corporate andMerchant Bank

Nedbank Capital Standard Bank Investec Bank

R B

n

0

500

1,000

1,500

2,000

2,500

3,000

3,500

4,000

4,500

R B

n

Value of transaction (2005) in Rm Average Deal Size in Rm

Bank Number of transactions (2005)

Value of transaction (2005) in Rm

Average Deal Size in Rm

Rand Merchant Bank 25 99,823 3,993

ABSA Corporate and Merchant Bank 20 69,058 3,453

Nedbank Capital 33 60,746 1,841

Standard Bank 28 35,672 1,274

Investec Bank 39 21,709 557

THE BEE COMPETITIVE ENVIRONMENT

4

Bank Startup Finance Contract Finance Franchise Finance Guarantees Asset Finance Partnerships/Joint Funds Trusts/Broad-based Schemes/BEE Partners

Business Partners/Khula Start-Up Fund

Khula Guarantee Fund BP/UYF Franchise Fund

DBSA All of funding Products No dedicated product N/A N/A Depends on nature of funded project

Progress Fund Financing through BEE Consortiums

Matching Scheme

Partnership Scheme

Product Development Scheme

N/A

N/A

UYFUYF/FNB Progress Fund General Fund N/A UYF/Buisness Partners Fund N/A N/A

UYF/Business Partners Franchise Fund UYF FNB Progress Fund UYF Voucher Programme

BP/Khula Start-Up Fund

Business Partners No dedicated product Business Partners/Umsobomvu Franchise Fund

N/A

N/AN/AIsibaya Fund(Fund of Funds and Private Equity Fund)

PIC

Tourism Fund

IDC N/A Yes Yes-through the dedicated unit

N/A

Financing through BEE Consortiums

N/A

N/A IDC Partnership for Transport

N/A

Yes

Tourism Fund

THE BEE COMPETITIVE ENVIRONMENT (Cont.)

5

THE BEE COMPETITIVE ENVIRONMENT (Cont.)

5

• DFI’s• Transaction sizes vary greatly• Only IDC offers a Contract Finance Product• Khula and UYF partners with BP and Banks to rollout its

products• BP offers most comprehensive post investment support products• BP leaders in SME financing

Private Equity Fund

• Comprise captive and independent Fund Managers

• BEE is a key driver of deal flow (R3 billion in 2005)

• Preference for later stage, buy-out funding

• Limited “subsidised” funding to BEE groups

6

THE BEE COMPETITIVE ENVIRONMENT (Cont.)

NEF APPROVED & DISBURSED DEALS BY NUMBER

31ST DECEMBER 2006

0

20

40

60

80

100

120

Accumulative No. of Deals Approved Accumulative No. of Deals Disbursed

99

79

Launch of funding products

Additional R151m capital

allocation

Appointment of CEO

Appointment of new Board of

Trustees

NEF APPROVED & DISBURSED DEALS BY VALUE

31ST DECEMBER 2006

0

100,000,000

200,000,000

300,000,000

400,000,000

500,000,000

600,000,000

700,000,000

Accumulative Value of Deals Approved Accumulative Value of Deals Disbursed

R632m

R433m

Launch of funding products

Appointment of CEO

Additional R151m capital

allocation

Appointment of new Board of

Trustees

NEF work in progress: 185 of R1,409 bn

ENQUIRIES

APPLICATIONSNEW DEALS

ACCEPTEDDUE DILIGENCE

APPROVED DISBURSED

(Including

Undrawn Capital)

Approx

22,593 4,534

41

worth

R313m

45

worth

R461m

20

worth

R202m

79

worth

R433m

FUND MANAGEMENT PIPELINE

17

FUND MANAGEMENT STRATEGY – DIVISIONAL OVERVIEW

Strategy is aimed addressing the following issues:

Internal External

• Clarify focus areas and broad investment criteria

• Enhance risk management, thereby driving down impairments

• Facilitate greater efficiency and turnaround times

• Facilitate the deepening of skills / product specialisation in the two funds

•Accelerate delivery on NEF mandate

• Address issues of access to finance

• Position NEF as the pre-eminent provider of BEE financing solutions

• Position NEF as a catalyst for leveraging commercial banks and other DFI funding for BEE

