Despite a decrease of 2.6% in the volume of funds in the South African private equity sector from 2008 to 2009, the funds under management (excluding undrawn commitments) still reflected a healthy balance of R107 billion as at 31 December 2009. This represents 3% of GDP value, despite the global recession of 2008, and remains unchanged from the 2008 percentage. In real terms, this is a drop from the R109 billion in December 2008. However, this is still higher than the international norm of 2.7%.
These were some of the findings of a joint survey conducted by KPMG and the South African Venture Capital Association (SAVCA). This is the eleventh annual survey into private equity and venture capital performance by KPMG and SAVCA.
Warren Watkins, head of Private Equity for KPMG in South Africa and the Africa region observes that “the private equity market in Sub-Saharan Africa over the past two years has been characterised by caution. As a result, the appetite for deals has been reined back significantly. But while market participants remain cautious about 2010, a consensus is building that 2011 is likely to show a robust increase in activity.”
BEE and emerging markets
Despite the challenges mentioned above, some highlights from the survey show that a positive role is being played by private equity in market activities. In the Black Economic Empowerment (BEE) space, for example, the fact that of the total R107 billion of funds under management, R82 billion is under the control of empowerment entities (R69 billion in 2008) is a positive development of 19.1% and illustrates the importance of this sector to the economy.
BEE compliant fund managers also have undrawn commitments of R23.4 billion (the equivalent of 70% of the total of R33 billion in undrawn commitments). The private equity sector significantly supports the BEE influence in the South African economy.
While funds to the value of R33 billion in undrawn commitments remain available for future investment, most private equity houses believe that acquisitions made or likely to be made in 2010 / 2011 would yield returns well in excess of 20%. The 2009 survey might show that the industry is down, but it is certainly not out!
Looking forward, J P Fourie, Chief Executive of SAVCA, maintains that as an asset class, private equity has a proven track record for strong performance. “With its evolved business models focused on active value management, the industry is in a position to take on new challenges. With the worst of the financial crisis hopefully over, emerging markets present an attractive case for investment. Local fund managers will be looking to increase activity on the continent.”
“Many Private Equity funds globally see emerging markets as a significant growth area and it is inevitable that South African fund managers, with their particular understanding of the region, will look for investment opportunities in Africa as a whole to harness that growth,” said Watkins.
The shrinking global market
Some additional findings from the survey show that R6 billion was raised in 2009, down from R11 billion in 2008. Foreign investment accounted for R4 billion of the R6 billion. Watkins notes that “this foreign direct investment is encouraging as private equity is a longer-term investment of usually eight to ten years for the investor.”
Investment in new or existing portfolio companies accounted for R7 billion during 2009, showing a significant decrease from R19 billion in 2008. “This can be contextualised within the overall downturn of 43% in the South African mergers and acquisitions market,” said Watkins. A further compounding factor was a shrinking global market in which the United States saw a reduction in 2009 to US$52 billion from US$113 billion in 2008, while the United Kingdom saw a drop to US$12 billion from US$113 billion in the same period and Germany saw a contraction to US$3 billion in 2009 from US$20 billion in 2008.
“It is also interesting to note, in these difficult economic times, that write-offs in South Africa increased from R31 million in 2008 to R80 million in 2009,” said Watkins, “this is a very small percentage of the total R3.3 billion in funds returned to investors in 2009. In contrast, European private equity funds wrote-off approximately R32 billion of investments in 2009, representing 33%of all exits.”