Higher profits for private equity

Johannesburg - A study has found that private-equity firms create more jobs and show higher profits than JSE- listed companies.

The study, conducted by the South African Venture Capital & Private Equity Association (Savca) in collaboration with the Development Bank of Southern Africa, found that enterprises backed by private equity showed employment growth of 9% between 2005 and 2008, compared with an average of 4% for JSE-listed companies and 7% in the narrower index for the top 40 companies on the stock exchange.

In the comparable period, sales growth for the private-equity groups was 20%, compared with 18% on the JSE, while pre-tax profits were 16% up, as against the JSE companies' 14%.

The study was based on responses received from 327 private-equity companies. These were compared with JSE data held by McGregor BFA.

Savca chief executive JP Fourie says it is interesting to discover that private equity is not mere asset-stripping - as is often perceived.

In recent years the private-equity industry has shown strong growth and it currently has assets of R103m-odd under management. The sector employs about 6% of the workforce - or 595 000 workers.

It differs from listed enterprises in that share transactions take place mutually between parties, away from the public eye.

Another surprising finding was the close link between private-equity companies and black empowerment. A total 54% of the respondents indicated that empowerment transactions were possible only after private equity became involved.

Another benefit is greater management involvement, which extends beyond the financial investment. Management itself often has a large stake in the company. Finance is easier to access at a time when banks have arrested the flow of credit in the wake of the global financial crisis.

One of the problem areas involves foreign-exchange dealings, which are often difficult to manage because investments take place across national borders.

The double structure of a fund also holds tax implications.

Fourie says foreign private-equity funds frequently wish to invest in South Africa and Africa.

- Sake24.com

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