Private Equity Dealmakers Can Be Nice Guys Too
The immediate image that springs to mind when thinking of a private equity dealmaker is one of a hyena or shark, seeking out weaknesses in others as opportunities to feed their own appetite for ever more money. But speak to one of SA's longest serving players in this field, Ethos, and you'll be surprised how your perception could change.
In fact, at a time when business is tight and opportunities scarce, it's these guys that may be coming up with the best strategy to generate jobs and growth.
Anthonie De Beer, Ethos partner, told BusinessLIVE/I-Net Bridge in an interview on Monday to mark their 101st deal, that there are specific funds that may have a break-up strategy, "but we don't do it that way". Instead, Ethos looks at issues product expansion, geographic expansion and improving efficiencies by looking at both the buy and sell value chain, corporate government and general management.
And while CEO AndrÃ© Roux says the company is experiencing strong investment activity, having concluded the initial public offering of Holdsport and acquisition of Universal Industries in the second half of 2011 and this year the buyout of Kevro, the company is loath to speak about the exact number of upcoming deals, though they are expected to be big ones and form part of expanding its African footprint.
"The quality of the pipeline over the last six to nine months has improved dramatically," says De Beer.
"But we are not really a volume shop. We want to build sustainable companies and better businesses and dispose of companies at the back end that are better. The only way to do that is to contribute to growth and demonstrate that to managers."
The R850 million Kevro deal is seen as an important opportunity to expand the company's African footprint, as well as for Ethos to grow its scale on the continent, using SA as a base.
"We are seeing massive growth in sub Saharan Africa," admits De Beer.
But that doesn't mean taking a "big swing" at the continent is the way to go either. "We are focused on a risk adjusted basis and go in increments so we don't wipe out capital."
De Beer expects local demand to support companies and says while Holdsport's listing happened when "the world was a bit messy", the company has continued to deliver and "will continue to deliver despite challenges in the market".
Despite the positive signs, something of a flushing out has been taking place in the private equity space in SA, with Brait the only other player at the higher end of the scale, though it has changed to a largely investment holding business model. Banks prefer to provide debt capital, with regulatory capital requirements leading to a pull-back from pure plays. Old Mutual tends to operate more as a co-investor in the deals.
A pure player like Ethos, which is independent, will look to raise the equity component of a deal (around 50%) from pension funds, retirement funds, endowment funds, financial institutions, merchant banks and sovereign wealth funds, who make an investment into one of Ethos' funds.
De Beers gets a sense foreign investors have now "opened their minds" and are looking to investing in emerging markets "in a big way" as fewer opportunities present themselves in developed markets.
Private equity, though, has been receiving some pretty bad press of late as one of the front runners for the Republican hot seat comes from this industry. One campaign from an opponent said these companies contributed to the greatest job losses since World War Two. Mitt Romney, who was head of Bain Capital for 15 years and in the race to lead the Republicans, also had to publicise his tax rate last week.
But the private equity train keeps rolling. It was announced in mid January that private equity group Blackstar spent R468 million to acquire Coronation's 28% stake in Mvelaphanda Group, while in late December BK One debuted on the JSE yesterday, raising R200 million in an initial public offering (IPO) that came at the bottom end of the target range.
And revised pension fund rules in SA allow up to 75% investments in equities and include investments in Africa, in hedge funds, private equity funds and commodity ETFs.
While a small company like Purple Capital has recently limited the number of private equity interests it has, other big guns in the game like Brait has reverted more to an investment holding mindset.
John Daniel and Cycad private equity driven ventures may still leave a sour taste with some investors, and while the muted response to BK One's listing reflects the concerns, a new dawn is in evidence for this asset class in Africa and it looks like Ethos is ready to take full advantage. Africa is seen by some analysts as the last great frontier for private equity with one report saying that funds had raised nearly $1,5bn for sub-Saharan Africa last year, an increase of 55% over 2009's figure.
According to statistics released by Emerging Markets Private Equity Association as quoted in allAfrica total funds raised for investment grew by 4% in 2010 to US$ 23.5 billion from US$22.6 billion - a low not experienced since 2005. The improvement from 2009 is a clear indication potential exists. Investors and entrepreneurs should take careful note if this avenue is the class of choice for growth in Africa over the next few years.
Latest mergermarket numbers how the volume of mergers and acquisitions in SA last year increased 28%, but the value remained the same as in 2010, at $16bn.
Ethos is a management-driven private equity fund manager and was founded in 1984 and Roux anticipates making further announcements over the first and second quarters of 2012.
Founded in 1990, Kevro is a leading supplier of corporate clothing and promotional products in Africa.