8

TABLE OF CONTENTS

1. MISSION, MANDATE AND OBJECTIVES

2. CURRENT STRATEGIC PLAN AND STRUCTURE

3. ASSESSMENT OF THE BEE FUNDING ENVIRONMENT

4. FUND MANAGEMENT DIVISION

5. ASSET MANAGEMENT DIVISION

6. BUDGET

7. CONCLUSION

8. CASE STUDIES

FUND MANAGEMENT DIVISION

As a facilitator of the Codes of Good Practice of the Broad-Based Black Economic Empowerment Act (the Codes), to support the pillars of black enterprise by providing finance and financial solutions through the Fund Management Division across a range of sectors and stages of business;

PRODUCTS TO FACILITATE BUSINESS GROWTH

Start-UpStart-Up

CC & (Pty) LtdCC & (Pty) Ltd Acquire assetsAcquire assets Working capitalWorking capital Bridging financeBridging finance Debt and EquityDebt and Equity Black >75%Black >75% Max. 7yearsMax. 7years

ExpansionExpansion

CC & (Pty) LtdCC & (Pty) Ltd Debt & EquityDebt & Equity Black >51%Black >51% Max. 7yearsMax. 7years

TransformerTransformer

MBOs & LeveragedMBOs & Leveraged financefinance Management buy-insManagement buy-ins ESTEST Unlisted entitiesUnlisted entities Debt & EquityDebt & Equity Black >26%Black >26% Max 7yearsMax 7years

Liquidity & WarehousingLiquidity & Warehousing

Create sustainable BEE Create sustainable BEE ownershipownership

Refinancing existing BEERefinancing existing BEE structuresstructures

Max. 3yearsMax. 3years

Capital MarketsCapital Markets

Facilitate new Facilitate new entrants into JSEentrants into JSE & Alt& Altxx

Black >26%Black >26%

Max. 2yearsMax. 2years

Start-Up Expansion Maturity/Decline

High Risk Low Risk

Preferential Procurement

Preferential Preferential ProcurementProcurement

CC & (Pty) LtdCC & (Pty) Ltd Acquire assetsAcquire assets Working capitalWorking capital Bridging financeBridging finance Debt Debt Black >75%Black >75% Max. 7yearsMax. 7years

NEF FUND MANAGEMENT STRUCTURED INTO FOCUSED FUNDS

Chief Investment Officer

iMBEWU FUND•Entrepreneur support•Rural & Community•Proc. Contracts

CORPORATE FUND•Entrepreneur support•Capital Markets•Liquidity & Warehousing

Legal ServicesPre-Investment

ManagementPost-Investment

Management

NEF iMBEWU FUND•Entrepreneur support

(<R3m)•Rural & Community•Proc. Contracts

NEF CORPORATE FUND•Entrepreneur support

(>R3m)•Capital Markets•Liquidity & Warehousing

NEF STRUCTURED INTO FOCUSED FUNDS

The NEF iMbewu Fund • provides debt finance from R250 000 to R3 million (in

exceptional cases up to R20 million for Procurement Contracts and Rural & Community Development) for start-up, expansion and equity transformation products

The NEF Corporate Fund • provides complex investment debt and equity solutions from

R3m to R50m for all products

(R) Value%

By Number%

By Value By Number

Transformer R 180m 41.6% 10 12.7%

Capital Market R 74m 17.0% 4 5.1%

Start-Up R 61m 14.1% 39 49.4%

Liquidity & Warehousing R 60m 13.8% 3 3.8%

Expansion R 38m 8.8% 17 21.5%

Contracts R 19m 4.3% 5 6.3%

Rural & Community R 1m 0.3% 1 1.3%

R 433m 100% 79 100%

INVESTED PORTFOLIO BY PRODUCT: 31 Dec 2006

11

INVESTED PORTFOLIO BY REGION: 31 Dec 2006

 (R) Value %

By ValueBy Number %

By Number

Gauteng R 222 m 51.3% 46 58.2%

Western Cape R95 m 22.0% 14 17.7%

Eastern Cape R78 m 18.0% 7 8.9%

Kwa Zulu Natal R 34 m 7.8% 7 8.9%

Limpopo R3 m 0.7% 3 3.8%

Mpumalanga R 0.4 m 0.1% 1 1.3%

Free State R 0.25 m 0.1% 1 1.3%

Northern Cape 0 0.0% 0 0.0%

North West 0 0.0% 0 0.0%

R433 m 100% 79 100%

INVESTED PORTFOLIO BY SECTOR: 31 Dec 2006

12

INVESTED PORTFOLIO BY SECTOR: 31 Dec 2006

SECTOR (R) Value%

By ValueBy

Number%

By Number

Construction R 85 m 19.5% 9 11.4%

ICT & Media R 74 m 17.0% 10 12.7%

Food & Agri Processing R 51 m 11.9% 15 19.0%

Tourism & Entertainment R 47 m 10.8% 4 5.1%

Mining Services R 45 m 10.5% 2 2.5%

Manufacturing R 45 m 10.4% 6 7.6%

Printing Services R 14 m 3.3% 5 6.3%

Wood & Paper Industry R 13 m 2.9% 4 5.1%

Textile Industry R 11 m 2.6% 3 3.8%

Motor Industry R 11 m 2.5% 3 3.8%

Engineering R 10 m 2.2% 4 5.1%

Note: Only main invested sectors above 2% by value are reflected above

(R’m) Value % By Value By Number % By Number

Associate Investment (Loan & Equity)

