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LOOKING INTO AFRICA

Source: Financial Mail

All dressed up, nowhere to go. With about R50bn of committed, but unspent, capital and tighter conditions both here an internationally, how are private equity funds keeping busy?

The pressure is on because capital commitments must usually be spent within five years or be repatriated to the investors in private equity funds. André Roux, CE of private equity firm Ethos, says the ability to close deals in the SA market has become more difficult, “but while our banking system has taken enormous strain, it is more because of excess consumer lending, not the global credit crunch”.

Roux adds that higher interest rates have made closing deals much harder than nine months ago. Added to this, he says, “is that rising interest rates have seen banks become more demanding about covenants, and has placed constraints on the size of deals that can be done. Their execution will be more dependent on price flexibility.”

According to numbers compiled by KPMG, SA’s private equity industry last year had funds totalling R86,6bn — 46% more than in 2006 — of which R55bn remained uncommitted. (See graph.)

This followed two years of fund-raising, mostly in the US market, by SA’s largest private equity groups, led by Ethos, Actis and Brait

Despite this, Roux says that given Ethos’ substantial deal flow over the past 24 months, it is almost time to raise the next Ethos fund. “We have been pretty busy in this market and we are looking at sectors that are not consumer-related.”

Ethos and its rival Actis are looking to infrastructure for opportunities, amid the retail sector’s slow recovery. Says Actis CE John van Wyk: “The SA consumer sector has run strongly but we are not invested heavily. We think the industries that will really benefit in SA are those exposed to infrastructural spending.”

This month Actis backed this strategy with the R5,2bn leveraged buyout of engineering group Alstom SA, a deal backed by Old Mutual and a consortium of black investors. Alstom SA, a subsidiary of French companies Alstom and Areva, is a major supplier to the engineering sector.

This is one of SA’s biggest deals and breaks the paucity since Bain of the US took listed Edcon private earlier last year in a R27bn deal. Actis is one of the few SA private equity firms that also has a big presence in Africa, where it offers expansion and growth capital.

Patrick Helson, Actis COO in Africa, says: “Conditions in the international debt markets have had an impact on larger deals, but our deal flow in Africa has not been badly affected.” But he adds that, given global financial uncertainty, it would be extremely difficult to conclude transactions valued at more than R6bn in current conditions. However, on the plus side, possible acquisition targets are becoming cheaper. Helson sees a lot of potential for deals on the continent, which is resource-rich with a growing consumer market. It has made successful investments in Africa, including Nigeria communications group Starcomms, which it recently listed on the Nigerian Stock Exchange.

Helson and his team have also been busy in the DRC, Tunisia and Egypt, having invested R360m into Egyptian food group Mo’men in July to raise its profile in these markets. Sanlam Private Equity has also launched a R700m private equity fund this month with a focus on agricultural businesses in sub-Saharan Africa.

Other new funds include Vunani’s private equity fund-of-fund. Vunani’s Matthew Hunt says: “The fund seeks to provide access to private equity for institutional investors, with a diversified portfolio of underlying private equity funds.” Vunani targets a net return of 20%-30%/year. Vunani, says Hunt, can move quickly. “The funds are invested in purpose-built hedge funds, whose underlying assets range from equity funds through to high yield and event-driven funds.” But regulation 28 of the Pension Funds Act is proving a challenge for Vunani and other private equity players. They compete with hedge funds and derivative suppliers for the 2,5% allocation to alternative investments that pension funds may hold.