SA’s largest asset manager, the PIC, feels the greylisting sting

The Public Investment Corporation (PIC) has felt the sting of SA being greylisted for nearly two years, with the state-owned asset manager saying that it is subject to greater scrutiny, which has made doing business and transactions outside of the country more difficult.

The PIC is a state-owned asset management firm that, as of 31 March, managed investments worth R2.69-trillion on behalf of its clients — the biggest being the Government Employees’ Pension Fund (GEPF). The PIC invests the pension savings of more than 1.2 million current and retired public servants to generate a return so that the GEPF can pay their retirement benefits.

The PIC also manages investments for other social funds, including the Unemployment Insurance Fund and Compensation Fund.

The PIC invests in various asset classes such as shares, bonds, cash and property based in SA, the rest of Africa, and offshore to generate returns for its clients. By doing so, the PIC investment portfolio is exposed to cross-border transactions, regulators and international investors.

On 24 February 2023, SA was greylisted by the Financial Action Task Force (FATF) because, in the eyes of the developed world, the country was seen as not being serious about preventing financial crimes or having proactive measures in place to prevent such crimes from occurring. The FATF is a Paris-based intergovernmental body that assesses countries’ ability to combat illicit financial activity.

The organisation found that SA’s lax anti-money laundering measures allowed wrongdoers to move money without alarm bells being set off by financial institutions. Such money flows could potentially finance terrorist activity.

Read more: SA may have lengthy, perilous road to navigate in order to escape greylisting

More than a year into SA being greylisted, the PIC has continued to count the cost and impact.

“Since the Financial Action Task Force greylisted the country in February 2023, concluding transactions outside the country has proved challenging. The PIC is now subject to greater scrutiny and enhanced monitoring by its international counterparts,” said the PIC’s chief investment officer, Kabelo Rikhotso, in the company’s 2024 annual report.

Arguably, Rikhotso has the most important job in SA’s asset management industry as, through the PIC, he oversees trillions of rands worth of investments that have a bearing on the economy’s performance.

Due diligence

“Local regulators see greater risk in the PIC conducting transactions in low-tax jurisdictions and in foreign entities, enhancing client due diligence of the PIC and its beneficial owners and co-investments,” said Rikhotso.

In other words, the PIC and others in the financial service industry have to go through long steps to prove things such as the source of funds used for investment decisions, which increases their compliance costs and adds a layer of complexity.

Rikhotso added: “These developments have delayed the conclusion of transactions outside the country and hindered doing business on the rest of the African continent. Regulators are also cautious about approving capital flows to other jurisdictions, requiring time to undertake their own due diligence on transactions.”

Other South African entities, including banks and government entities, have reported troubles with accessing international finance at competitive or feasible interest rates because of the scrutiny brought on by the greylisting.

Meanwhile, regulators such as the Prudential Authority arm of the SA Reserve Bank and the Financial Sector Conduct Authority are clamping down on offenders.

Read more: Financial services offenders to pay up a collective R36.9m in sanctions this year

The government has been working to address concerns raised by the FATF and reforming SA’s anti-money laundering and financial crimes measures. The National Treasury has estimated that by February 2025, the government will have addressed all concerns raised by the FATF. From then, or the middle of 2025, Treasury officials expect South Africa to exit the greylist.

Read more: SA faces another year on the Financial Action Task Force grey list

Despite the greylisting impact, the PIC said it had generated returns across its portfolio on behalf of clients during the 2023/24 financial year.

The total value of assets it manages grew by 3.6% to R2.69-trillion by 31 March, from R2.599-trillion a year before. The GEPF contributed 88% to assets under management.

The PIC board also declared and paid a dividend of R141-million to the government. This makes the PIC a rare state-owned enterprise that pays out dividends to the government. Its peers take from the government because they rely on taxpayer-funded bailouts for survival. Over the past three years, the PIC has been in reform following the findings of a commission of inquiry into its governance affairs, headed by retired Supreme Court of Appeal judge Lex Mpati.

The PIC said it had implemented 242 of the 243 recommendations of the inquiry, among them, reinstating a chief investment officer with the appointment of Rikhotso. DM