South Africa's Private Equity Sector should Embrace, Rather Than Fear Disruption
8 upcoming trends in private equity
Despite recent uncertainty (both economic and political), private equity is still able to weather ongoing storms, while providing attractive returns for investors. This asset class provides feasible alternative investment strategies, particularly in markets in which change and volatility are rife. Here are some of the developments we can expect to see in the sector across Southern Africa:
Investors currently face a number of uncertainties when financing organisations and initiatives in Southern Africa. External factors such as the unknown potential effects of Brexit and possible lower prospects of foreign aid as a result of Donald Trump's administration may be just some of the challenges impacting the private-equity sector.
In spite of this, according to the 2017 Deloitte Africa Private Equity Confidence Survey, growth projections for specific markets in the region remain positive: Mozambique is expected to grow by an average of 5.3 percent per year (2017-2019), while Mauritius' per-annum growth over the same period is forecast at 4 percent. To add to this, average real GDP growth of 5 percent and 4.6 percent is expected in Malawi and Botswana respectively.
In South Africa – despite the IMF's prediction of a 0.9 percent growth rate for 2018 – recent political developments (including Zexit and the Cabinet reshuffle) as well as a halt on downgrades in December have given business confidence a substantial boost, as reported by the recently released Business Confidence Index (BCI).
It stands to reason that the political transformation in Zimbabwe will also have a positive role to play in reassuring investors. Despite this perceived turnaround, private-equity players will still need to be agile and resilient in preparing for changes in market dynamics, good or bad.
Close encounters of the fourth kind...
As the fourth industrial revolution looms – characterised by exponential rather than linear evolution, as well as an ongoing disruption – artificial intelligence, big data and mass automation will be the order of the day. In fact, according to the World Economic Forum (WEF), creative thinking ranks third on the list of most important skills needed to survive this upcoming shift.
What does this mean for private-equity players? Not only will these developments shape the investment landscape (creating new sectors to invest in), but they will also have a significant impact on the labour force, placing increased emphasis on company culture and value creation within portfolio companies.
Sorry for the disruption
Speaking of disruption, according to a study by EY, fintech usage in South Africa stood at 35 percent in August 2017, outranking the global average of 33 percent. The study also predicted a substantial increase in adoption rates, stating that South Africans prefer fintech firms based predominantly on convenience rather the pricing. The launch of Bank Zero, an app-only bank with no branches, is a testament to these new investment opportunities; an area that many private equity investors have, and will continue to favour.
Bitcoin and others (tokenisation of cryptocurrency - in which the rights to an asset are converted into a digital token on a blockchain) could possibly have a notable impact on the private-equity sector. Business owners could potentially "tokenise" their business shares, preventing the need for investors to register their shares or make use of a central intermediary.
However, a framework is still not in place to mitigate the risks associated with cryptocurrencies, and one will need to be established before these developments can reach fruition. Recent regulation blocking people from purchasing cryptocurrencies with a credit card is just the start of the long road to governance and legitimisation.
Would you like fries with that?
The 2017 Deloitte Africa Private Equity Confidence Survey also revealed upcoming investment focus areas in the region. These are expected to be dominated by the food and beverage sector – followed, interestingly, by the manufacturing and industries sectors, which have faced significant pressures over recent months.
Coupled with investor interest, President Cyril Ramaphosa also recently reiterated the importance of revitalising the manufacturing sector as a key driver of employment and GDP growth, in his state of the nation address (Sona). Additional investment prospects are expected to be found in the financial-services sector, healthcare and pharmaceuticals, retail, and education. There is also the potential for a growth in specialised funds, as well as investors targeting later-stage companies, which are often viewed as lower-risk investments.
Is now a good time to exit?
Sentiment around Southern Africa's exit environment hints at a possible decline – however, a continued pipeline of good exits is expected as a result of investments made post-2008/financial crisis that are/will mature. Secondary sales to private-equity funds, as well as sales to strategic investors, remain steadfast as chosen exit routes in the region, along with partial exits via refinancing.
Growing development finance institution (DFI) investments into Africa have seen an increase in the requirement for impact as an investment criterion. The latest African Investing for Impact Barometer (2016) reveals that the top investment themes across Southern Africa include small and medium-sized enterprises (SMEs), transformation, infrastructure, health and energy.
According to the Global Impact Investing Network (GIIN), South Africa leads the way as the largest market for impact capital in the region. Going forward, we will certainly see more and more South African private-equity firms investing towards socioeconomic transformation, especially in B-BBEE.
There is no doubt that a focus on value creation will be key to the continuous delivery of attractive returns, especially given a dynamic and ever-changing operating environment (Bain & Company). As such, we will continue to see the appointment of skilled portfolio partners (be it across marketing, sales or logistics), and a focus on the value that fund managers can add – particularly when it comes to local and industry expertise.
These players are thus able to closely advise on a range of aspects, including routes to market, skills development and other strategic business decisions.
Reputation is everything
The rise of shareholder activism and an increased focus on corporate governance and transparency for portfolio companies will continue to play a fundamental role in the private-equity sector. Social media has increased the risk of exposure and (witness the likes of Bell Pottinger, McKinsey, et al.) could result in severe financial consequences.
As a result, deliberate reputational risk mitigation will become a non-negotiable when it comes to the formulation of ongoing business strategies.
Private-equity companies themselves will increasingly utilise PR services to correctly position funds, as well as consequent investments. Private equity has, time and time again, proven itself as a resilient asset class with immense growth potential. The key to success in Southern Africa will be finding opportunity in uncertainty and embracing the advantages of, rather than fearing disruption.