Red tape noose
Edcon bondholders could have been better protected — and the retailer might arguably not find itself in its current debt predicament — had the private equity (PE) industry been better regulated in SA.
The Financial Services Board (FSB) has been slow to release new rules governing private equity specifically, while globally a wave of regulations has been dumped on the industry, representing a notable cost burden.
PE funds in SA currently operate with Financial Advisory & Intermediary Services (Fais) Act licences 1 or 2, depending on their funding model, and are regulated by the FSB as financial service providers. Certain parts of the Companies Act and collective investment schemes (CIS) rules may also apply.
Category 1 licences are for nondiscretionary managers and subject to less onerous regulations. Discretionary PE asset funds (domestic or foreign) with SA pension fund investors must hold a category 2 licence, which has tougher reporting requirements.
Rigorous general requirements and the absence of conducive and specific regulation to protect and grow the PE industry have been problematic for PE managers operating in SA. These are probably some of the reasons Bain is struggling to find a more suitable debt structure for its Edcon investment and to manage costs.
Fais was designed to protect retail investors and is not necessarily compatible with the needs of the wholesale or institutional investor base predominantly seen in PE, says Craig Dreyer, CFO of Ethos Private Equity. “As a result the FSB agreed that private equity would fall within a separate licensing category, created specifically for private equity,” he says in a Southern African Venture Capital & Private Equity Association (Savca) report earlier this year on the rise and fall of local private equity.
Other PE managers argue that the many layers of legal and regulatory requirements represent a cost burden for the industry — one that could crowd out smaller firms which lack the resources to employ additional reporting and compliance staff or to outsource the functions.
The FSB has been consulting with industry for more than three years with a view to introducing a category 6 licence specifically tailored for PE managers. However, no information has been released by the regulator in