Private-equity exits touch a high of $450bn

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BUSINESS DAY
27 MAR 2015

PRIVATE-equity exits globally reached a historical record of $450bn last year as companies looking for growth acquired businesses from private-equity firms, research by management consulting firm Bain has showed.

The stability of stock markets is expected to be one of the key drivers behind private-equity exits this year, Bain said. When private-equity companies exit investments, it creates opportunities for initial public offerings (IPOs).

With the massive returns coming to institutional investors because of the exits, many will look to reinvest their capital in the private-equity system, Bain partner Andrew Tymms said in an interview this week, following the release of its report.

The top 10 large private-equity exits occurred in the UK, US, Spain, South Korea, France and Belgium.

In SA, one of the major private-equity exits involved Alexander Forbes, with Actis and Ethos selling their holdings in the financial services company. This enabled Mercer, a professional services, risk management and insurance brokerage firm and subsidiary of Marsh & McLennan, to buy 34% of Alexander Forbes.

The private-equity exit at Alexander Forbes paved the way for the financial services company to relist its ordinary shares on the JSE.

The Alexander Forbes IPO was valued at about R3.7bn.

Alexander Forbes had originally been delisted in a private-equity buyout worth R8bn in 2007.

More details are expected on the value of the private-equity exits in SA when KPMG and the Southern African Venture Capital Association (Savca) and KPMG come to release their report.

For the 2013 year, the KPMG and Savca report showed funds returned to investors sat at R10.2bn compared to R7bn in 2012.

In terms of investments last year, Bain’s Global Private Equity Report showed that $252bn worth of private-equity investments were made globally ”” about 2% lower than what had been invested in 2013.

Last year, about $187bn was raised by private-equity players compared to $211bn in 2013. Out of the $187bn raised, an estimated 10% had been invested, Mr Tymms said. This left room for more deals and increased competition for good assets.

“There is a significant amount of dry powder in the industry. Over the next five to 10 years, deals will continue to be done,” Mr Tymms said.

Because of the availability of cash resources and the hunger for quality assets, there was also a risk that prices could become overly inflated.

Mr Tymms said acquisitions at high prices would also put pressure on private-equity players to generate better returns for their investors.

The RisCura-Savca South African Private Equity Performance report released in January this year showed investments into private-equity funds delivered an annualised rate of return of 18.5%, net of fees, over the 10 years to September last year.

The returns for private-equity investors were almost in line with those of the South African equity index.

The RisCura-Savca South African Private Equity Performance report showed that the Johannesburg all share index returned 18.8% over the 10 years to September 2014 and the shareholder weighted index returned 19.7%.

It said that private equity returns for the five years to September 2014 reached 17.3% and continue to show recovery since the financial crisis.

In the 2009 crisis, the performance of private-equity funds lagged behind stock markets, raising fears among investors about their private-equity investment prospects, Bain said. That trend has been reversed.

Mr Tymms said players in Africa had appetite for investments in healthcare, broad-based financial services, consumer, retail and manufacturing.

One of the deals to come out of SA this year involved private-equity firm Ethos, which bought a stake of more than 50% in AutoZone, an independent automotive parts retailer and wholesaler, for an undisclosed amount.

Ethos said the deal was within the “Ethos sweet spot” of between R750m to R3bn.