DEAL ACTIVITY IN SOUTH AFRICA TO REACH PRE-CRISIS HIGHS It’s an exciting time for private equity in South Africa and Africa in general, according to KPMG’s Warren Watkins, head of private equity markets, Africa Putting together statistics from a number of sources, 2013 was a hands down record year for fundraising for the industry in which R160 billion poured into African private equity funds. Of that, R40 billion was earmarked for South Africa. That is a substantial sum, particularly considering that at the end of 2012, the total funds under management in the South African private equity market stood at R126 billion. The biggest factor in this boost has been surging global investor appetite for Africa, igniting the industry after a difficult few years. International pension funds under pressure to generate returns to support funding levels are once again in a position to consider increasing their allocations to private equity and looking to the enormous growth potential on the continent in an otherwise grim global investment landscape. PE returns beats listed indices Figures from RisCura show that over one, three, five and 10 years, returns on investment in South African private equity are ahead of those from listed equity on average. Some of the PE funds generated up to 10% per annum more than their counterparts managing equity portfolios. The perception is that over the next decade, that trend will continue, so suggests the findings of an inaugural report into investor views on private equity in Africa by RisCura and the private equity and venture capital associations of South Africa and Africa. 65% of the 48 Limited Partners (LPs) interviewed said that private equity returns would outpace local listed equities by at least 5% over the next decade. This is also fuelling activity, with a new wave of fundraising by major SA private equity funds under way to capture demand. They shouldn’t be disappointed. The survey also found that global pension funds expect to increase their portfolio allocation to African private equity from an average of 1% at present to 3% within two years. Other LPs were even more bullish. About two thirds (70%) of the participants rated the continent as “more” or “much more” attractive than other emerging markets. Pension fund rule change Another boost to the sector comes from a rule change in African pension fund regulations and strategic asset allocation limits which could represent a new source of capital for private equity funds targeting the continent. Currently, African pension funds have on average about 1% of their portfolio in private equity strategies. Compare that with the international average of 4% and 14% for the most mature pension funds, such as California’s huge public retirement system CalPERS. Leading the way is South Africa’s Government Employees Pension Fund (GEPF), the largest retirement scheme in Africa, with the recent announcement that it will deploy R60 billion – 5% of the R1.2 trillion fund – to unlisted assets in to support positive economic development and sustainable growth in a five to 10-year strategy. The GEPF’s principal officer, John Olifant, has said in the past that it is the fund’s responsibility to generate social as well as financial returns and that with 50% of its funds in listed stocks, it was prudent to diversify. It’s biggest commitments so far to the asset class has been R13 billion last year to three South African private equity funds, targeting clean energy and recycling, broad-based job creation and food security. Back to 2007 peaks The surge of interest combined with about R35 billion available in undrawn commitments suggests to me that the South African market is ripe for some of the large transactions that we saw in pre-crisis 2007 and 2008. Back then a number of listed companies went private in multi-billion rand highly leveraged management buyouts supported by private investment companies. Glass packaging firm Consol Glass, Edgars owner Edcon and Radio 702 parent firm Primedia were among them. This time round I should think infrastructure will be the big winner as the South African government has shown committed to building railways, roads, ports and developing the country’s tourism sector. In 2012, infrastructure took the lion’s share of investment in private equity at 27.5% of R14.4 billion raised, and I see this trend continuing. Education and healthcare are also ripe for investment with huge scope for private equity to get involved. Huge school building and improvement programmes are desperately needed in the country as are solutions to provide affordable healthcare for a population of 50 million, the majority of which are reliant on an ill equipped, underfunded state system to turn to as a last resort. South Africa Many investors, both global and local, are also excited by a recent trend for South African private equity funds to give their managers the discretion to allocate up to a fifth of the funds north of the border in the great untapped frontier and fast-growing markets of Nigeria, Kenya, Tanzania and Ethiopia. With a huge movement toward political, social and economic reform in many African countries, these are currently turning heads much faster than South Africa, a relatively mature market, where private equity has been considered a proven asset class for at least 12 years. In addition, low growth, widespread strikes and high tax rates are tarnishing South Africa’s crown as the investment gateway to Africa, while there also seems to be a perception globally that the market is overcooked. In fact this couldn’t be further from the truth, with PE penetration in South African GDP only a quarter of what it is compared to the genuinely mature markets of the US and UK. This indicates that it still has full scope to add value for private equity. South Africa is still an emerging market despite some first world areas of its economy and that is a message that needs to get out more. I hope that now, with the world’s eyes on South Africa and Africa as a whole, that governments work quickly to create an investor and business friendly policy framework that will persuade private equity to stay long after Europe and the US begin to look once again like possible investment destinations. Johannesburg head office 85 Empire Road, Parktown, Johannesburg, 2196 Tel: + 27 (0)11 647 7111 www.kpmg.com
