Private equity and hedge funds: good alternatives
Private equity is grouped with hedge funds as an alternative investment.
But the core activity of hedge funds is shorting shares - making money while ordinary members of the public are losing it. Private equity firms were once equally notorious as they were associated with high leverage and a slash-and-burn approach to the companies they owned.
Photo: Erika van der Merwe, Hands-on style
But the growing appetite for infrastructure and sustainable investment projects - especially in Africa - plays to the strengths of private equity managers.
The ranks of the SA Venture Capital & Private Equity Association (Savca) include pan-African infrastructure investors Harith, an associate of the Public Investment Corp, and African Infrastructure Investment Managers, a joint venture between Australian bank Macquarie and Old Mutual.
Says Savca CE Erika van der Merwe: "Private equity, through its relationship-driven approach, its accountability to investors and its medium- to long-term view, is a powerful tool for the implementation of sustainable investments."
SA private equity, however, is dominated by late-stage, commercially driven investments. The largest by far in 2012 was actually a recycled investment, Waco, the scaffolding business - once part of the failed FSI conglomerate. Ethos bought this business back from investors in Asia.
Another large deal was R740m for Trudon, formerly Telkom Directory Services, responsible for the white and yellow pages, in print and electronically. This was acquired by a consortium of second-tier firms, Trinitas, RMB Corvest and Nodus Capital.
Private equity has a more benevolent image in SA than in the US because of its role in encouraging black economic empowerment.
Four of the top 10 deals in 2012 led to a change of control to a BEE company - Wekaba Engineering, Cerebos and Boxmore Plastics as well as Trudon.
Private equity, with R126,4bn under management, is four times larger than the SA hedge fund industry. It still has R35,3m of "dry powder" or undrawn commitments, R19,9bn for SA and R15,4bn under a pan-African mandate.
There was a 35% increase in funds raised in 2012 compared with 2011 to R14,4bn. The bulk of this was for Ethos Fund 6.
Ethos partner Ngalaah Chuphi says that with the regulation 28 changes to the Pension Funds Act, there has been increased demand for private equity, and not just from large funds such as Eskom or Transnet, but also from the private-sector funds.
But fundraising remains a painful and long-winded task, which has driven Brait, the industry pioneer, and Sphere, the leading black-controlled manager, to opt to invest through their balance sheets rather than third-party funds.
Ethos is harvesting the assets in Fund 5, for which funds were raised in 2006/2007. "We are fortunate that we never used much leverage and were not too badly affected when the banks tightened up after the global financial crisis," says Chuphi.
Investors are frustrated that private equity houses have been so slow at asset disposals. In 2012, R7bn was returned to shareholders, well down on the R25,7bn returned in 2011. A few large relistings such as Alexander Forbes and Edcon are expected over the next 18 months.
Actis partner Natalie Kolbe says most of the exciting deals in Africa are outside SA, and they will form the backbone of the new Actis 4 fund.
Actis focuses on consumer-facing industries which have more reliable cash flows than commodity businesses. It was also an early adopter of responsible investing and does not invest in alcohol, tobacco, gaming or defence.
Private equity looks quite leisurely, as three or four deals are considered a busy year.
Says Kolbe: "We do a lot of fishing but don't catch many fish."