Roux Spells Out Major Industry Trends
KPMG & SAVCA SURVEY
There are many new entrants to the private equity industry, but old hands like Andre Roux, chief executive of Ethos Private Equity, have been since the dawn of the industry.
As someone who’s experienced the ups and downs, he offers his perspective on exactly what the trends revealed in the KPMG/Savca 2005 survey really mean.
The survey shows a substantial amount of undrawn but committed capital (R15.6 billion at the end of 2005, compared to R13.8 billion in 2004), and Roux believes this could herald a period of over-capacity in the small to medium cap end of the market.
“I believe this capital is ear-marked for the small and medium cap end of the market, and what concerns me is that there is already a fair amount of over-capacity in that market relative to deal flow, and this further liquidity could prompt some over-trading in the market,” he says.
The large players, Ethos and Brait, have invested all their money and are both in the process of finalising their funds, and represent the large cap end of the market. So the univested capital has to be for the rest of the market.
What this means, says Roux, is the potential for consolidation in the market as some funds are unable to do deals at viable valuations as competition for deals pushes up prices.
“We will see increased deal flow from foreign players. This is a warning signal, he says, rather than a definitive statement as there can be no guarantee all the undrawn capital is for the small and medium end of the market. “For the moment, the market remains buoyant. But for funds, that have to translate capital into deals it could mean there is too much capital chasing too few deals.
Another US$1 billion (R6.5 billion) is soon to be added to the private equity market once Ethos and Brait finalise their funds, and this will translate into more deals in the top end of the market. This top end of the marketing will have its own challenges: as it is a segment currently less crowded, and will continue to provide deal flow, it is likely to attract increased competition both from local players possibly abandoning the small and medium end for the big-cap end, and from international private equity participants.
At the moment there is excess capital in the global markets caused by: the baby-boomer generation approaching retirement age; a Middle East awash with surplus capital from high oil prices; and Asia’s excess capital form its trading surpluses.
This capital needs a high-return home, and emerging markets such as South Africa are attracting increased attention. Ethos itself was involved in the first major transaction of this nature, when its exit from Waco led to its purchase by a foreign private equity firm, rather than the expected JSE listing.
“Waco will not be an isolated event – we will see increased deal flow from foreign players, who will be concentrating on the larger deals,” says Roux.
This is a trend that offers pros and cons, he says: there will be increased competition, but this in turn may stimulate increased deal flow. Heightened local activity may also stimulate greater involvement in Africa, he adds: “All South African private equity funds will seek a mechanism and opportunity to start being able to migrate into the less crowded areas in the rest of the continent.