Ernst & Young Warns Of Delay In SA Private Equity Recovery
The global private equity sector bounced back strongly in the second half of last year, according to a new report from professional services firm Ernst & Young ”” but a strong uptick in SA could still be several months away.
The report, which was published last week, found that worldwide private equity activity had been on the rise from the third quarter of last year, following a gruelling first half.
Deal value last year was at 95,5bn ”” down 56% from 2008 levels. But the momentum picked up towards the end of the year had carried into the first quarter of this year, which saw a 59% annual rise in global deal value to 27bn.
“Firms are taking advantage of improving markets to make acquisitions, enhance portfolio company performance and exit investments in order to return funds to limited partners in advance of 2011 fund-raising rounds,” said John Harley, global private equity leader at Ernst & Young.
Emerging markets were likely to gain a larger share of deal activity, said Harley, as firms concluded the prospect of better returns than in developed markets outweighed “risks arising from political, structural market and legal uncertainties”.
But Graham Stokoe, the company’s private equity leader in SA, said the country would have to wait longer for a sustained upturn in deal volume.
“We’re not quite at that sizeable increase yet. Our decline in private equity came slightly after the decline in Europe and America, so the bounce-back will also be slightly later.”
Confidence had returned to the sector, with an increase in discussions on possible investments. But this had not “translated into concluded deals”.
Stokoe said deal volumes in SA were “either flat or down” in the first months of this year, compared with the prior year period, and would see a notable rise only in the second half of this year.
Bill Ashmore, a partner at private equity group Ethos, said he expected a KPMG survey, which will be published next month, to show first-quarter deal values in SA were “roughly the same as last year ”” there’s not much on the go”.
Ashmore ascribed the delayed recovery in part to the sluggish return of credit availability, which had begun “only in the last few months”.
Though he agreed that activity would pick up strongly only in the second half of the year, he noted a strong wave of interest in emerging markets from overseas investors. “But they have their own problems ”” the downturn has impacted exits, so there’s a lack of money coming in. I think investors would like to see money coming back into their funds before they commit to putting more into private equity.”
J-P Fourie, CEO of the South African Venture Capital Association, said a “straw poll” of members at its recent annual conference showed “a lot more positive sentiment”.
“The price gap between buyers and sellers has narrowed; private equity fund managers have further line of sight for future earnings of potential target companies, and there’s more stability in the economy.”
But the sector had not yet turned the corner, he warned.
“The recovery will not be as quick as the decline. Investment this year will be down on the record years in 2007 and 2008 .”