Private Equity Stands Up For Itself - And Its Lush Deals
EE in no danger from foreign buyers, writes Richard Stovin-Bradford
Until mid-year, private equity was hardly mentioned in South Africa’s corporate arena ”” but the emergence of household names like retailers Edgars and Shoprite as potential buy-out targets has thrust private equity on to centre stage.
An indicative private equity consortium bid for financial services group Alexander Forbes kick-started the latest wave of high- profile private equity deals.
The last big-ticket deal ”” still the country’s largest so far ”” was the R5.4-billion sale of scaffolding firm Waco International to CCMP Capital Asia and JPMorgan Partners Global Fund last year. Waco was about to be listed on the JSE but the private equity buyers placed a much higher value on it. In addition to the two retailers, glass packaging group Consol, gambling company Peermont and logistics firm Super Group are also in private equity buyers’ sights.
Ethos Private Equity chief executive AndrÃ© Roux said: “Private equity investment is a force for economic good ”” our portfolios have generated higher revenues, higher profits and created jobs.”
REVAMP: Equity executive Andre Roux
has created higher revenues, higher
profits & more jobs.
A feature of the current private equity phenomenon is the direct involvement of foreign firms. A consortium led by Actis of the UK is trying to buy Alexander Forbes, and US giant Kohlberg Kravis Roberts (KKR), fresh from trawling Australia’s retail sector, is said to be eyeing local retailers.
Roux said: “The weight of money seeking investments around the world is enormous ... and, of itself, that’s driving activity. “Over the last two or three years, SA has become a much more favoured destination for foreign direct investment, with economic growth reckoned to average 4% until the end of the decade.”
He said significant interest in the retail sector was the result of strong growth in it, underpinned by the black middle class. But the string of private equity deals could spell delistings ”” not a popular word in the JSE’s vocabulary. John Burke, its general manager of listings, is unfazed, saying:
“Would it be sad to lose those counters ”” of course it would. But companies and their directors must do what’s best for the companies and their shareholders. “Some of the counters will be back ”” it’s not worth getting hysterical about it.” Some fund managers bemoan dwindling investment choice.
They recall that Barclays was forced to leave Absa’s listing intact because some could not find comparable alternative investments. Others just wanted to participate in the upside in Absa shares.
RMB Asset Management portfolio manager Royce Long says: “Lots of companies are under cautionary, but the only case where a buyer’s shown its hand with hard cash is Alexander Forbes. Judging by the relative performance of Forbes shares against the sector, the proposal hasn’t been well received. “For investors to say goodbye to a share and reduce investment choice, the buyers must come up with a decent offer.”
But Long said recent private equity interest was “good for all stakeholders” because it brought with it better valuations. Some fund managers treat private equity as an attractive, high-yield alternative asset class in its own right. The investments are riskier and less easily tradeable, but the returns can be significantly higher.
One private equity practitioner said: “Private equity is about making businesses better ”” we are entrusted with money by pension funds and life companies because they know we can make a better return. “But we can’t make a better return if we don’t make a better company. At the end of the day you need something to sell. Private equity firms aren’t here to slash and burn.”
A concern raised by South Africa’s anti- large-salary lobby is that private equity deals take listed companies out of the limelight, allowing their senior executives to obscure generous remuneration packages.
Critics of private equity also maintain that corporate governance deteriorates. But, in the absence of state prescription of maximum salaries, private equity masters focused on extracting maximum value are famously more rigorous than normal institutional investors in balancing cost containment with appropriate executive pay.
Roux points out that executive pay in private equity deals is usually linked to cash flow generation instead of the short-term earnings or return on equity measures commonly used by listed companies.
He added: “Corporate governance doesn’t get abandoned with private equity ”” it becomes more entrenched. That’s because private equity shareholders and management can establish a relationship of trust more easily than institutional shareholders in the public markets.
“In a public company there is information asymmetry because executives are conscious of price-sensitive information and listing rules. In the private equity environment, the information is symmetrical and orderly. Private equity owners have legitimate inside information and thus govern their investments better.”
The black economic empowerment (BEE) structures of buy-out targets are unlikely to be casualties of the private equity trend because buyers see no merit in jeopardising hard-earned credentials.
The private equity practitioner said: “Introducing private equity investors is an ideal way to introduce BEE ownership because you don’t face the challenges you face in a listed company.”
The fact that private equity is “private” should not rattle the shareholders of target companies. Whether individuals or institutions, they will still get the chance to accept or reject any offer. Private equity firms just need to win their hearts and minds.