- Amid Growing Calls for Reform
Government conceded that there is no statutory requirement mandating that a portion of pension funds be allocated to local Small and Medium-sized Enterprises (SMEs) to boost them despite recent efforts to reduce pension assets’ exposure to global markets.
In response to a question from Kanye North Legislator Thapelo Letsholo, Minister of Finance Peggy Serame addressed Parliament regarding the role of asset management firms in supporting local businesses through investment and capital raising. Letsholo had asked the Minister to provide an update on this topic and to discuss potential regulatory measures being considered to stimulate SME growth.
While funding and investing in SMEs is crucial due to their significant role in the economy, Serame emphasised that institutional investors managing large funds face the challenging task of fulfilling their fiduciary responsibilities. Consequently, they may prefer to allocate their capital to more stable companies and other potentially more lucrative investments.
“The bottom line is that asset managers, acting on behalf of their investors, are profit-oriented and cannot be forced to undertake investments that do not favour them. At the end of the day for them returns are more important,” Serame highlighted.
She indicated that asset management firms often reject SMEs’ requests for funding due to several key reasons: insufficient returns, where the anticipated profitability does not justify the underlying risk; a lack of strong and capable promoters, sponsors, or management to support the transaction; and inadequate deal size, as smaller transactions are more difficult and typically take longer to conclude compared to larger ones, making them less attractive to asset managers.
Though there is no directive yet to allocate a specific portion of investment funds to SMEs, she noted that the Pension Fund Investment Rule 2 (PFR2), the regulatory tool that dictates investment limits for pension funds, does allow asset managers to allocate part of their funds into private equity and alternative investments. According to her, the potential benefits to Botswana’s economy and business development, particularly for SMEs, are evidenced by the increased limits.
“The increase in investment limits enables SMEs to grow and expand, therefore, contributing to the economic growth of the country at macro and micro level,” she explained.
Moreover, Serame stated that asset managers are currently among the largest capital providers to large corporations, such as banks, with some of the capital raised by these banks being subsequently deployed to finance loans for SME businesses.
She added that as the funds are reallotted domestically over the coming year, the government in collaboration with key stakeholders will closely monitor developments and adjust regulations and policies as necessary.
Reacting to the Minister’s response, Letsholo emphasized that pension funds belonging to Batswana should not be used solely for profit but should also be directed towards stimulating economic growth through investments in SMEs. He argued that local SMEs have substantial, yet underutilized potential, primarily due to financial constraints and limited access to capital. Letsholo compared the P1.1 billion annual funding for SMEs from various government sources to the P143 billion held in pension funds, suggesting that even a small percentage of these funds redirected to SMEs could significantly boost economic development.
“For example, in Botswana, the Citizen Entrepreneurial Development Agency (CEDA) provides around P500 million in funding annually. The recent Chema Chema Fund was allocated P500 million to support informal small businesses, while the Youth Development Fund (YDF) distributes approximately P114 million in grants and loans. This totals around P1.1 billion in funding for SMEs. However, this amount pales in comparison to pension funds, which collectively hold about P143 billion. If just 20 percent of these pension funds were allocated specifically to stimulate growth through investing in SMEs, it could massively boost the economy,” he said.
Letsholo also proposed reducing the P50 million annual turnover threshold set by asset managers for potential investees. He believes this threshold is too high given Botswana’s economic context, making it difficult for many local businesses to meet the criteria and access investment.
The government revised the Retirement Funds Act to increase the limit on local investments from 30 percent to 50 percent, Letsholo cautioned against the risk of capital flight. He expressed concern that some of these funds might be invested in publicly traded multinational corporations, particularly property investment companies based outside the country. Letsholo argued that this could undermine the government’s efforts to stimulate economic growth, as these companies often channel their profits back to their home countries. He also called for a reduction in the number of foreign companies with local asset status to prevent them from overshadowing citizen-owned local businesses.
Palapye legislator Onneetse Ramogapi echoed concerns about asset managers’ profit-driven approach, criticizing their preference for large-scale investments over projects with tangible benefits for Batswana. He urged the government to create policies that balance profit motives with developmental goals.
“The government has the right to protect and create opportunities for its citizens. Policies and laws should ensure a balance between investing for profit and investing for development,” he told the Minister of Finance.
When participating in the Botswana Stock Exchange (BSE)’s Tshipidi Investment Forum in 2023, the Chief Executive Officer (CEO) of the Botswana Insurance Fund Management (BIFM), Clair Lisenda indicated that while SMEs also want to be considered by asset managers for investment, this hardly ever happens because asset managers operate under the restrictions of asset holders who emphasise good governance and other principles.BIFM is one of Botswana’s leading asset management firms with more than P23 billion assets under management.
“We execute what the institutional investors and pension funds have requested to assist them with regard to gaining exposure,” said Mathe.
During the past four years, an average of P12 billion has been invested in local businesses with an annual turnover of less than P50 million and in the same period, an average of eight local businesses with less than P50 million in annual turnover had their proposals rejected by asset managers for funding.
In 2021, asset managers invested P8.95 billion in these smaller local businesses, which amounted to 0.02 percent of the total assets under management, which were P45, 974 billion. The following year, 2022, saw a decrease in the amount invested, dropping to P6.28 billion. This lower investment represented just 0.01 percent of the total assets under management, which had increased to P49, 283 billion. However, there was a notable rise in investment in 2023, with P18.74 billion allocated to local businesses, corresponding to 0.03 percent of the total assets under management, which were P59, 474 billion. For 2024, up to May, the amount invested was P14.35 billion, reflecting 0.02 percent of the total assets under management, which had risen to P61, 835 billion
