In the calendar year 2012, the local private equity industry added 10.4% to its total funds under management, which closed at R126.4 billion. The 2012 growth surpasses the previous four years’ combined cumulative growth of only 4.6%.
Results come from the annual Venture Capital and Private Equity Industry Performance Survey of South Africa conducted by KPMG and the South African Venture Capital and Private Equity Association (SAVCA). “This year’s survey has highlighted a reignited industry” says Warren Watkins, KPMG Partner, Private Equity South Africa.
Now in its thirteenth year, the Survey represents over 90 percent of total South African private equity funds by value. Current funds under management represent a compound annual growth rate of 11.6 percent (excluding undrawn commitments – i.e., those funds committed by investors but not yet deployed) since the inception of the survey in 1999.
“This year’s survey reflects an industry on the move, driven by revitalised global investor appetite and beckoning opportunity in the African and South African markets”, says SAVCA CEO, Erika van der Merwe. “Large amounts of cash in developed markets, the US and Europe in particular are in search of growth assets that are not apparent in their own domestic markets. South African private equity managers therefore present an attractive, sophisticated and low-risk opportunity for these investors.” In addition to the growth in 2012, 2013 should again show a meaningful increase with a number of significant funds that are on the fund raising trail. For instance, Ethos successfully closed its Fund VI in the first quarter of 2013 with a fund of $800 million.
Further indication of increased activity in the South African private equity industry is the announcement by the Government Employees Pension Fund (GEPF) that it intends to deploy up to R60 billion into private equity over the forthcoming years. “The industry is again on the move”, confirms Watkins.
Funds raised in 2012 were R14.4 billion, up from R10.7 billion in 2011 and not far from the record level of R15.4 billion in 2007, the historical peak of the private equity Industry. The funds have been raised primarily from South African sources – at 56.2 percent of the total – and the remainder from overseas. “South Africa remains an attractive investment destination”, says Watkins. “The pooled returns for the industry of 20.6 percent per annum over 10 years beat most of the mature markets. The private equity market is also proving to be far more stable than the listed market.”
Investments of R10.6 billion in 2012 were down from the R16.5 billion in 2011. “We should see significant investment activity in 2013/2014”, says Watkins. “We have R35.3 billion available in undrawn commitments. This, together with the current fund raising under way, means we should see the return of the large transactions which were last seen in 2007/2008.”
As in the past, a large portion of private equity investments were made into existing portfolio investments (follow-on investments). “In many instances, the portfolio companies are expanding into Africa and the private equity industry is providing the capital for this drive”, says Watkins. “It’s not surprising to see the infrastructure sector taking the lion’s share of the investment (27.5 percent) in 2012.”
Exits in 2012 were significantly reduced at R7.0 billion (R25.7 billion in 2012). “As far as exits are concerned, the industry is under pressure. Many of the larger funds are maturing and will be required to dispose of their portfolio companies over the next two years. Exits through listings are a possibility”, says Watkins.
Regulation in the private equity industry has increased significantly and mostly relates to tax issues. “Regulation will have an impact on the industry, particularly in the way that deals are structured relating to offshore debt,” says Watkins, “but, importantly, the industry is clear on the regulations and understands the framework within which it needs to operate.”
The private equity industry again entrenched and facilitated Black Economic Empowerment through both its management companies and their portfolio investments. Investments classified as non-empowered account for only 25.2 percent of the industry’s total funds under management.
“The life cycle of the South African private equity industry, being the raising of funds, acquiring companies and their ultimate disposal is in motion again after three years of near dormancy.”