Another Decent Year
Mostly ups for SA’s private equity industry
The results of the 2005 KPMG/SA Venture Capital Association private equity performance survey, released in May, reveal a mixed bag of accomplishments.
The industry boasts R43,9bn in funds under management at end-2005, 10% up on a year earlier. There was R15.6bn in undrawn commitments available for future investments at year-end compared with R13,8bn a year earlier. But investment spending by private equity firms fell 24% to R4,9bn, from R6,5bn the previous year.
There was some considerable new fund raising: “Captives – financial services” funds under management increased 18% and have increased by a compound growth rate of 28% over the past four years, “Captives – government” funds under management increased 33% during the year. The difference between the total funds under management figure and new income raised is accounted for by the fact that R4,4bn was returned to investors during 2005.
Funds tend to be of fixed duration, typically 10 years, and returned to investors as fund managers exit investments close to the 10-year ceiling. All South Africa’s major investment banks – Standard bank, Absa Capital, Nedbank Capital, Rand Merchant Bank and Investec – are heavily involved in private equity, either on their own balance sheet or through captives (caped funds).
One of the more interesting statistics says veteran AndrÃ© Roux, CEO of Ethos Private Equity, is the substantial amount of undrawn but committed capital (R15,6bn in 2005, compared to R13.8bn in 2004). Roux says that could herald an era of overcapacity in the market, particularly in the medium and small cap end of the market.
Market leaders Ethos and Brait are both focused on large cap investments as are some of the investment banks. But according to the survey, last year there were 44 entities managing 77 funds – and many of those are focused on the smaller end of the market.
Says Roux: “I believe the undrawn capital is earmarked for the small and medium cap end of the market. And what concerns is that there’s already a fair amount of overcapacity in that market relative to deal flow and that further liquidity could prompt some overtrading in the market.”
Roux gives that conclusion because Ethos and Brait have both exhausted all their available capital and are currently raising new funds.
So the uninvested capital has to be for the rest of the market. Roux sees potential for consolidation in the market as funds become unable to make deals at viable valuations as competition pushes up prices.
“For the moment the market remains buoyancy has to translate to deals – and they won’t do so if there’s too much capital chasing too few deals.”
All South Africa’s major investment banks are heavily involved in private equity. Another US$1bn is soon to be added to the private equity market once Ethos and Brait finalise their funds, and that will translate into more deals at the top end of the market.
The large cap segment will also face challenges: as it’s a segment currently less crowded and will continue to present deal flow it’s unlikely to avoid increased competition, particularly from international private equity participants but also from SA players disillusioned with the remainder of the market.
Ethos itself was involved in the first major incursion by a foreign private equity player into SA when its exit from Waco led to that company being bought by an overseas equity firm rather than the anticipated JSE listing.
Says Roux: “Waco won’t be an isolated event but this in turn may well stimulate increased deal flow for the entire market.”