Private-equity investors look deeper into Africa

WITH a host of private-equity investments coming to fruition from a highly active entry period six to eight years ago, there may be a record number of exits in SA this year, but the country is providing much less fertile ground for entry investments as investors turn to African expansion for good returns.

Broadening Horizons, a joint study of private equity exits in Africa carried out by EY and the African Private Equity and Venture Capital Association, found that privateequity investors were taking a keen interest in Africa. But research leader Graham Stokoe, Africa private equity leader at EY, said South Africa looked set to miss out.

According to Stokoe, it’s an unfortunate trend. “That’s where a lot of South African growth could come from. But there’s been a drop in multinational buyer interest in South Africa over the last year, which is concerning. They’re interested in Africa as a whole. South Africa-based funds are also getting more involved in Africa.

“We know they’re doing business, trying to get their investment holdings to expand. What we don’t yet appreciate is that although 1% of their business may be up in Africa right now, in a few years it could be 30%, growing at 20% to 30% a year, while South Africa grows at a nice stable 10%,“he said.

“You can still have a really good business based here, but if you don’t expand it, 10% to 15% returns will be much less interesting.

“Most of the investments being made by local private equity funds is greenfields in nature — opening agencies, getting products out, sorting out the supply chain, finding ways to new markets on the continent.”

Is the JSE also becoming too expensive for private equity firms to be busier in South Africa? “There is a question mark about that. I think the other challenge is dealing with the process of delisting — getting all the approvals, which can mean 75% on one method or 90% on the other.

“The challenge is finding thinly traded companies because you have to get hold of a multitude of shareholders. A case in point is the Adcock debacle, where the Chileans couldn’t get all the approvals they needed,” said Stokoe.

An option some private equity players have taken is getting significant stakes in listed businesses, without gaining complete control.

But this route comes with pressures of its own. “This hasn’t happened so much in South Africa, but one example is Standard Chartered buying a chunk of a listed Botswana retail business that is a key player in its market and competes with the likes of Shoprite.

“It’s often lower risk, and you can get to know the company better, and it’s at least one way to keep making your money work,” he said.

Looking forward at 2014, Stokoe thinks some funds are under pressure to exit investments they’ve been sitting on for seven or eight years.

“Exit times in Africa are still on average slightly longer than in the US or Europe, but only by a year or less at close to six years. In 2013 the number of investments made was probably the second-best figure behind 2007 since we started tracking but last year was a poor year for exits after a busy 2012.

“I think 2014 could see a record number of exits because a lot of funds raised in the last decade are feeling internal pressure to get out of investments. However, in South Africa in terms of entries, I think there is a wait-and-see attitude that is lingering from the end of 2013.”

Most exits will not go to public listings. “We had the listing of Ascendis last year, and before that we had Ethos listing Moresport around 2011. It’s been a fairly dry run for listings in the last few years.

“Alexander Forbes is the obvious big future listing, and Primedia is rumoured to be preparing to list, although that’s not traditional private equity any more — it’s more of an investment holding company structure like a Remgro,” Stokoe said. “I think all private equity players would prefer a clean deal with a buyer rather than going to an IPO [initial public offering]. The challenging bit with a listing is you really only know after a lot of investment where you’re getting to, and the number of investments suitable for a listing is quite low anyway.”