Private equity's critical role in South Africa

Until recently, 2007 had been hailed as South Africa's year of private equity. Even though the Shoprite deal collapse has hit sentiment, private equity has an ongoing role to play in South Africa.

International attention on private equity has been intense and landmark deals included Edcon, Consol and Primedia. But in May the Brait-Shoprite deal collapsed and questions have since been raised about the benefits and long-term viability of private equity in our local markets.

Private time

There are a number of assets on the JSE, particularly in industrial shares and retailers, which are ripe for a bit of 'private time'. Private equity, as an asset class, has been increasing in prominence and with a lot of liquidity, interest in SA-listed securities from private equity businesses is likely. Taking a medium to long-term view on a company's prospects, private equity can focus on the long-term turnaround of underperforming aspects of businesses. In addition, when they invariably find their way back to the stock exchange, they become potentially better businesses for investors. Private equity players also provide fresh strategic input and expertise to more efficiently optimise a company's balance sheet.

Return of choice

Private equity also helps return choice to the stock market. In the past few years, several factors have reduced the number of listed equity companies available to investors. However, private equity deals also assist with quality investment opportunities being returned to the JSE as the business will ultimately look for an exit strategy in some form. The increased activity of private equity players in our market will also provide a pricing underpin to the market.

Not as attractive

In terms of providing a source of future deal flow, listed equity investments are not as attractive to private equity companies as they use to be. This is partly due to the inherent conflict which comes from a more informed investment community and a more expensive market. The conservativeness in the expectations of the cash flows of potential investments made by PE players also plays a role. The large investment houses are more informed about the prospects and long-term values of these targeted listed companies and this often makes it more difficult to conclude deals. This is more evident for larger companies listed on the JSE because of the quality of research generated on these companies. Shoprite was such an example.

Nevertheless there are a number of private equity players sitting on a pile of cash which they are under pressure to invest. Pressure from investors is bound to result in ongoing activity in the equity market.

Positive contribution

The Shoprite-Brait situation has sent the message that these deals are not easy and that shareholders with different agendas can make the implementation of these deals problematic in some situations. However, private equity contributes very positively to the economy. Its benefits far surpass mere investments. They are felt in the creation of new enterprises, the rejuvenation of older businesses and the resultant job creation and the myriad BEE deals which it helps facilitate. The balance they add to the markets is also invaluable.