309 71% 22 28%

Loan 112 26% 54 68%

Equity 13 3% 3 4%

433 100% 79 100%

INVESTED PORTFOLIO BY INVESTMENT STRUCTURE

NEF INVESTED PORTFOLIO BY FINANCIAL INSTRUMENT BY VALUE

31ST DECEMBER 2006

Loan

26% Equity

3%

Loan & Equity

71%

13

Total Invested(R’m)

Total Impairment(R’m)

%

Start-up 61 36 50%

Expansion 38 23 61%

Transformer 180 2.5 0%

Contracts 19 5.5 29

Rural & Community 1 1 100%

Capital Market 74 1 0%

Liquidity & Warehousing 60 30 50%

433 98 23%

IMPAIRMENTS BY STAGE OF INVESTMENT:31 Dec 2006

16

Total FMDiMbewu

FundCorporate

Fund

R’m R’m R’m

2006/2007 Allocation 459 205 254

Projected 2006/2007 performance 352 94 258

Disbursed up to 31/12/2006 156 26 130

Projected disbursements (4th Quarter) 196 68 128

Undrawn Surplus 107 111 (4)

2007/2008 Budget allocation 450 150 300

Total available capital 557 261 296

Less: Approved / potential transactions in current pipeline to be invested in 2007/2008

(214) (120) (94)

Available for other deals in 2007/2008 332 136 195

FUND MANAGEMENT RESERVES - 2007/2008

18

TABLE OF CONTENTS

1. MISSION, MANDATE AND OBJECTIVES

2. CURRENT STRATEGIC PLAN AND STRUCTURE

3. ASSESSMENT OF THE BEE FUNDING ENVIRONMENT

4. FUND MANAGEMENT DIVISION

5. ASSET MANAGEMENT DIVISION

6. BUDGET

7. CONCLUSION

8. CASE STUDIES

ASSET MANAGEMENT DIVISION

By structuring accessible retail savings products for black people through the Asset Management Division, which is a custodian of certain equity allocations in State Allocated Investments (SAIs), the NEF aims to foster a culture of savings and investment amongst its beneficiaries.

•

The South African consumer challenges

Intimidating locations

Complex products

Non conducive markets

EnvironmentUse of accessible channels and

Media

Access to retail brokers

Timeous announcements

Distribution and access Distrust formal institutions

No financial planning

Prefer holding cash e.g. storing money

under the bed

Culture

Very little education and financial

Intimidated by financial jargon

EducationMedical costs eats up disposable

income

Reduces pool of targeted

investors

Disillusioned and disgruntled

Nation, that do not see a need

to save,

HIV/AIDSAffordability,

Minimum subscription

Diversity

Costs

2006 Survey of Financial usage

2005 & 2006 people with bank accounts increased by 1,5 m to 15.9m

2% invest in a savings or investment policies

Savings & investment knowledge is limited

67% do not understand how interest rates work

38%

Emergency

29%

Funeral

Costs

28%

Food

2006 Survey of Financial usage

Overall people prefer having safe investment and Earning a low return

On average, whites invest more and use formal investment structures

Blacks are twice as likely to belong to a Stokvel than a retirement or annuity fund

Gaps Identified

Over subscription in the case studies demonstrates growing appetite for non-conventional retail financial products

Savings and investment diversification invites for more products targeted at the individual consumer

There is an increasing need for inflation beating products by all segments

Information irregularity between consumers & product providers, the underlying problem is financial illiteracy

Distribution of financial services and products is a key problem

The backlog and gaps in broad based empowerment dictates that more focused retail offers be made to Black people

•

Interventions to be explored

Continuous Education - Providing focused higher quality information

Accessible institutions and access to brokers, service providers - Monitor distribution channels more effectively at a high level - Distributors encouraged to take a closer look at the information they receive from product providers

Customer focused solutions & less complex products - Designing products that are client focused

