Asset class shows its mettle
The strong bounce-back from Covid has been boosted by SA pension fund investment
Despite the tough economic environment, SA’s private equity industry has remained resilient, with about R205.7bn funds under management in 2020, according to a recently released Private Equity Industry survey produced by the Southern African Venture Capital & Private Equity Association (Savca).
The survey found that, though both the value and volume of investments declined in 2020 as a result of Covid headwinds, the decline was not as sharp as expected and private equity firms still managed to make investments.
At the onset of the pandemic and lockdown restrictions, much of the focus was on supporting existing portfolios to ensure they survived the crisis, says Savca CEO Tanya van Lill.
“Private equity fund managers were hands-on to support the companies they invested in to navigate the health and economic crisis they faced. This halted new investment activity in the first half of the year,” says Van Lill.
Total capital raised fell about 22% in 2020, but in the second half of the year, once existing portfolios had stabilised and industry players had adapted to the new normal, investment and fundraising efforts continued. The industry has had to adapt how it raises funds and invests, with the majority of interactions and due diligence processes moving to virtual engagements.
Funds raised from local investors rose 200% during 2020, compared with the previous year. What is encouraging, says Van Lill, is that the majority of funds raised in 2020 were from SA pension funds, which clearly see the potential and benefit of including private equity in their portfolios.
An unlisted asset class, private equity hasn’t traditionally attracted pension fund investment. However, that appears to be changing as institutional investors get more comfortable with this asset class.
Of concern has been the 67% decline in foreign investment in 2020. “The industry’s challenge will be to attract capital from foreign investors,” says Van Lill.
But to achieve this, the industry needs to successfully sell the country and the region as a viable investment destination to foreign investors, and compete with all the other emerging markets for future capital.
The survey highlighted the sharp increase in global private equity exits to an all-year high in the first half of 2021, which could potentially be a leading indicator for greater exit activity from SA private equity firms.
In 2020, according to the survey, investments in real estate
What it means:
Private equity may be a small asset class, but it’s well placed to channel funds to grow companies and create new jobs and infrastructure represented more than 41.7% of the cost of total investments, while investments in manufacturing and services were the most popular sectors for investments by volume.
While private equity remains a relatively small equity class in SA, Van Lill believes it is well placed to channel funds to grow and develop companies and create new jobs, which will ultimately boost the economy.
“The private equity industry has experience with investing in a myriad industries, from fintech and manufacturing, to health care and infrastructure,” she says.
“In the 2020 Savca Impact Study, we reported that companies that have received venture capital or private equity funding increased jobs by an average of 22% postinvestment, and revenue by 24%.”
Regulation 28
Savca backs proposals to amend regulation 28 of the Pension Fund Act so that pension funds have more leeway as to where they invest by increasing the proportion of funds they are allowed to place in asset classes other than shares, bonds and property.
Van Lill says the proposed change to regulation 28 is a step in the right direction as it will allow pension funds more choice to place funds in investment vehicles and infrastructure projects that will not only result in good financial returns but will, over time, create more jobs and improve SA’s competitiveness. It will also allow private equity investment to more proactively support the country’s economic recovery.
“It’s vitally important to improve SA’s competitiveness as a critical player in the African economy and to attract more foreign investment, while at the same time giving our own institutions more investment choice,” she says. Private equity has been shown to not only add financial returns to portfolios but also to make a positive social impact, says Van Lill.
“In our 2020 Savca industry survey, 98% of members reported that ESG [environment, social and governance] factors are considered during the investment process. What Covid has amplified is the potential risk and managing of risk during a crisis.”
She says private equity firms were well placed to navigate the crisis, given the emphasis on ESG factors during and after the investment process.
“We’re also seeing more and more fund managers emphasising specific impact measures as part of their investment thesis,” she says.
Van Lill cautions pension funds investing in the unlisted space to match the investment duration and vehicle with their liability requirements and to ensure they have conducted proper due diligence before any investment.
2021 prospects
Globally, the private equity industry is growing and SA is following a
similar trend, with a larger pool of fund managers entering the market.
Encouragingly, the survey reveals there’s been a sharp uptick in investment in 2021. Globally, private equity investments in the first half of 2021 have almost tripled the value achieved in the same period in 2020. Analysts expect that deal activity in SA will rise in 2021, particularly in comparison with 2020, says Van Lill.
“The industry has more than R30bn at its disposal to make investments — of which about a third is available in SA — and will continue to look for opportunities to add value to their investors.”
Shaun Cabrita, an executive at RMB Corvest, confirms that after a slowdown in deal flow in 2020, deal activity has accelerated in the past six months, though the unrest in KwaZulu-Natal and parts of Gauteng in July affected some of its investments.
“Fortunately they have all managed to adapt quickly and move ahead,” says Cabrita.
RMB Corvest invests primarily in well-managed, medium-sized businesses across Sub-Saharan Africa and follows a consistent approach for each investment.
“We look at forming long-term partnerships that maximise returns for all the parties involved,” he says.
“A fundamental component of every successful transaction is establishing strong relationships with proven management teams. We don’t get operationally involved in the underlying businesses; our strength is to identify the right management team, ensure there is alignment at shareholder level, and back them to run the business.
“Where we get involved is on the strategic side at board level. This approach allows us to monitor the performance of the business without being involved in the minutiae of the business’s day-today operations.”
RMB Corvest’s private equity portfolio is coming through the pandemic surprisingly well, says
Cabrita. He attributes this to the right approach in terms of giving management teams the autonomy to run the business, which meant they were in a position to respond and adapt quickly to a new environment. In addition, most of the businesses in the portfolio were not excessively geared.
“There is still a great deal of uncertainty regarding how the pandemic will ultimately play out, but as the operating environment normalises, we’re looking to invest smartly. Fortunately, there are still good opportunities and prospects out there.”
Rather than trying to time markets and cycles, RMB Corvest prefers to invest consistently through cycles. Successful private equity deals in this environment, says Cabrita, will need to be correctly priced. “It’s about adapting in terms of pricing or structuring — or a combination of the two.”
The model adopted by RMB Corvest is to create and grow value by implementing growthbased strategies rather than cutting costs to improve margins and profitability.
“For most companies, there is a trade-off between growth and profitability, but we’ve seen better returns when focusing on the former, even though this is often more challenging and requires greater investment.”
“Get it right and the knock-on impact is significant: growing jobs, increasing business with suppliers, and adding corporate tax contributions to the fiscus. This should, in turn, help improve SA investor confidence and sentiment.”
Broad-based BEE is one of the fundamental components of RMB Corvest’s offering, which also means its investments are playing their part in SA’s transformation initiative.
A fundamental component of every successful transaction is establishing strong relationships