More work needs to be done on IPO exit route

The JSE must do its bit

Finweek English Edition - - INSIGHT -

THERE’S MUCH CU­RIOS­ITY about this pri­vate equity lark. Most specif­i­cally, can re­tail in­vestors make a bit of dosh back­ing the so-called “smart money”? In South Africa, spe­cialised in­vest­ment ve­hi­cles such as Pal­adin, RE:CM & Cal­i­bre, Reinet and Brait have cap­tured the imag­i­na­tion of in­vestors even if in­vest­ment re­turns haven’t yet started to ar­rive.

The chal­lenge that con­tin­ues to be a prob­lem isn’t so much the is­sue of throw­ing money at in­vest­ments but more about who you can sell to when you want to re­alise a profit.

In SA that has had an added chal­lenge, with lim­ited ap­petite for Ini­tial Pub­lic Of­fer­ings (IPOs) on pub­lic ex­changes. While there’s been plenty of in­ter­est in new prop­erty listings and the likes of Brait and Reinet be­ing able to raise cap­i­tal at will – the ap­petite for less tried and tested teams has been lim­ited. Es­pe­cially when they’re per­ceived to be “ex-growth” and that all the best money has al­ready been made by pri­vate equity in­vestors.

Point­ing to the re­cently listed Hold­sport – which saw pri­vate equity firm Ethos net a tidy US$170m – Graham Stokoe, as­so­ciate di­rec­tor for Trans­ac­tions Ad­vi­sory Ser­vices at Ernst & Young, says: “South African pri­vate equity in­vestors con­tinue to look at IPOs as an exit op­tion. Due to the gen­er­ally smaller mar­ket caps of South African and other African pri­vate equity (PE) owned com­pa­nies, IPOs rep­re­sent a lower pro­por­tion of PE ex­its than the more ma­ture PE mar­kets in the US and Europe. How­ever, we do be­lieve – sim­i­larly to other emerg­ing mar­kets – the num­ber of IPOs across African com­pa­nies is also ex­pected to in­crease.”

Stokoe’s col­league Jef­frey Bun­der, global pri­vate equity leader at Ernst & Young, con­curs. “De­spite on­go­ing un­cer­tain­ties in the mar­kets, mo­men­tum is clearly con­tin­u­ing to build through­out the IPO mar­kets, giv­ing PE spon­sors an ever-widen­ing win­dow to exit hold­ings as in­vestors move fur­ther out of the risk spec­trum in search of com­pa­nies with strong growth sto­ries.”

That up­beat view on PE con­firms what was an­nounced by the South African Ven­ture Cap­i­tal and Pri­vate Equity As­so­ci­a­tion (Savac) in its 2010 re­port back in June, which was con­ducted in con­junc­tion with con­sult­ing firm KPMG. At the time War­ren Watkins, SA and Africa head of pri­vate equity mar­kets at KPMG, com­mented: “Africa’s po­ten­tial growth rates are sig­nif­i­cantly higher than those of ma­ture mar­kets and should lead to fur­ther in­vest­ment.”

This year al­ready has seen a num­ber of new “Africa”-fo­cused prod­uct of­fer­ings hit­ting the mar­ket and par­tic­i­pants ex­pect that trend to con­tinue. The as­set class is also likely to re­ceive a fur­ther boost from changes in Reg­u­la­tion 28, which will make pri­vate equity a more vi­able as­set class.

Savca CEO JP Fourie says: “In the past, PE fund man­agers were held to a limit of 2,5% for pen­sion fund in­vest­ments in PE. That’s changed. The lim­i­ta­tions have been

GRAHAM STOKOE

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