“Our joint survey – conducted by KPMG and SAVCA (the SA Venture Capital and Private Equity Association) – revealed that despite an overall decrease in funds from R105.4 billion to R97.6 billion, we see undrawn commitments in the region of R31 billion (2009: R33 billion). This represents many investment opportunities for the private equity industry,” said Warren Watkins, South African and Africa Head of Private Equity Markets at KPMG. 63 fund managers, representing 75 funds completed the 2010 survey (2009: 41 and 61 respectively).
Funds raised rose from R3.8 billion (2009) to R11.1 billion (2010). “That’s very encouraging, even though a portion of that percentage has come from new participants in the survey. Nonetheless, it helps us present a more accurate picture of what’s happening in the sector and displays some significant market confidence.” In more developed markets, the PE sector growth has stabilised and, in many cases, has dropped.
“The PE sector represented 3.6% (excluding undrawn commitments) of South African GDP in 2010, up from three percent in 2009. This falls behind the UK and US norms which have been in excess of four percent, but compares very favourably with the other BRICS countries. These figures indicate that South Africa has a vibrant market with adequate potential to grow,” said Watkins.
“From a BEE point of view, BEE remains a vital cog in the PE industry, as funds with some form of BEE ownership account for R75.4 billion, or 77% of the total funds under management. This is a slight drop from 79% in 2009. In addition, black investment professionals in the industry now total 43% of the industry’s total.
Watkins is also optimistic that both South Africa and Africa represent significant growth opportunities for international funds, which in recent months have displayed interest in the African continent. “It is also good to note that investor interest and that of PE fund managers extends north of our borders as well.”
Lending further confidence to continental growth in the PE sector are the projected growth rates of four to eight percent in the African economy, says Watkins. “These are significantly higher than those of mature markets and should lead to further investment.” KPMG has found a number of international private equity houses making serious enquiries into the South African market in the last six months.
Looking ahead, regulatory changes being implemented by government should also have a positive effect on the sector. J-P Fourie, CEO of SAVCA, contends that new prescriptions in South African regulations make it possible to accelerate PE sector growth.
“In the past, PE fund managers were held to a limit of 2.5% for pension fund investments in PE. This has changed. The limitations have been raised for PE and Hedge funds, from 2.5% to 10%. This is not only a significant change for the industry, but a beneficial long-term regulatory modification,” said Fourie.
While the proposed change to the regulation will cap pension fund investments into PE at 10%, most pension funds have been conservative in the past and only taken up a portion of the regulated limit. This trend is expected to continue despite the raised levels now offered to pension funds, however. The new ceiling will promote more capital being released into the PE sector. “This is very important. When international investors consider investing in PE funds, a key consideration for them is the extent of local participation by investors in the industry and the specific funds into which they want to invest. A situation that limits this local participation will hamper the extent to which international investors will invest and in this way limit private equity as an important source of foreign direct investment for South Africa,” said Fourie.
Other key findings of the survey include:
- Investments by PE funds have increased from R7.2 billion in 2009 to R10.4 billion in 2010.
- 42.4% of all funds raised during 2010 were from South African sources (2009: 50.3%) followed by Europe with 21.4% (2009: 12.2%).
- Total funds returned to investors increased to R17.3 billion from R2.0 billion. (This includes the Venfin disposal to Remgro.)
“PE remains a medium to long-term investment which stimulates and encourages economic growth. Its success is based on the underlying growth of its portfolio companies, which is expected to continue into the future,” said Watkins. “PE makes up a significant portion of M&A activity and brings in much needed Foreign Direct Investment into the country. The returns, which exceed the comparatives on the JSE, continue to secure its place as a significant asset class in South Africa.”