Weighing The True Effects
It’s official: private equity really is the best – and most caring – business model in SA. Long vilified as Machiavellian corporate raiders intent only on slashing companies to ribbons while laying off staff, private equity has had to rail against such perceptions for years.
But the first “private equity impact study”, performed by the Development Bank of Southern Africa (DBSA) along with the SA Venture Capital & Private Equity Association (SAVCA), confirms that this asset class outperforms the others on just about any metric. The discrepancy is quite illuminating.
Between 2005/2006 and 2008/2009, for example, SA private equity-backed firms employed 10% more people, saw pretax profits grow 16%/year and exports increased 31%. By contrast, the number of people employed in SA grew only 1% during that time, while profits of JSE-listed firms increased 14%. Exports in the wider SA business context grew at only 24%.
SAVCA’s JP Fourie says this study, the first of its kind intended to chart the impact of private equity in SA, should eradicate many prejudices. “It shows that private equity is more efficient, and better for the country and the individual companies in the long run,” he says.
The survey drew 327 responses from “private equity-owned companies”, representing the smallest firms (revenues below R5m) to the largest (revenues higher than R2bn).
The DBSA study reveals that 64% of respondents said “they would have developed less rapidly without private equity investment”, while 47% said they “would not have survived without private equity investment”.
An equally notable finding is that while you might expect that private equity-owned firms would be too indebted to spend too much on the “softer” issues like research and development (R&D), this isn’t the case.
Investec companies surveyed spent, on average, 7% of their turnover on R&D, notably higher than the 1% spent by JSE-listed firms, though, did better on this score than private equity firms, spending 12% of turnover on R&D.
Says the DBSA: “Sixty-nine percent of private equity-backed businesses have introduced new products or services in the past two years.” Seed and early stage companies appeared to benefit the most from private equity investment, according to the study. “Exports grew by 102%, more than doubling in each of the years in the period of consideration. Pretax earnings grew 32%, while capital expenditure and total sales grew by over 20% on average,” it said.
If anything, the survey shows that companies owned by private equity are managed better than their public contemporaries – contradicting the theory that “anything goes” in the world of private equity.
Ethos partner Stuart Mackenzie says private equity houses are concerned with ensuring their portfolio companies are run properly. “Our model forces us to take governance seriously, and you have to have a reputation for honest dealing if you plan to make repeat investments,” he says.