ASIAVIEW: The thought that counts

Given PERE’s reach into the world’s emerging economies, it was only a matter of time before we came across a private equity real estate fund that positioned social impact investing at the heart of its strategy.

Truth be told, we would likely not have looked twice at the Talana Impact Fund (TIF) if it were not for the involvement of Asia investment veteran Robert Zulkoski. Indeed, it was the backing of the former Asia head of Oaktree Capital Management that brought the fund to our attention. The brainchild of Wouter de Vos, Patrick Kilkenny and William George, Talana is the third investment by Zulkoski’s venture capital firm Laurasia Capital Management.

Nevertheless, the vehicle warrants attention, not least because it provides the opportunity to debate whether it is possible to operate an optimal investment strategy that concurrently delivers optimal social returns. Talana believes that, thanks largely to South Africa’s black empowerment policy, it is possible to offer something that comes as close as is realistically possible to achieving just that balance. As the firm markets the fund over the coming months, no doubt this question will be asked by investors time and again.

For the most part, TIF is a typical private real estate investment fund: closed-ended in structure and lasting up to seven years. Talana expects to attract limited partners by demonstrating it can purchase income-producing property, across the country and across property types, from which it can deliver an approximately 18 percent IRR and a 2.3x equity multiple. Linear stuff.

Where Talana differs in its strategy is in its onus on dealing with counterparties keen to improve their black empowerment credentials and in how it expects to divvy the spoils of its outperformance – the carried interest. Starting with the latter of these nuances, TIF’s management plans to share any promote earned from its investments with a charity called Columba Leadership. That charity is focused on helping young South Africans reaching the senior years of their schooling to realize their potential for the benefit of themselves, their communities and, ultimately, South Africa.

Talana’s promote sharing with Columba effectively qualifies the fund as able to offer its counterparties credits as they look to build their black empowerment scorecards – a measurement tool introduced by the government in 2003 to increase black participation in the country’s economic growth. Corporates with strong scorecards will be better placed to procure business with government enterprises, to obtain licenses and concessions or even buy government assets. By Talana’s reckoning, TIF’s Columba connection means access to property deals offered on an attractive basis by organizations that prioritize scorecard improvements over optimal property dealing, hence providing the fund with a competitive advantage over its competition.

As such, the counterparty focus and promote arrangement could be described as symbiotic in nature. Well-executed, this dynamic should see the fund’s investors benefit from its advantage in the marketplace, its counterparties benefit from improved black empowerment credentials and Columba Leadership receive a capital infusion that would be bigger than any corporate donation it previously has received.

Still, does TIF truly demonstrate that it is possible to concurrently deliver optimal social and financial returns? Would it not be fair to suggest that, while a black-focused charity stands to gain considerably from this fund working, once again we have a situation where white people eat first? How many black institutional investors are there likely to be within TIF’s investor pool? Probably few. The very purpose of carried interest, after all, is a reward for managers achieving alpha, after investors receive what is due to them.

These are devil’s advocate points for sure and, given how difficult it is to measure social returns, perhaps they also are a bit unfair. When PERE posed them to the founder of Columba Leadership, he admitted that how the optics of partnering with private equity like this would impact the reputation of his organization was a concern. However, quite reasonably, he countered by asking what there was to lose.

TIF is understood to be the first fund of its type and, should it work, Columba Leadership would be significantly capitalized. Perhaps it will even serve as a litmus test for other managers to explore something similar.

Furthermore, it is only right to note that it is the investors that are taking the lion’s share of the risk in the first place. Added to that, we should recognize that fund managers don’t typically get into this game to split the spoils with a charity. The intentions of de Vos, Kilkenny and George, as well as Zulkoski, should be acknowledged.

All in, this could be one of those situations where there is no clear answer and maybe that’s okay. What surely matters the most is that innovative efforts are being made in the name of correcting a country’s prior wrongs.