Prevailing regional challenges represent opportunities for the private equity industry

Erika van der Merwe, CEO of SAVCA.

The general view of the Southern African private equity industry remains overwhelmingly positive, despite what appears to be a challenging local, regional and international economic and financial setting. This is according to Erika van der Merwe, CEO of the Southern African Venture Capital and Private Equity Association (SAVCA), who says that private equity managers thrive on seeking out overlooked investment opportunities and on applying their strategic skills, extensive networks and operational insights to enable businesses to reach their potential and deliver returns.

Van der Merwe says that while economic performance in the Southern African region appears unpredictable, the strength of top-performing private equity managers lies in their ability to make investee businesses more resilient and to enable them to navigate macroeconomic circumstances.

Commodity prices are an example of such macroeconomic considerations for investors in the region, explains Paul Boynton, CEO of Old Mutual Alternative Investments: “West African economies including Nigeria and Angola that have a strong reliance on oil for example, are particularly at risk in the current cycle. This contrasts with Kenya, Tanzania, Egypt and Ethiopia who are net importers of commodities and continue to grow strongly. Macro cycles inform us of head winds and can create pricing opportunities but our work is focused on the fundamentals of individual businesses,” he says.

Boynton adds that prevailing economic conditions have to some extent created opportunity. Pricing in Africa has moderated somewhat on the back of overall slowing growth but the long term investment thesis remains intact. His team regards the current environment as an opportunity for funds to acquire companies at attractive valuations.

This sentiment is echoed by Anne Keppler, Vice President Corporates & Funds Africa, Equity and Mezzanine: DEG, who says the short-term movements have not dissuaded the DEG team from investing into private equity funds. “Be it in our fund or direct investments, we keep investing and assessing the corrections individually as some appear to be an opportunity rather than a crisis,” she says.

Sbu Luthuli, Chief Executive: Eskom Pension and Provident Fund, elaborates on specific prospects that his team has recognised. “Opportunities have been identified in businesses that are able to solve key problems and backlogs for the African consumer and business, or that address the significant supply and demand mismatch. These include access to growth capital and quality real estate.”

According to Van der Merwe, this perspective on the investment prospects in the Southern African and other African regions would continue to attract private equity investment. “Fundraising by private equity funds with a Southern African and broadly African mandate has been remarkably successful over the past year, with a number of houses announcing final fund closes. In fact, fundraising has been the stand-out feature of Southern African private equity activity in 2015.”

She cites the historical returns generated by the industry -- over the ten years to December 2015, private equity returned 18.5%, compared with return of 14.1% from the FTSE/JSE All Share Total Return Index (ALSI) over the same period* -- as reason for capital allocations to Southern African private equity to continue. “Careful deal selection followed by thoughtful, focused and active management of the investee company are notable drivers of industry returns.”

Van der Merwe concludes that “announcements of deals and exits across a number of industry sectors, and of varying sizes and structures, confirm that there is ample investment opportunity for this newly raised capital.”