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The amount of funds allocated to private equity investments in South Africa is significantly below the international average, presenting a potential boon to company growth prospects and early-stage venture capital.
"While we have no definite numbers, South African pension funds invest only about 1% of their funds into private equity, while, internationally, this number is 4% on average.
“This means that there is room for them to grow their private equity investments and [potentially] diversify their portfolios in a limited liability and tax efficient manner," financial services firm KPMG Africa private equity markets head Warren Watkins said on Wednesday.
Private equity funds under management in South Africa currently stood at about R162.2-billion, while the undrawn funds – funds not yet invested – were around R58.6-billion.
This represented a potential investment value of R150-billion in unallocated funds, once gearing and broad-based black economic-empowerment impacts were included.
Further, average global private equity investment as a percentage of gross domestic product was around 1% in the US and UK, while in South Africa, this ratio was 0.13%, again presenting significant potential for private equity investments to grow in South Africa.
However, this growth potential also meant that competition between private equity investors would increase.
New funds raised for private equity during the past year amounted to R27.3-billion, with R8.2-billion of this raised for early-stage investments, which are typically venture capital to establish new businesses or to grow small businesses.
The remaining R19.2-billion was raised to fund growth in existing investments, particularly expansion opportunities.
"The drivers for private equity investment include high returns, limited liability as a limited partner, tax efficiency and short, fixed investment periods.
“However, these investments hold higher risk, offset by limited liability for limited partners, as well as limited influence on the investments made, with this covered by an investment mandate to the fund manager or private equity house," Watkins told attendees at a private equity seminar hosted by the South African Venture Capital and Private Equity Association and the Gordon Institute of Business Science.
Further, he pointed out that a key obstacle for South African private equity investment was the fact that the high taxes and additional expenses incurred to conduct business meant that about 70% of a company’s pretax profit went towards these expenses, leaving only 30% of the pretax profit for the company to fund its operations and show a net profit.
"South Africa is not a conduit into Africa. Mauritius has 70 000 foreign-owned companies registered on its shores, because of the tax benefits. We have extremely high costs in South Africa and, while there is limited competition in the private equity sector, there are few drivers for this sector to expand," stated Watkins.