Vantage Risk Capital leads the pack with a R1 billion fund

Vantage Risk Capital, the country’s only black-owned independent mezzanine fund manager, today announced it had closed its Fund with commitments from third party investors and management of over R1 billion. Combined with the borrowing capabilities of the Fund, Vantage Risk Capital will be able to deploy over R1,3 billion to invest in South African and sub-Saharan African markets.

Luc Albinski, the co-managing partner of Vantage Risk Capital, said the closure of the Fund was a huge success for the mezzanine team, especially as this was its first capital raising.

“For a first-time mezzanine fund such as ours, to raise over R1 billion, is a great achievement. I believe this is testimony to the interest the market has in this new asset class and the world class team we have assembled at Vantage Risk Capital under the leadership of Mutle Mogase.”

Albinski pointed out that Vantage was one of only five funds in the industry which have successfully raised in excess of R1 billion. “We belong to a small group of fund managers who have been able to source significant amounts of capital from a broad base of local and foreign investors. We are the youngest; all the others have been around for dozens of years in one shape or another.”

The two largest contributors to the fund were the Old Mutual Group and Vunani Private Equity Partners which have made commitments of R225 million and R150 million respectively.

Albinski said it was particularly pleasing to secure the participation of Old Mutual, who is a substantial player in the South African debt and mezzanine market. “The professional capabilities of Old Mutual’s debt origination and structuring abilities are widely recognized and it is a real vote of confidence in our abilities to have Old Mutual as a partner in the mezzanine fund.”

Vunani Private Equity Partners is a black owned and managed financial services group that was established in 1998. Vunani is involved in stock broking, property investment and property development, private equity, investment banking, asset management and research and corporate finance. It recently established Vunani Private Equity Fund which is the first independent fund of private equity funds to be launched in South Africa. This is its second investment.

“The emergence of fund of funds in the private equity industry is a sign of growing maturity in the industry. It is a positive development as it will allow emerging fund managers like Vantage to tap into a broader pool of domestic capital than that which they have hitherto been able to access.”

The foreign investment component in the Vantage Risk Capital fund comprises 34% of the Fund’s total closing amount of R1,003 billion. The international investors in the Fund include:

• R100 million commitment from FMO, the Netherlands Development Finance Company;
• R100 million from CDC, a UK government-owned fund of funds specialising in emerging markets;
• R68 million from the German development finance institution Deutsche Investitions - und Entwicklungsgesellschaft mBH (DEG); and
• R72 million from the Swiss development finance institution the Swiss Investment Fund for Emerging Markets (SIFEM) and its co-investor responsAbility BOP Investments (raBOP).

All the foreign investors are development finance institutions that are mandated to play a pioneering role in developing the financial sectors of emerging markets such as South Africa. Mezzanine, as a nascent asset class, was a prime candidate for these development-oriented investors, several of which have made investments in similar mezzanine funds in other emerging markets such as Eastern Europe and South-East Asia.

“These investors look at financial markets around the world to find asset classes which are under-developed. In South Africa they saw a gap in the mezzanine market and are assisting in growing this new asset class.”

Albinski said these institutions were also keen to address the shortage of access to capital amongst mid-market companies. Internationally, these companies create most of the new jobs and opportunities but they are often hamstrung by limited access to capital. Banks are reluctant to take much risk in this sector. Owner-managers do not want to sell out to private equity firms. Mezzanine financing often provides a compelling alternative.

The local investors in the Fund are:

• R70 million from Sanlam Capital Markets;
• R60 million from Metropolitan Asset Managers;
• R50 million from the Transnet Retirement Fund;
• R50 million from the Eskom Pension and Provident Fund; and
• R50 million from the Public Investment Corporation.

Albinski said these commitments were secured as local pension funds have started to mirror trends amongst their international counterparts by investing in domestic mezzanine funds. “Internationally, pension funds are major investors in mezzanine funds which provide them with long-term attractive yields which they can apply against their long-term liabilities towards future pensioners. It is very gratifying to note the same trends are now having an impact on the local retirement industry.”

Albinski said the fund is close to 50% invested and intends to reach the 80% of the capital invested target by the end of 2008. “We have looked at about 75 deals since we started,” he said. “Despite Vantage’s youth, dealflow has been excellent.”

Vantage has committed capital to three large transactions to date. Vantage provided R125 million in mezzanine funding to facilitate York Timber's purchase of the Global Forest Products business for R2 billion. Ian Heron, the Chairman of the Fund’s Investment Committee comments: “With the York deal, we helped create South Africa’s largest privately owned integrated forestry company which is well positioned to take advantage of massive demand for construction timber.”

With the FMO, Vantage funded the R190 million acquisition by Thebe Investment Corporation, a leading empowerment group, of a 21% stake in polymer manufacturer Safripol. Mutle Mogase, Vantage’s Executive Chairman said “the Safripol transaction was a milestone in the transformation of the chemicals sector. Safripol is South Africa’s only producer of high density polyethylene and a strategic national asset. Empowerment was an absolute imperative.”

A further R200 million deal in the outsourcing and corporate services sector will be announced shortly.

“Mezzanine financing is becoming an unstoppable force in the market. The demand is there and we can achieve the returns demanded by our investors.”

Albinski said the successes achieved in such a short period is a reflection of the appealing nature of the asset class, especially when it comes to Black Economic Empowerment (BEE) funding and the innovative approach of Vantage Risk Capital in structuring its deals.

“By using mezzanine funding, BEE companies are able to structure deals along more flexible, cost-efficient lines allowing for a shortening of the time BEE partners need to wait before they enjoy the unencumbered economic benefit of their ownership. It is also superior to other forms of financing for BEE companies as it has a less dilutionary effect on the empowerment partners and is a cheaper source of funding than private equity.”

“Mezzanine financing is in the sweet spot of the financial markets – it has security of debt but also an equity kicker to share in the upside of a deal.”

Colin Rezek, Vantage’s co-managing partner, said one of the factors that differentiated Vantage Risk Capital from other funds in the market was the skills set it could bring to bear on a deal as well as its independent third party status.

“We have a balanced team of experts drawn from industry and entrepreneurial backgrounds as well as from finance, which is able to provide the Fund with a diverse set of inputs into any given investment decision. Unlike some of our competitors, Vantage is also a genuine third party fund manager which is not overly dependent on any single funder and has no representatives of its investors on its Investment Committee. This allows the Committee to make decisions on the pure merits of the transaction alone.”

Vantage Risk Capital will consider raising a new and much larger fund once it has successful invested its first Fund.