KEEP UP TO DATE WITH ALL THE IMPORTANT COVID-19 INFORMATIONCOVID-19 RESOURCE PORTAL

FANews
FANews
RELATED CATEGORIES
Category Investments

A ‘Turbulent but Encouraging’ Year Ahead for South Africa’s Private Equity Industry

16 September 2021 The Southern Africa Venture Capital and Private Equity Industry Association (SAVCA)
Tanya van Lill, CEO at SAVCA

Tanya van Lill, CEO at SAVCA

SAVCA Private Equity Industry Survey highlights the need for more African investment and increased exit volumes

With the onset of the COVID-19 pandemic amidst a turbulent macroeconomic landscape, Sub-Saharan Africa was expected to go deep into contractionary territory in 2020. Highlights from the SAVCA 2021 Private Equity Industry Survey showed this prediction to be accurate, but also painted a picture of a resilient private equity (PE) industry as it emerges from 2020 showing prospects of an upturn given strong levels of confidence from South African investors.

“Turbulent, yet encouraging,” were the three words that (Ernst & Young) EY Associate Director, Gergana Ivanova used to describe the state of private equity in 2020, going into 2021.

The survey showed a marked decrease in fundraising, with an almost 22.1% decrease in the total value of funds raised. However, this was still higher than the 2016-2018 period – an encouraging finding and an indication of a possible rebound for the South African market. 72.5% of funds came from inside South Africa, with the majority coming from pension and endowment funds (largely mandated for South African investments) – a positive indicator of confidence in the private equity industry. A further 27% of fundraising came predominantly from Europe and the United Kingdom.

The Survey found that funds under management (FUM) increased from R184.4 billion in 2019 to R205.7 billion in 2020. This was mainly driven by a few captive PE firms having increased values of unrealised investments. The value of dry powder available for new investments stayed relatively flat at slightly over R30 billion with approximately one third available for investing in South Africa. It was encouraging to see that of the FUM, 30.7% are being managed by Level 1 rated PE firms, up from the 6.5% reported in 2019.

Commenting on the results of the Survey in a webinar hosted by the Southern African Venture Capital and Private Equity Association (SAVCA), Ivanova explained that: “What we’re seeing is a definite contraction in the fundraising, investments and exits in 2020, which is not unexpected given the environment we were in. Historically, the sector showed a substantial fund injection from both US and other African territories, which in 2020 was not at all prevalent. What we need is to build confidence from global investors by restoring African confidence in the sector before we can convince the rest of the world to keep investing.”

A webinar poll showed that the majority of attendees believed that the value of new investments made in 2020 was around R6 billion. In fact, new investments amounted to R10.2 billion –significantly higher than follow-on investments which equated to a record-low of R4.3 billion. While the value and volume of investments declined in 2020, the decline was not as sharp as expected, and PE firms still managed to make investments, despite the challenges in deal-making caused by COVID-19. According to the Survey, investments in infrastructure (also the biggest gainer in terms of FUM) and real estate, represented over 41.7% of the cost of total investments in 2020, whilst manufacturing and services were the most popular sectors by number.

The cash injection into the digital infrastructure industry was of particular interest to Natalie Kolbe, Partner at Actis, who explained that, “the pandemic has catalysed rapid digitization. What this has brought to the fore in South Africa is the affordability of data in comparison with the rest of the world. Considering that at any given time, 50% of the South African population is out of data, our need for digital infrastructure development on the continent cannot be overstated. Digital infrastructure is the very backbone of the new technology companies we see emerging in South Africa and Africa at large, so it is a welcomed trend – one that will see new businesses leapfrog legacy industries and ways of doing business.”

In terms of exit activity, the Survey made clear that with declining exit volumes – 14 in 2020 down from 30 in 2019 – emphasis will need to be placed on exit activity going forward. The most noticeable discrepancy between exits in 2020 when compared to previous periods was that exits to other PE firms or financial investors represented 50% of funds returned to investors in 2020 versus the rate of under 6% in 2019 and 2018. According to the Survey, this change was driven by a few high-value exits to PE/financial investors.

When asked to comment on how exits have been navigated in 2020, Tshego Sefolo, founder and CEO of Agile Capital observed that: “exits need to be part of a company’s investment thesis from the onset, if that is the ultimate goal. One needs to have a clear picture of who the universe of buyers will be upfront and make an investment case early into the process if you’re looking to command a premium. If an asset is not ready for sale, companies will need to go back to the drawing board and review their internal approach to make it market-ready and worthy of private equity.”

To this end, “pivot” was the word of the year for Kolbe, which illustrated the strategic positioning of companies who were set to take on the challenges brought on by the pandemic. Nimble leadership became the hallmark of companies who managed to reap positive returns despite a volatile macroeconomic climate, and going forward, the ability to adapt to change transformed the way private equity firms looked at those businesses.

In closing, SAVCA CEO, Tanya van Lill explained that, “in terms of private equity, we saw a definite trend of firms looking inward and taking a practical approach to investment, to assist their portfolio companies during a time of national and global crises. We expect that this will have created a backlog of deployment and exists. Capital will need to be deployed and we’re confident that this will propel the industry forwards towards better prospects in 2021.”

The SAVCA 2021 Private Equity Industry Survey is presented by SAVCA and EY. The survey was based on responses from over 50 Private Equity firms operating in Southern Africa and covers the analysis of the industry’s strategic priorities, investment and divestment activity, fundraising, funds under management, the impact of private equity, BBBEE and the diversity of PE investment.

Quick Polls

QUESTION

Do you believe this is the toughest period for financial advice in many years?

ANSWER

Yes, it’s hard to navigate the challenges and difficult to adapt. I’m struggling.
No, I have managed to navigate the challenges and have adapted. I’m good.
50/50. I just feel like whether we like it or not, we have to ready ourselves for change… be resilient and scale for the future. It’s not about survival of the fittest anymore but survival of the quickest. We just have to move on with life.
fanews magazine
FAnews October 2021 Get the latest issue of FAnews

This month's headlines

IFA nuggets: Prospecting for clients
FSCA weighs in as universal life policy premiums rocket
No short cuts for the short term broker
Investment lessons worth sharing
Tightening of policy wordings… likely in the future?
Subscribe now