Publications
Partners
There’s much curiosity about this private equity lark. Most specifically, can retail investors make a bit of dosh backing the so-called “smart money”? In South Africa, specialised investment vehicles such as Paladin Capital [JSE:PLD], RE:CM & Calibre, Reinet Investments [JSE:REI] and Brait have captured the imagination of investors even if investment returns haven’t yet started to arrive.
The challenge that continues to be a problem isn’t so much the issue of throwing money at investments but more about who you can sell to when you want to realise a profit.
In SA that has had an added challenge, with limited appetite for Initial Public Offerings (IPOs) on public exchanges. While there’s been plenty of interest in new property listings and the likes of Brait and Reinet being able to raise capital at will – the appetite for less tried and tested teams has been limited. Especially when they’re perceived to be “ex-growth” and that all the best money has already been made by private equity investors.
Pointing to the recently listed Holdsport – which saw private equity firm Ethos net a tidy US$170m – Graham Stokoe, associate director for Transactions Advisory Services at Ernst & Young, says: “South African private equity investors continue to look at IPOs as an exit option. Due to the generally smaller market caps of South African and other African private equity (PE) owned companies, IPOs represent a lower proportion of PE exits than the more mature PE markets in the US and Europe. However, we do believe – similarly to other emerging markets – the number of IPOs across African companies is also expected to increase.”
Stokoe’s colleague Jeffrey Bunder, global private equity leader at Ernst & Young, concurs. “Despite ongoing uncertainties in the markets, momentum is clearly continuing to build throughout the IPO markets, giving PE sponsors an ever-widening window to exit holdings as investors move further out of the risk spectrum in search of companies with strong growth stories.”
That upbeat view on PE confirms what was announced by the South African Venture Capital and Private Equity Association (Savac) in its 2010 report back in June, which was conducted in conjunction with consulting firm KPMG. At the time Warren Watkins, SA and Africa head of private equity markets at KPMG, commented: “Africa’s potential growth rates are significantly higher than those of mature markets and should lead to further investment.”
This year already has seen a number of new “Africa”-focused product offerings hitting the market and participants expect that trend to continue. The asset class is also likely to receive a further boost from changes in Regulation 28, which will make private equity a more viable asset class.
Savca CEO JP Fourie says: “In the past, PE fund managers were held to a limit of 2,5% for pension fund investments in PE. That’s changed. The limitations have been raised for PE and hedge funds from 2,5% to 10%. That isn’t only a significant change for the industry but also a beneficial long-term regulatory modification.”
While there’s much going for SA’s private equity sector, the issue of “exits” is a critical one. Local companies such as Fundamo, CSense Systems and Peresys have found themselves more attractive to buyers overseas, such as Visa, General Electric and IRESS rather than electing to go the IPO route.
While the original investors can’t be blamed for selling out to offshore companies you have to think the technology board on the JSE is crying out for quality companies of that stature, especially considering the loss of Dimension Data to the bourse earlier this year. While the JSE consistently talks up its world-class systems there’s a trend emerging that says companies aren’t seeing the JSE as a natural destination for some private equity investments.
Technology may be the current “hot” sector but there are a number of retail and construction offerings housed inside the likes of Brait, Ethos and Actis that are going to be looking for exit mechanisms.
The elephant in the room is retail giant Edcon, which is fast coming to the end of a natural private equity cycle. It would be a frustrating situation to discover an appropriate “exit” mechanism can’t be found in the local market and it makes better economic sense for a company like Bain to simply sit on the revenue generating capabilities of an Edcon rather than return to market.
Perhaps it’s time to start asking some tough questions: While private equity is coming to the party, is the JSE doing enough to provide the natural stepping-stone to keep the sector alive?
By the numbers…
1 In 2011 to date, private equity (PE) backed companies have raised US$31,1bn in 68 separate IPOs.
2 Companies based in the emerging markets raised $7,7bn from 17 separate deals, the most since fourth quarter 2007.
3 There’s R31bn in undrawn private equity commitments in South Africa.
4 Investments by PE funds increased from R7,2bn in 2009 to R10,4bn in 2010.
5 Some 42,4% of all funds raised last year were from South African sources (2009: 50,3%), followed by Europe with 21,4% (2009: 12,2%).
Emerging market deals
Some of the big money emerging market deals sold to foreign competitors:
* Cape-based mobile start-up Fundamo was sold to US financial services giant Visa for $110m
* Pretoria-based CSense Systems was sold to GE for an undisclosed amount
* Australian private equity firm IRESS acquired Peresys for R375m. This was the third transaction that Horizon’s TechVentures had completed following sales of Prism and Medikredit
And on the other side two emerging market companies scoring through the Initial Public Offering route:
* Etalon Group raised US$575m issuing shares on the London Stock Exchange
* Internet company Yandex raised US$1,4bn by listing on the Nasdaq.
