Special Report: Unquote" South Africa Private Equity Congress 2010
The third annual South African Congress organized by unquote“ in association with the South African Venture Capital and Private Equity Association (SAVCA) was held at Cape Town”˜s Table Bay Hotel on 11 February. The event was again a complete sell out attracting close to 300 delegates and 13 sponsors, led by the events principal supporters, Brait and Ethos.
“Health check “reveals strong pulse
According to SAVCA’s J-P Fourie, the February event once again provided an invaluable forum to conduct a “health check” for the industry in the region. “Basically, the Congress allows us to assess the sentiment of the industry to check its pulse. While the last few quarters have undoubtedly been more challenging for GPs than in recent years, the general mood of the event and the content of the presentations were very positive. All in all, we can conclude that the pulse of the Southern African private equity industry is certainly strong.
“To begin with, it is clear that the role of the industry, as long term provider risk capital, is more important now than ever before. It employs 5% of South Africa’s formal sector employees and recently released economic impact data shows that the industry is an extremely significant investor."
Furthermore, despite the difficult economic climate, managers of private equity portfolio companies continue to report that their backers have improved efficiency, sales, profits and expenditure on R&D, and investment.
“So, overall, the sentiment of the congress left us in no doubt that the investment case for Southern Africa could not be stronger given the lasting legacy that is sure to be left by the 2010 FIFA World Cup, which is now just a few months away."
”Yes the economic crisis has had an effect, with weaker external demand and lower commodity prices, but the outlook remains defiantly positive. Notably, the business environment has less attributable risk and a better operating environment than is commonly understood.”
Back to basics
For Bruce Mac Robert, the event’s chairman and director of buyout group Brait, one of the key themes coming out of the conference was the message from GPs that this past year has been an exercise in “getting back to basics" for the private equity community.
“Fortunately, the South African private equity industry has not seen any liquidations, nor the high number of distressed debt situations seen elsewhere in the world, as there is a lot less gearing in South African private equity deals. In fact in many cases, leading GPs have concluded equity-only deals in the South African market as the opportunity for growth is prevalent in portfolio companies.
“Another key theme was that GPs benefit from being close to their portfolio companies in times of crisis and this allowed private equity firms to deliver the value –add needed to build these businesses into more successful entities. At the same time, though, the GP community is also cautious of the changing regulatory landscape, which could affect private equity players and banks going forward.”
“On a slightly different angle, it was also very interesting to note some of the advice coming from the LP community during the day. For instance, it came across strongly that LPs are generally not keen on GPs changing style or going “off script” mid fund. They also clearly take a dim view of GPs that target specific reasons of the Africa continent because one or more of their LPs had put pressure on them to do so: the African continent as a whole does present attractive growth opportunities for the South African private equity industry but this should be on a select case by case basis only “.
In search of Alpha
According to Ethos Private Equity partner Stuart Mackenzie: “This year’s private equity congress underlined to us that the South African private equity sector remains vibrant and exciting despite the difficult period that has followed the global financial crisis. The broad participation and rich content of the various presentations and panel discussions at the event was testament to this observation.
“As far as we are concerned, private equity is a proven asset class with strong differentiators that will continue to underpin future returns. However GPs will have to evolve their business models in order to continue to deliver Alpha. But there is no blueprint for this; rather, Alpha is generated through a complex blend of a private equity industry differentiators, GP core competencies and active value management."
“In the environment of the ”˜new normal’ where there will be less leverage and increasingly competitive acquisition processes that ensure pricing tension, active value management is going to have play a far more prominent role. Of course, as we discussed at the event, the principle of active value management is nothing new, but in the context of the sea-change that has taken place over the last 18 months, it has become significantly more important in driving returns.”
“It came through very strongly at the conference that the greatest single challenge facing the industry today is under performing investments in current funds; in addressing this, GPs must evolve their models to deliver Alpha tomorrow.”