The value of active ownership
The ability to act quickly and decisively gives private equity an advantage in crises
The performance of the local private equity industry is, to a large extent, determined by the amount of liquidity available in the market (essentially the under- or over-supply of capital), as well as the state of the economy. As such, it’s a reflection of how well the economy is being managed.
The private equity industry only really became established in SA in the early 2000s under Thabo Mbeki’s presidency, when the country experienced economic growth and political stability.
This period was characterised by exceptionally strong returns in the SA private equity market. The inflow of capital into emerging markets after the global financial crisis resulted in record funds being raised subsequently.
This record supply of capital, combined with a weak economy, has resulted in more moderate returns over the past five to 10 years, but private equity has still, in most cases, outperformed listed equity.
In addition to a conducive economy, foreign investment enhances the environment for private equity to perform optimally. However, the state capture years, characterised by slower economic growth, saw SA become a pariah as far as foreign investment was concerned.
Despite amended regulations, the uptake of private equity as an asset class in recent years has been slower than expected. That now looks to be changing.
There are several reasons why private equity is an increasingly attractive asset class. The first is its ability to significantly outperform listed equity, which has been evidenced across various markets over an extended period, says Jacci Myburgh, co-head of Old Mutual Private Equity (OMPE), part of Old Mutual Alternative Investments.
It also diversifies portfolios and its long-term nature means that it’s able to ride out volatility. An important part of private equity investment is integrating environmental, social and governance (ESG) elements with set targets and regular measurements, which means the asset class is becoming a socioeconomic force for good.
The next five years, Myburgh believes, will be an exciting period for private equity, given a more stable political and economic environment, capital supply being more balanced and the fact that foreign buyers are starting to once again dip their toes into SA.
“We don’t need the economy to grow at 4% or 5% for private equity to do well, 1% or 2% will suffice,” he says. “In this environment, longterm capital is a great advantage.”
Founded in 2000, OMPE is one of the country’s most established private equity managers, having invested more than R9bn across 31 transactions in the past two decades over various investment cycles.
Its approach emphasises a long-term, value-driven mindset. “We don’t interfere operationally, but we work with management to craft a clear strategy that outlines how a business will compete in a
particular market or under certain conditions,” says Myburgh.
OMPE’s active ownership model came to the fore in 2020, when some of its larger businesses suffered significant losses due to the hard lockdown imposed to curb the spread of Covid.
“We had the advantage of seeing how the impact of the lockdown and pandemic was playing out across many different portfolio companies,” says Myburgh.
“As a result, we were able to develop a sort of playbook to support the management teams of the various companies. This involved securing the safety of our people, managing working capital and costs responsibly, and engaging with important stakeholders such as lenders and landlords.”
At one stage, says Myburgh, OMPE, alongside its fellow shareholders in various portfolio companies, held urgent board meetings with management teams up to twice a week to decide on the way forward.
“Our advantage was the ability to act quickly and decisively, based on current information, to mitigate losses and risk, compared with a listed company, which only meets with its board four times a year and with its shareholders twice a year,” says Myburgh.
What the team learnt, he says, is that the active ownership model works better than the passive one in periods of crisis.
“Our ability to support management teams and apply learnings across the portfolio allowed our businesses to weather the crisis very well,” he says.
The pandemic crisis has also provided a new perspective on what is possible.
“Covid forced our management teams to implement sometimes drastic measures — like cutting product inventory by half, for example — to survive. In some instances, they learnt that their businesses were still viable despite these circumstances,” he says.
Not all businesses in OMPE’s portfolio were negatively affected by the pandemic. Some businesses, he says, have actually benefited from the crisis.
Commenting on the company’s future and present investment programme, Myburgh says: “We look for businesses that are ideally in a tailwind industry — or at least are not facing headwinds — and then find ways to build their market share. It’s a mindset focused on long-term growth.”
A recent example of this approach was OMPE’s acquisition of a majority interest in footwear retailer Footgear in 2019. At the time of the acquisition, it had 63 stores in SA. After OMPE’s investment, it has grown to 172 stores. Footgear’s footprint was significantly expanded with the addition of Edgars Active and High Key.
“Not only did we save about 1,000 jobs, but our ability to deploy capital into the business, combined with a growth mindset, has put Footgear on track for exciting, sustainable growth,” says Myburgh. “This is the kind of approach that the SA economy needs to grow and prosper.”