The Harvest Begins
After many years in which buyout firms delisted companies from the JSE, the trend could be turning. Over the past year, for example, Ethos Private Equity alone has listed sports retailer Holdsport and niche lender Transaction Capital out of its funds. There is speculation that retail giant Edcon, the largest private equity deal in SA history, will also come back on the boards.
Alexander Forbes is also on the final leg of its restructuring under private equity control. After selling its insurance broking business to US-based Marsh, it is a leaner business, focused on consulting, institutional investment and wealth management, which could attract a high multiple, especially when the market turns more bullish.
But Ethos partner Ngalaah Chuphi says at least 50% of the time the firm has preferred to make a strategic - or trade - sale, as a business in the same industry is prepared to pay a control premium.
"But there are companies for which a listing is appropriate as they benefit from being in the public eye - Holdsport, a retailer, and Transaction Capital, as a retail lender, were good examples."
Chuphi says that over the years Ethos has built its name as an SA specialist and it is arguably the pre-eminent third party private equity manager. Its main rival, Brait, changed its business model last year and now operates as a listed industrial holding company.
International private equity firms have tended to come in for one deal, then go: Bain Capital hasn't been seen since it was the lead investor into Edcon in 2007.
The exception is Actis, which was spun out the Commonwealth Development Corp. It has five large investments in SA: Alexander Forbes; Actom, an electrical engineering firm; miner Platmin; logistics business RTT; and most recently, the Tracker vehicle recovery business, by far the largest private equity deal last year.
Actis director Jono Matthews says even though most countries in Africa have higher growth rates than SA, the much deeper capital markets in SA, and the number of mature businesses in which to invest, will ensure funds investing in the region will not ignore SA.
At least some of the recent deals have raised the profile of private equity at a time in which the universe of investors has increased. Under the changes to regulation 28 of the Pension Funds Act, retirement funds can invest up to 10% of their assets in private equity - up from a maximum of 2,5 % under the old rules.
Ethos is raising money for its sixth fund, in which it aims to raise US$750m (it is industry practice to quote fund sizes in dollars), though not all from SA institutions. The first investment will be into Waco, the scaffolding group which Ethos recently bought back.
Carlyle is soon going to launch its sub-Saharan Africa fund with at least US$500m, and these are just the two largest fund-raising exercises. It looks as if there will be a bounce back in fund raising, which in 2011 fell by 27% to $1bn.
Marang Denelane, a director of the BEE private equity firm Sphere, says SA institutions have not historically been large investors in private equity. Firms aiming to set up larger funds have been forced to raise money primarily in North America and the UK: Canadian pension funds are core shareholders in Alexander Forbes, for example.
Denelane says regulation 28 may provide the environment for greater commitment to private equity, but it is a poorly understood asset class.
"It is illiquid and there is no secondary market to dispose of interests," she says. The biggest stumbling block for pension fund trustees, she says, is the J curve, meaning there are normally losses on investments in the first two or three years. Serious cash starts to flow back only when the underlying companies in the fund are sold on.
Another hurdle could be that private equity managers are not regulated under the financial advisory and intermediary services (FAIS) legislation. Trustees should get some comfort from the proposal to launch a category 6 for private equity managers.
"Regulation must be relevant and appropriate," says Denalane. "The previous licence categories were not well suited to asset class. We welcome initiatives which lead to greater relevant disclosure to our investors to protect them."