Private equity in SA: fruitful partnerships

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DAILY NEWS BULLETIN
27 FEB 2017

A key consensus in the private equity community is that significant scope exists for private equity and venture capital managers to partner with businesses for growth, expansion and value creation in Southern Africa. This was a central theme of discussion amongst delegates who attended the annual Southern African Venture Capital and Private Equity Association (SAVCA) Private Equity in Southern Africa Conference in Stellenbosch, South Africa.

More than 200 African private equity deals were reported over the past year. Of these, based on transaction information disclosed, around half were transacted in Southern Africa, of which some 65% were in South Africa.

With the theme of “Fruitful Partnerships”, the 2017 SAVCA conference closely reviewed the impact of such private equity partnerships on businesses, communities and economies. “Collaborations between private equity managers and institutional investors mobilise capital from international and local sources for productive deployment; the teamwork between private equity managers and investee companies builds better businesses, which in turn creates new employment opportunities and shapes healthier communities,” says Erika van der Merwe, the outgoing CEO of SAVCA.

The two-day conference saw industry players discuss their views on major themes and industry trends over the past year, and expectations for the private equity industry and investing in Southern Africa in 2017.

This included:

Transactional activity

Transaction activity – both on the acquisition and the realisations side – was firm over the past year, across the deal-size spectrum and in a range of industry sectors. The SAVCA Quarterly Data Tables, prepared in collaboration with Webber Wentzel, indicates that there were 203 reported acquisitions and 41 exits in Africa during 2016. There were 99 reported deals and 14 exits in Southern Africa over this period. Of the acquisitions, a third were in South Africa, with Nigeria, Kenya and Namibia also featuring prominently.

John Bellew, head of private equity at Bowmans, notes the shift towards a broader regional perspective in acquisitions. “We have seen a fair amount of deal activity across the continent; many of the African deals we have seen have been of companies operating across multiple African jurisdictions.”

Competition for quality assets

Careful deal selection and due diligence processes, together with mindful support for investee companies, are a clear focus for the industry, to ensure investor returns are maximised while operating in a setting of complexity and competition. “The market is much more competitive than previously, but there are still those willing to pay a premium to get in,” says Lydia Shadrach-Razzino, director at ENSafrica.

Clive Howell, head of private equity at Nedbank Corporate & Investment Bank, notes that the inclination towards auction processes for transactions is evident even in the lower mid-cap space, owing to heightened competition and an increase in the number of private equity managers in the market.

Volatility and investor resilience: Value creation as an earnings-boosting strategy

A major theme in the industry has been the volatility in both local and international market conditions, which creates significant challenges for deal-making, and the juxtapositioning of this uncertainty with increased competition for deal flow amongst private equity managers, other financial buyers and trade buyers.

Andrew Dewar, managing director of Rockwood Private Equity, believes that “astute fund managers will think very carefully how they manage their portfolios in a low-growth environment. If one is disciplined and cautious, one will be able to do deals and extract value.”

Rohan Dyer, partner and head of investor relations at Ethos Private Equity, emphasises the point of mindful asset selection – and the importance of supporting the investee business through strategic transformation that ultimately supports the earnings performance. “The underperforming South African economy is negatively affecting deal flow as low GDP growth creates risk in return expectations, plus there is regulatory uncertainty in some sectors. However, we are still finding attractive opportunities to invest in entrepreneurial companies with good growth potential, which can be accelerated by supporting them with our Value Add capability.”

Managing the exit in a world of complexity

There is notable exit activity in the industry, as fund managers realise portfolio investments using a range of mechanisms. Keith Woodhouse, partner at Hogan Lovells, has witnessed an increase in the use of secondary buyouts as a way of exiting: “This demonstrates that the private equity market in Africa is maturing. It is also evidence of some private equity houses needing to achieve exits. This need to exit is typically the case where the funds are reaching the end of their life cycle or where there is a need to support future capital raises.”

An evolving approach to funding private equity

According to the SAVCA 2016 Private Equity Industry Survey, the Southern African private equity industry raised some R29 billion in 2015. While updated figures for 2016 are still being finalised, there are more than 15 fund managers in the process of targeting funds well in excess of the 2015 total.

There has been a move, notable in developed markets and now a reality in emerging-market regions such as Southern Africa, to list fund entities or vehicles that feed capital raised on public markets into a traditionally structured fund.

Ethos Capital debuted on the JSE in August 2016, following a R1.8 billion oversubscribed public placement. The listing gives the market the opportunity to invest in a diverse pool of unlisted small to medium-sized companies through private equity funds managed by Ethos Private Equity.

Nicole Paige, Partner at Webber Wentzel, notes: “There has been a growing interest from other private equity managers and investment holding companies looking to do similar transactions and access alternative sources of capital that require liquidity, which can be a challenge for private equity funds”.

Private equity in 2017 and beyond

Van der Merwe concludes that all indications are that the positive transaction trend will continue into 2017, with a good pipeline of deals already spilling over into the first quarter of 2017. Although competition for institutional capital is intensifying, she similarly expects that the positive fund raising momentum will continue.

She adds that, similar to 2016, SAVCA will remain focussed on engaging with local and regional institutional investors about the fruitful impact the asset class offers. “Contrasted with the global trend being reported, of investors now increasing their private equity allocation, local investors remain relatively underexposed to the asset class. SAVCA continues to work towards a more balanced appreciation amongst Southern African investors for the role of the asset class in boosting returns, mitigating risk and in bringing about environmental, social and governance improvements in businesses.”