R10-billion Investment Bonanza
Private local funds are proving an irresistible lure for foreign investors, writes Richard Stovin-Bradford.
That South Africa is in the grip of a private-equity bonanza is clear from the way local firm Ethos has almost effortlessly raised a record R5.5-billion (750-million) ”” the country’s largest private equity fund to date ”” for investment in local and regional buyouts.
The Ethos fund was oversubscribed, suggesting pent-up appetite for local investment risk. Private equity investors typically have a five-year investment horizon. Given this strong interest in private equity, local rival Brait, which released September interims on Friday, was expected to report completion of its own sizeable fundraising.
But it said the exercise had not yet been completed, prompting market talk that it perhaps did not want to be outdone by Ethos’s achievement and was trying to raise additional commitments to top it. Brait is expected to disclose the final size of its fund in mid- December, when it closes for commitments. It set out to raise 500-million but has already exceeded its own expectations, pointing out that it was “likely to be at the top end of expectations”.
Industry expectations are that the fund could amount to about R4.5-billion. Whatever the final amount, the local and international fundraisings by Ethos and Brait are set to make available a good R10-billion of new cash for immediate investment ”” keeping private equity at the heart of local corporate activity in the coming months.
This adds to the R43.9-billion of local private equity funds estimated to be under management at the end of last year in a KPMG/South African Venture Capitalists Association survey. The private equity phenomenon has gained traction in South Africa in recent years as a result of restructurings of local companies.
Since 1994, a number of major JSE-listed industrial groups such as Barlow Rand, CG Smith and Malbak have been broken up into their component businesses.
Ethos chief executive AndrÃ© Roux said: “What emerged from that process was that a lot of businesses still had good market shares. But it was hard to do takeovers because of competition legislation, so businesses that could have been subjected to mergers and acquisitions (M&A) weren’t.”
Private equity stepped into the shoes of trade buyers in many of those potential M&A opportunities. At the time, South Africa was still out of favour as a destination for foreign direct investment. But Barclays’ acquisition of Absa and other recent acquisitions of local firms by foreigners have elicited new investment interest in SA among conventional trade buyers from abroad ”” and among international private equity firms.
The funds raised by Ethos and Brait will compete with the relatively larger resources of foreign firms like Britain’s Actis and Kohlberg Kravis Roberts of the US, as well as with local banks and smaller private equity firms in the race to snap up undervalued JSE-listed companies.
Retailers Edcon and Shoprite are known private-equity targets, along with Alexander Forbes. Others that are thought to be in talks with private-equity consortiums include glass packaging group Consol, gambling company Peermont Global and logistics firm Super Group.
Commitments to both funds come predominantly from investors such as pension funds and life assurers who recognise the track record of Ethos and Brait in identifying and structuring deals on their behalf ”” and delivering handsome returns.
Brait, which reports in dollars, reported a 10.7% year-on- year decrease in diluted headline earnings a share to 17.5 US cents, giving an unchanged interim dividend of 7.85c. Net asset value increased to 153.2c from 142.4c a year ago.