Channeling increasing consumer expenditure towards savings and investment

Acceleration of Broad Based Empowerment

Designing innovative products

Undertake better post-sale analysis of the performance of products

•

Designated State Allocated Investments

Asset Shareholding % Status

• MTN Group 1.5 received by NEF• Telkom 5 not yet received• SAA 5 not yet received• ACSA 10 not yet received• Connex Travel 10 not yet received• Viamax 10 not yet received• Syncat 10 not yet received• Transwerk Perway 10 not yet received• Sentech 10 not yet received• Uthingo 5 received by NEF• SAFCOL 10 not yet received

BEE RETAIL PRODUCTS

• Current BEE Retail Product Initiatives

TABLE OF CONTENTS

1. MISSION, MANDATE AND OBJECTIVES

2. CURRENT STRATEGIC PLAN AND STRUCTURE

3. ASSESSMENT OF THE BEE FUNDING ENVIRONMENT

4. FUND MANAGEMENT DIVISION

5. ASSET MANAGEMENT DIVISION

6. BUDGET

7. CONCLUSION

8. CASE STUDIES

‘millions Fund Management Operations TOTAL

2003/4 R35 R25 R60

2004/5 R150 R15 R165

2005/6 R371 R40 R411

2006/7 R495 R66 R561

TOTAL R1 051 R146 R1 197

R1 035

INVESTED:COMMITTED:

R635

R400

BUDGET:

2007/8 R646 R143 R789

2008/9 R965 R107 R1 072

2009/10 R978 R116 R1 094

TOTAL MTEF R2 589 R366 R2 955

MTEF YTD R3 640 R512 R4 152

OVERVIEW OF CAPITALISATION

R151 m

R380 m

Budget v MTEF: Operating Costs

Budget Budget MTEF Budget MTEF Budget MTEF

R'm R'm R'm R'm R'm R'm

COSTS

Personnel Costs 43 71 67 76 72 82 78 Professional fees 5 14 10 15 11 17 12 Marketing Costs 6 16 7 17 8 18 8 Building Costs 3 6 3 6 4 7 4 Administration Costs 9 19 14 20 14 22 15 Total Operating Costs 66 125 102 134 109 145 117

Capex 1 18 6 - - - -

Total costs 67 143 108 134 109 145 117

2007/8 2008/9 2009/10 Budget v/s MTEF

2006/7

2006/7 2007/8   2008/9   2009/10

Budget Budget MTEF   Budget MTEF   Budget MTEF

  R'm R'm   R'm R'm   R'm R'm

Operating budget

66

125

102

134

109

145

117

Capex

1

18

6

-

-

-

-

Operating budget

67

143

108

134

109

145

117

Investment capital              

Imbewu Fund investment budget

200

150

244

250

355

350

368

Corporate Fund investment budget

247

300

357

365

430

475

430

Post Investment Support

-

8

-

8

-

9

-

Strategic Projects

36

73

120

250

150

211

150

BEE Retail

45

115

40

-

30

-

30

Total Capital

528

646

761

873

965 1,045

978

TOTAL FUNDING REQUIREMENTS

595

789

869

1,007

1,074

1,190

1,094

Budget v MTEF: Operating Costs and Investment Capital

TABLE OF CONTENTS

1. MISSION, MANDATE AND OBJECTIVES

2. CURRENT STRATEGIC PLAN AND STRUCTURE

3. ASSESSMENT OF THE BEE FUNDING ENVIRONMENT

4. FUND MANAGEMENT DIVISION

5. ASSET MANAGEMENT DIVISION

6. BUDGET

7. CONCLUSION

8. CASE STUDIES

CONCLUSION

• The board of trustees and management are clear on and committed to the mandate of the NEF;

• The NEF has an important mandate which is to drive the transformation of the South African economy through the implementation and funding of government BB BEE policy;

• The new board of trustees and management team has successfully advanced the NEF to a positive position in terms of track record, delivery and obtaining overall stakeholder support from the dti, National Treasury and business in general;

• Having achieved all of this, management and the board of trustees continue to drive the NEF to become a most credible and strategic DFI in South Africa, an example and an authority in the effective implementation of transformation policy, beyond the Republic of South Africa.

TABLE OF CONTENTS

1. MISSION, MANDATE AND OBJECTIVES

2. CURRENT STRATEGIC PLAN AND STRUCTURE

3. ASSESSMENT OF THE BEE FUNDING ENVIRONMENT

4. FUND MANAGEMENT DIVISION

5. ASSET MANAGEMENT DIVISION

6. BUDGET

7. CONCLUSION

8. CASE STUDIES