While 2008 saw the rest of the world go into a financial tailspin, it appears that the South African private equity industry remained in a relatively healthy position. Even though both deal value and flow during the past few months were lower than the previous year, the industry still reported over R20 billion of investment activity in 2008. The private equity industry in South Africa also reached a momentous milestone in 2008 when total assets under management exceeded R100 billion.
This bodes well for Black Economic Empowerment (BEE) in South Africa as, despite the recent negative media attention, the past year saw investments into BEE grow, and we expect this trend to continue in 2009 and beyond. Private equity investments in entities that are black owned, empowered or influenced are up 38% from R11.8 billion during 2007 to R16.3 billion during 2008. This R16.3 billion was invested across 331 BEE investments in 2008 at an average deal size of R49 million. R29 billion is available for further investment by the whole industry, just on 80% of these available funds are managed by fund managers that are at least black influenced or managed by governmental funds. This represents a significant pool of capital for funding businesses and continuing the vital socio-economic BEE process.
Private equity in South Africa is a significant role player in the development of BEE. The industry’s impact on BEE is far reaching and it is important to note that:
• Private equity transactions enabled higher gearing, whereby a combination of private equity investment and loans allow the implementation of an appropriately geared financial structure, allowing management of the investee company to acquire a significant stake in the company. This leveraged model also creates opportunities for involvement of black management and other BEE parties in the ownership and management of the investee company.
• The vast majority of transactions concluded by the private equity industry have a significant BEE component and the majority of private equity fund managers have a BEE element to the structure of their funds.
• Given the clarity provided in the interpretative guide to the Codes of Good Practice on Broad-based Black Economic Empowerment, as to how a company may treat its ownership arising from a private equity fund as if that ownership were held by black people, the industry is well poised to further increase its already significant bearing BEE. These requirements can be summarised as follows:
• More than 50% of any exercisable voting rights associated with the equity instruments through which the private equity fund manager holds rights of ownership must be held by black people
• More than 50% of the profits made by the private equity fund manager after realising any investment made by it, must by written agreement, accrue to black people
• The private equity fund manager must be a black-owned company, as defined in the BEE Codes.
• Over a 10-year period, the private equity fund must have more than 50% of the value of funds invested, invested in black-owned enterprises that have at least 25% direct black ownership.
South Africa’s private equity industry boasts total funds under management of R103.1 billion (inclusive of undrawn commitments that are available for further investment of R29.2 billion). This is a R16.8 billion (19.5%) increase from funds under management at end 2007 of R86.3 billion (inclusive of R31.6 billion undrawn commitments). The industry has achieved a compound annual growth rate of 14.4% of total funds under management since 1999.
If one analyses the funds under management from a BEE perspective and include funds that are provided by the South African government (such as the National Empowerment Fund, The Industrial Development Corporation, the Umsobomvu Youth Fund and others) the growth is also staggering; R68.6 billion of funds under management at end 2008, an increase of 16.3% from 2007 (R59 billion) a dramatic increase from the funds under management levels of 2004 (R24.4 billion) and 2005 (R34.1 billion).
Figure 1 – Funds under management by BEE fund managers at year end (Rbn) – click here to view
Source: SAVCA KPMG 2009 Private Equity Industry Performance Survey
Reported private equity investments decreased by 18% from R26.1 billion during 2007 (which includes the Bain Capital buy-out of Edcon for an equity value of around R8.7 billion) to R21.3 billion during 2008, while the total M&A industry activity declined by 39%.
BEE investment by private equity bucked this trend, as the percentage of total investments that BEE represents increased despite the overall decline. Empowerment deals in the M&A market also fell off dramatically, R61 billion (2008) from R96 billion (2007). Showing, again that there is a symbiotic relationship between BEE and Private Equity.
Figure 2 – Cost of investments made during the year (Rbn) based on new or follow-on investments
Source: SAVCA KPMG 2009 Private Equity Industry Performance Survey
Figure 3 – Cost of BEE investments made during the year (excluding government funds) (Rbn)
Source: SAVCA KPMG 2009 Private Equity Industry Performance Survey
Investments by private equity into black companies (more than 50% black ownership) almost doubled from 2007 to 2008, underling that the industry is investing into BEE more than ever.
Looking forward for BEE and private equity: The private equity industry is posed to further its role in BEE given (a) the un-invested funds that are managed by BEE fund managers, which will need to be invested over time, and (b) that various industry specific BEE charters are only now being finalised, after which further large BEE deals will be announced. Some market players believe that this, along with the economic downturn, will herald a new era of restructuring and refinancing BEE deals, which will make it tougher for participants in the BEE deals to raise ‘conventional’ funding to facilitate these transactions. So, many companies may turn to private equity funds for this financing. Given the performance of some of the BEE private equity funds, hopefully some of these, now mid-size funds, will advance to levels where they have scale and capacity to syndicate and lead this new era of BEE. If this scenario plays out, BEE and private equity are set for a long and profitable relationship.
J-P Fourie, BCom (Hons) is the Executive Officer at SAVCA.
