Tough times may break in 2019
Options such as high-quality companies and management teams make for a good buffer in this tough climate
Just as businesses operating in SA have had to streamline and get debt under control to get through a tough few years in the local economy, so have private equity (PE) players had to manage gearing levels, temper expectations and wait for a more opportune time to exit at a decent price.
While returns are expected to remain muted until the local economic environment improves, private equity players have been cautious about overpaying for assets and, where value can be found in acquiring stakes, have become more hands-on as strategic partners in growing and developing markets for underlying companies.
Jacci Myburgh, head of Private Equity at Old Mutual Alternative Investments, one of Africa’s largest private alternative investment managers, says even in a challenging macroeconomic environment, SA is blessed with high-quality companies and management teams, so there is not a shortage of options. But where these management teams are dealing with 100% exposure to a growth-challenged local economy, with no tailwind, the imperative becomes growing market share to drive revenue and resultant returns for PE fund investors.
“We’ve decided to expand our focus to include slightly smaller businesses in the midmarket band (in addition to the large-cap space), which have a clear, aggressive and implementable strategy to grow market share, either organically or through acquisition. It’s a matter of backing the right jockeys,”
Myburgh says.
The past five years have been the toughest of the past 20, and across Africa competition in the R800m to R1.5bn ticket size bracket has been fierce, Myburgh says. “We’re not seeing many proprietary, exclusive deals in that space. By focusing more on control deals in the midmarket space we’re approaching management teams directly to say we like their business and here’s what we can offer. From there it’s a matter of aligning what we’re both good at.”
Old Mutual is not alone. According to Tanya van Lill, CEO of the SA Venture Capital Association (Savca), the sector is experiencing an uptick in new funds, with most of them — alongside existing players — targeting the midvalue band of R100m-r1bn, as well as breaking off into specialisation such as targeting certain sectors.
“This is true across geographies in Africa, where lots of traditionally Sa-focused funds are now exploring the continent for investments to find growth,” she says.
A midmarket focus seems a Investors have number of profitable options as alternative tools to navigate the crisis caused by subdued economic growth that spooked them over the past few years sound strategy where “chunkier” assets may struggle to grow market share and revenue enough to provide the desired returns into funds, Myburgh says. “Eventually you have to exit, either to financial buyers such as other private equity (PE) players or to local or foreign strategic buyers; or through an initial public offering on an exchange. The large assets, such as Consol, in which we hold a stake, are generally too large for most PE players to consume.”
Needing support from global players to buy these stakes or participate in public listings brings with it a certain level of risk most PE players seem averse to taking right now. “The mini-emerging market crisis of 2018 affecting the likes of Turkey, Argentina and Russia also impacted foreign capital’s appetite for exposure to South Africa, making it trickier to exit large assets,” says Myburgh.
RMB Ventures (RMBV) co-head Andrew Aitken says the market for third-party funds has been tough. “Dollar returns over the past 10 years haven’t been as good as expected — this being the result of a combination of rand weakness because they are required to target a dollar return hurdle, weak macroeconomic conditions and funds being pressured to exit into suboptimal market conditions. We are, however, positive that there will be a conducive environment for investing over the coming years as long as you are willing to take a longer view.”
Myburgh says Consol looked at an initial public offering (IPO) last year but did not proceed, based on shareholders’ value expectations, giving an indication of the requirement for strong offshore interest when exiting very large investments. But he and Old Mutual Private Equity, which through its funds holds stakes in Actom, Consol, Tourvest, 10X Investments, Primedia and Tiger Wheel & Tyre, are excited and optimistic about
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