Revival in private equity
A fund-raising cycle is under way in SA's private equity industry, says Erika van der Merwe, CE of the SA Venture Capital & Private Equity Association (Savca).
It ends a period of stagnation in which private equity funds under management rose marginally from R109bn at the end of 2008, Savca estimates, to R120bn at the end of 2012. Driving a fund-raising revival is strong interest from investors in the US and Europe. "Private equity offers foreigners yields they are battling to find," says Lindsay Robertson, a director of Capitalworks Equity Partners.
"A lot of SA fund managers are looking to tap into foreign money," says John Bellew, co-head of private equity at law firm Webber Wentzel. "The industry is robust and the deal pipeline looks good." In 2012 only 11 private equity deals were closed by independent firms, compared with 119 in 2007, ahead of the global financial crisis.
Robertson says the US$200m Capitalworks raised in its first fund in 2007 is now fully invested and the intention is to raise about $250m in a second fund. Capitalworks will join Ethos, which closed capital raising for its sixth private equity fund in February with $800m in the kitty. Other firms raising funds include Metier and Medu Capital, says Van der Merwe.
Potential yields on private equity investments in SA are alluring. "You have to achieve an IRR [internal rate of return] of at least 30% or you won't attract funds," says Robertson. IRR is the industry terminology for the effective annual return earned on an investment. The objective, says Robertson, is to hold an investment for about five years and sell it for three to four times its original cost. "Even if the rand falls to R12/US$ five years from now, foreign investors still stand to make a net IRR of about 20%," he says.
SA's private equity industry is in line to benefit from growing foreign interest in Africa. "SA is the gateway. We have the experience and the skills," says Van der Merwe. "The world is waking up to the opportunity in Africa," says Bellew. Much sought-after are private equity deals in infrastructure, agriculture, mining and property.