Private Equity - Friend Or Foe In A Growing Economy
”˜Barbarians at the gate’, ”˜heartless asset strippers’ and ”˜vultures’ are terms you sometimes hear associated with private equity firms. These and other strongly worded adjectives have been used recently in the media to describe the firms that are contributing significantly to the growing South African economy and its GDP. Private equity, a major driver of Black Economic Empowerment (BEE) and entrepreneurial activity, has on occasion, received less than favourable reviews. So why the bad name?
The notion that private equity firms buy out companies, spend time retrenching staff and replacing management in order to make a quick return, is a hang-over from previous years that private equity firms are struggling to shed. Taking a company private delivers benefits including the inflow of capital, transfer to know-how, synergy enhancement and operation turnaround strategies often resulting in greater profitability and operational results. A recent example is the Ethos-led consortium R5.4 billion exit of Waco. The company was purchased for R2.4 billion and with the introduction of strategies such as new management, growing the company’s footprint and certain disposals, the company developed into a formidable and highly profitable asset.
The media has recently voiced investor concerns over leading listed firms being removed from the Johannesburg Stock Exchange (JSE) through private buy-outs. Examples include the Edgars Consolidated Stores and Consol transactions. It is felt investor choice and liquidity of the bourse are sacrificed through these delistings. Are these and other investor concerns justified, and do they outweigh the obvious benefits of private equity activity in a growing economy?
An argument against these concerns is that a delisted company will possibly regain its position on the bourse in 5 – 7 years time when the private equity firms exit its investment. Two exit options face the private equity firm – the sale of its investment, alternatively, to exit through an initial public offering (IPO) of floatation.
Lack of investor choice, scrutiny and involvement are valid arguments against private equity, with the counter-argument being that no private equity transaction, which would result in a delisting, could take place without shareholder approval and that the number of JSE listings often counters delistings. Shareholders are increasingly voicing their concerns and standing their grounding the current private equity wave. Examples of increased shareholder activism include the much-publicized failed Shoprite takeover by Brait where shareholders believe they were not being adequately compensated for their investment. Another recent example is the rejection by minority shareholders of Remgro’s purchase of Rainbow Chickens.
Taking these concerns into account, the JSE is exploring the option of introducing a vehicle to give investors continued exposure to companies that have been delisted after private equity buyouts. The proposed ”˜public wrapper’ would offer investors as many choices as possible.
2006 and early 2007 experienced the influx of significantly foreign investment by private equity buyers. In addition, foreign investors invested heavily in local private equity funds in 2006. Direct foreign investment such as this is critical for an economy such as South Africa’s in order to achieve its growth targets.
So, is private equity not merely a symptom and component of well-functioning, competitive marketplace? No matter which argument you decide to side with, there is no doubt that private equity activity is a significant driver of M&A and BEE activity, which are crucial in achieving South Africa’s growth ambitions. It plays a critical role in driving entrepreneurial activity in emerging markets and the contribution it makes in terms of skill transfer in an economy desperately short of skills, cannot be underestimated.