KPMG/SAVCA 2014 Industry Survey indicates growing investor demand for private equity
The 2014 KPMG and SAVCA (Southern African Venture Capital and Private Equity Association) Venture Capital and Private Equity Industry Performance Survey indicates increasing investor appetite for private equity, with the asset class expanding by 17% last year to reach R162.2 billion in funds under management in 2013.
The survey, recognised as one of the most detailed of its type globally, is the fourteenth consecutive collaboration between KPMG and SAVCA and gives private equity stakeholders a greater understanding of this unique industry and its trends.
The increase in funds reflects a growing understanding of private equity as an asset class, an appreciation for the returns it offers as well as its important economic benefits. Over the past two years funds under management has increased by R46.1 billion – an increase of 42%.
Of the R162.2 billion funds under management, the industry currently has R58.6 billion still be invested – a record level of undrawn capital. Of this amount, 47.1% sits with fund managers that raise third-party capital (R27.6 billion), 38.9% with government entities that invest using their own balance sheets (R22.8 billion) and 10.8% with banks and investment holding companies that invest off their own balance sheets (R6.3 billion).
Deal flow has been picking up noticeably, with R17.5 billion of investments done in 2013 (R9.9 billion in 2012). Of this, R10.2 billion can be attributed to new investments (2012: R5.4 billion), while follow-on investment during 2013 amounted to R7.2 billion (2012: R4.5 billion). Follow-on investments are further investments by private equity players into companies where they already have an involvement. The overall average investment deal size increased from R48.9 million in 2012 to R72.6 million during 2013.
Private equity remains an attractive asset class compared with publicly listed equity. Warren Watkins, KPMG in South Africa Director for Private Equity, explains: “The 10-year internal rate of return (IRR) after fees on private equity for 2013 was 22.1%, very telling when contrasted with the JSE’s 19.6%.” These returns are according to the SAVCA-RisCura Quarterly survey released in February 2014.
The major portion of the funds raised in 2013 is from South African sources, mainly pension funds, and in particular the Government Employees Pension Fund (GEPF) the bulk of whose assets are managed by the Public Investment Corporation.
“Almost 60% of the R46.1 billion raised in the last two years can be attributed to the GEPF. In general, we expect to see more activity by pension funds in the next few years. This is because these investors make decisions based on both investment returns and positive societal impacts. They are particularly interested in the high employment and development characteristics that tend to accompany private equity investment,” says Erika van der Merwe, CEO of SAVCA.
The SAVCA-DBSA 2013 Private Equity Economic Impact study showed an increase of 40% in employment over two years in companies where private equity investors had taken a stake. The top twenty of these companies saw a 130% increase in earnings in the same period.
Similar to last year, infrastructure leads as the preferred sector for investment during 2013, at 48.4% – up 20.9% from the 2012 figures. “Infrastructural investment can be rewarding for fund managers and investors. It delivers pleasing long-term returns and meets mandates that prioritise sustainability, while at the same time playing a key role in the development of South Africa,” Watkins explains.
Of the R27.3bn funds raised in 2013, the portion focused on early-stage investments, also known as venture capital, is up significantly from R1.4bn in 2012 to R8.2bn in 2013.
The number of black economic empowerment (BEE) investments increased from 108 during 2012 to 140 during 2013. The average BEE deal size in 2013 was R96.43 million compared to R70.37 million during 2012. “These levels of activity, when compared to activity in South Africa, reflects that private equity BEE investments are an important element to the transformation of the South African economy,” says van der Merwe. The cost of investment into black-influenced entities (that is, entities with up to 25% black ownership) in 2013 was R13.5 billion, an increase of 77.6% from the 2012 levels.
Private equity exits are picking up, reflecting the life cycle of a private equity fund, which typically has a fixed horizon. The total value of exits rose from R7 billion during 2012 to R10.2 billion during 2013, a R3.2 billion increase. Watkins remarks that the level of returned funds are likely to remain at similar levels for the next two years. Private equity funds will be primarily focused on finding and closing new acquisitions.
South Africa’s private equity investment as a percentage of GDP is 0.13, which is higher than China (0.07% of GDP) and Russia (0.01%), is on par with Brazil, and behind India (0.20%). It is still some way off that of the United Kingdom (0.89%), the United States (1.02%) and Israel (1.62%). The survey highlights that although the South African private equity industry is small in comparison to those of the US and UK, it is well established and locally significant.