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Record private equity investment indicative of growth potential

Savca CEO Tanya van Lill

Savca CEO Tanya van Lill

17th July 2019

By: Simone Liedtke

Creamer Media Social Media Editor & Senior Writer

     

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South African private equity recorded a considerable increase in investment activity in 2018, with the value of new investments and follow-on investments having reached a record R35.4-billion, compared with an annual average of R15.2-billion over the preceding decade, the Southern African Venture Capital and Private Equity Association (Savca) said on Wednesday.

Of the investments made during 2018, 17.4% were in the services sector, 17% in the retail sector and 14.3% in the energy sector.

The figures were revealed in Savca’s 2019 Private Equity Industry Survey, which surveyed 47 managers, representing 82 funds, with a mandate to invest in South Africa and in other African markets. 

According to the survey, total funds raised increased by 71.6% in 2018. Of the R12.8-billion raised, R7.1-billion (56.6%) was raised in South Africa.

The industry also benefitted from initiatives such as the government’s drive for foreign investment and the increased interest shown by local pension funds to invest in real assets which include private equity.

Savca CEO Tanya van Lill told Engineering News Online that this uptick in investment activity, along with the strong fundraising figures reported for 2018, was indicative of the resilience of the private equity industry. She further noted that amid the numerous investment opportunities available in South Africa, investors were increasingly looking to private equity.

She explained how, while recent performance indicators of the listed market had not been great, looking at the figures from a financial perspective indicated that private equity was doing better than the listed space.

Referring to the US private equity market as an example, she said through investing in private equity, investors had found that private equity returns cushioned them from volatility in the listed space.

Investors are also increasingly looking for “investment with impact”, which sees investments having a positive influence on the company and the communities around them.

“We’re seeing a lot of money flowing into healthcare, education, infrastructure [and this] not only [sees investors] get financial returns, but [the investments] also [help to] build essential products and services that people need, specifically on the African continent,” she elaborated.

However, considering that the general sentiment in South Africa is that the economy is not doing well, coupled with a low rate of business confidence, the increase in investment activity in 2018 is owing to fund managers having a lot of experience in “looking for good deals and good assets”.

Fund managers in this space were also seeking investments in businesses that they could help grow and where they expected to see not only a financial return but a positive impact, Van Lill added.

“If you look at the figures in terms of the investment and the increase in investment, you’ll see that a lot of that investment was called follow-on investment – in other words, businesses that they’ve already invested in but where they still see a lot of potential for those businesses to grow, either growing in products and services or growing their geographical footprint, as an example.”

Moreover, research showed that Southern Africa’s private equity industry, which was made up of both government and private funds, had R171-billion in funds under management (FUM) as at December 31, 2018, which Savca said represented a compound annual growth rate of 9.3% since 1999, when the survey first began.

South Africa’s private equity capital penetration continued its upward trend, having risen to 0.8% of gross domestic product in 2018.

“This means that although the South African private equity industry as a whole is relatively small in comparison to more developed economies, it is still well-established and significant in the regional market,” said Van Lill. 

However, the South African private equity industry has “definitely increased in its potential to grow”, she told Engineering News Online, adding that if the same kind of growth and investment and fundraising levels were experienced moving forward, “the industry is still going to grow a lot more than it has the past few years”.

Also, as fund managers become more mature, it paves the way for other fund managers to join the industry. As an example, Van Lill reminisced that, in March 2017, Savca had about 110 fund managers. This number has now grown to over 130 fund managers.

“There’s already growth not only in the investments but also in the number of fund managers that are being established.”

Van Lill explained that fund managers not only brought in capital, they also brought experience, expertise and assets to networks and markets when investments were made.

“It’s this additional expertise and skills that they bring that will help unlock further growth for companies and will see not only new products and services, basic products and services that are needed, being provided, but will also see a growth in jobs and in the living conditions in the communities in which these companies operate,” she noted, adding that, ultimately, the multiplier effect would be beneficial for South Africa’s people, and the economy.

Meanwhile, funds returned to investors in 2018 totalled R15.6-billion, which represents all cash flows returned to investors including the proceeds from realising investments, dividends, interest and repayment of loans.

In terms of realising investments, trade sales were the most popular by value totalling R5.6-billion, while the yearly average funds returned to investors over the preceding five years was R13-billion.

“This is testament to the fact that emerging markets private equity continues to, not only provide investors with exposure to the private sector via private or unlisted companies and attractive returns, but also the opportunity to truly make a positive impact as investors and investees walk their journey together,” Van Lill said.

Additional highlights from the survey include the significant advances made in terms of transformation, with the percentage of female and black professionals within the industry having increased to 29.6% and 34.9%, respectively, from 21.8% and 29.9% in 2017.

Savca, as an industry body, on Wednesday said it was “excited to see the positive trend of female and black professionals within the private equity industry”, adding that it would like to see this trend extend to fund manager executive and ownership level. 

“The exciting new Fund Manager Development Programme is committed to driving a transformative change in the industry over the coming years,” Van Lill said.

The programme is a Savca initiative that aims to accelerate the entry of black and women-owned fund managers.

Overall, Van Lill emphasised that the private equity sector was “doing really well amid very difficult economic conditions”.

She highlighted that it was very important for the country to know that the sector had value that it could add to the South African economy.

“It’s to create that positive messaging about South Africa, which is what we need,” Van Lill concluded.

Edited by Chanel de Bruyn
Creamer Media Senior Deputy Editor Online

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