The challenge that continues to be a problem isn’t so much the issue of throwing money at investments but more about who you can sell to when you want to realise a profit.
In SA that has had an added challenge, with limited appetite for Initial Public Offerings (IPOs) on public exchanges. While there’s been plenty of interest in new property listings and the likes of Brait and Reinet being able to raise capital at will – the appetite for less tried and tested teams has been limited. Especially when they’re perceived to be “ex-growth” and that all the best money has already been made by private equity investors.
Pointing to the recently listed Holdsport – which saw private equity firm Ethos net a tidy US$170m – Graham Stokoe, associate director for Transactions Advisory Services at Ernst & Young, says: “South African private equity investors continue to look at IPOs as an exit option. Due to the generally smaller market caps of South African and other African private equity (PE) owned companies, IPOs represent a lower proportion of PE exits than the more mature PE markets in the US and Europe. However, we do believe – similarly to other emerging markets – the number of IPOs across African companies is also expected to increase.”
Stokoe’s colleague Jeffrey Bunder, global private equity leader at Ernst & Young, concurs. “Despite ongoing uncertainties in the markets, momentum is clearly continuing to build throughout the IPO markets, giving PE sponsors an ever-widening window to exit holdings as investors move further out of the risk spectrum in search of companies with strong growth stories.”
That upbeat view on PE confirms what was announced by the South African Venture Capital and Private Equity Association (Savac) in its 2010 report back in June, which was conducted in conjunction with consulting firm KPMG. At the time Warren Watkins, SA and Africa head of private equity markets at KPMG, commented: “Africa’s potential growth rates are significantly higher than those of mature markets and should lead to further investment.”
This year already has seen a number of new “Africa”-focused product offerings hitting the market and participants expect that trend to continue. The asset class is also likely to receive a further boost from changes in Regulation 28, which will make private equity a more viable asset class.
Savca CEO JP Fourie says: “In the past, PE fund managers were held to a limit of 2,5% for pension fund investments in PE. That’s changed. The limitations have been raised for PE and hedge funds from 2,5% to 10%. That isn’t only a significant change for the industry but also a beneficial long-term regulatory modification.”
While there’s much going for SA’s private equity sector, the issue of “exits” is a critical one. Local companies such as Fundamo, CSense Systems and Peresys have found themselves more attractive to buyers overseas, such as Visa, General Electric and IRESS rather than electing to go the IPO route.
While the original investors can’t be blamed for selling out to offshore companies you have to think the technology board on the JSE is crying out for quality companies of that stature, especially considering the loss of Dimension Data to the bourse earlier this year. While the JSE consistently talks up its world-class systems there’s a trend emerging that says companies aren’t seeing the JSE as a natural destination for some private equity investments.
Technology may be the current “hot” sector but there are a number of retail and construction offerings housed inside the likes of Brait, Ethos and Actis that are going to be looking for exit mechanisms.
The elephant in the room is retail giant Edcon, which is fast coming to the end of a natural private equity cycle. It would be a frustrating situation to discover an appropriate “exit” mechanism can’t be found in the local market and it makes better economic sense for a company like Bain to simply sit on the revenue generating capabilities of an Edcon rather than return to market.
Perhaps it’s time to start asking some tough questions: While private equity is coming to the party, is the JSE doing enough to provide the natural stepping-stone to keep the sector alive?
By the numbers…
1 In 2011 to date, private equity (PE) backed companies have raised US$31,1bn in 68 separate IPOs.
2 Companies based in the emerging markets raised $7,7bn from 17 separate deals, the most since fourth quarter 2007.
3 There’s R31bn in undrawn private equity commitments in South Africa.
4 Investments by PE funds increased from R7,2bn in 2009 to R10,4bn in 2010.
5 Some 42,4% of all funds raised last year were from South African sources (2009: 50,3%), followed by Europe with 21,4% (2009: 12,2%).
Emerging market deals
Some of the big money emerging market deals sold to foreign competitors:
* Cape-based mobile start-up Fundamo was sold to US financial services giant Visa for $110m
* Pretoria-based CSense Systems was sold to GE for an undisclosed amount
* Australian private equity firm IRESS acquired Peresys for R375m. This was the third transaction that Horizon’s TechVentures had completed following sales of Prism and Medikredit
And on the other side two emerging market companies scoring through the Initial Public Offering route:
* Etalon Group raised US$575m issuing shares on the London Stock Exchange
* Internet company Yandex raised US$1,4bn by listing on the Nasdaq.
