Introducing KEREF

South Africa has a rich network of individuals with often pioneering business ideas but without the means of turning their plans into a profitable, functioning business. Kagiso Enterprises Rural Private Equity Fund (KERPEF) strives to bridge this gap. KERPEF was established in 2002 by the Kagiso Trust as a fund management entity. It owes its establishment to the W.K. Kellogg Foundation which, in 2002 and subsequent years, advanced a R30 million grant to KERPEF. The grant is aimed at capitalising the fund which seeks to pursue sustainable rural development and wealth creation.

KERPEF has two principal mandates:

• To fund sustainable high growth rural enterprises.
• To facilitate economic participation of previously disadvantaged individuals in rural areas.

The History of KERPEF

The W.K. Kellogg Foundation’s grant stipulated that the grantee, Kagiso Trust, use the grant proceed of US $2 150 000 to establish, capitalise and manage the Kagiso Enterprises Rural Private Equity Fund in South Africa. The grant’s stated objective was to finance a portfolio of investments in rural high growth businesses. In addition to commercial viability, KERPEF’s investment portfolio companies should fulfil the additional grant objectives of the following:

• A positive effect on rural wealth.
• Job creation.
• Creating new employment opportunities for rural youth and women.

Post-capitalisation, Kagiso received an additional grant of US $1 155 000 in August 2006. These grant proceeds were used for consolidating and strengthening the initial work started by KERPEF. Since its inception, KERPEF has systematically evaluated over 100 potential investments, with the investment criteria focusing on sustainable rural enterprises. The extent of impact that the funds have, both socially and financially, are enormous. Since most financial institutions are reluctant to take equity risk in rural enterprises, particularly with start-ups, KERPEF provides critical equity and commercial funding to such projects.

At a time of food security threats and deepening rural poverty, the goal is to commercialise rural enterprises and enhance their participation into a value-chain by connecting the market directly with the operations. To achieve this, KERPEF provides low-cost funding to finance enterprises which create wealth and sustainable employment for the rural people. All returns are ring-fenced and reinvested to keep up with inflation.

In mid-sized entities KERPEF’s funding will normally range between 20% – 30% of total required funds; essentially KERPEF fills the equity gap. In smaller transactions KERPEF would typically provide 90% of the total funding required. While KERPEF is operating in an environment where people do not normally have access to funds, it has proven critical that entrepreneurs should invest or raise at least 10% of the required funding. This financial risk taken on by the entrepreneurs ensures that their interests are aligned to those of the investor.

KERPEF’S Approach to Investment

KERPEF is bridging a critical institutional gap in the rural business space. The approach is to commercialise rural businesses by identifying and mitigating risk factors, with the exclusion of businesses considered harmful to humanity i.e. liquor, tobacco, gambling, micro-lending and armament. The KERPEF team has a wealth of corporate experience and development expertise which positions the fund to be a partner of choice in rural development. The approach of sustainable development is to offer a holistic package to rural entrepreneurs.

Beyond screening the viability of the business KERPEF places great emphasis on the entrepreneur by:

• Linking them with a technical partner who should preferably and where possible hold equity interest in the business. The technical partner should bring with or link the business with services geared to the management and marketing of the business.
• The Fund secures a seat in the board by holding a minimum equity stake in the business in order to monitor the investment during the investment horizon which will on exit be sold to staff, the entrepreneur or third party. This helps to be proactive and to continually diagnose potential gaps and risks.

The Need for Development Finance

There is a wealth of entrepreneurial genie to be unearthed in the underdeveloped areas of our developing economy, entrepreneurial qualities which if rightly nurtured would mark the turning point of our countries urban small businesses (SME’s) and rural economic development.