While the number of deals was down to 521 from 547, deal value saw a substantial increase of 32.2 percent to R15.6 billion from R11.8 billion in the previous year. Warren Watkins, Clients & Sectors Head, Private Equity at KPMG in South Africa, comments: “This year’s survey has again highlighted the resilience of our industry in the face of difficult market conditions.”
Results come from the annual Venture Capital and Private Equity Industry Performance Survey of South Africa conducted by KPMG and the Southern African Venture Capital Association (SAVCA). Now in its 12th 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) since the inception of the survey in 1999.
Of the R15.6 billion invested in 2011, R8.6 billion went into follow-on investments, with the remaining R7 billion targeting new investments. This is the first year in which the proportional value of follow-on investments has outweighed that of new investments. It means that while fund managers are more buoyant in their outlook for the asset class, they’re still cautious about where and how they invest their funds. “We’re seeing more bolt-on activity, with fund managers investing in the growth of existing portfolio companies. In the current global financial turmoil, this offers a more secure investment option,” says Watkins.
Investment activity by independents represented 0.17 percent of South African GDP – internationally considered a proportionately strong contribution to economic activity. This compares with the UK figure of 0.75 percent and the US’s 0.98 percent. Israel boasts the highest percentage at 2.05 percent. Of the BRICS nations, only India saw a higher private equity contribution to GDP at 0.33 percent than South Africa. The figure for China is 0.14 percent, 0.01 percent for Brazil, and 0.08 percent for Russia.
The R34.1 billion pool of undrawn commitments will not only continue to drive efficiency in our capital markets, but prepares the industry to capitalise on future investment opportunities as they present themselves. “A portion of this ammunition is earmarked for investment north of our border, and as soon as the market returns to its confident past, we can expect an increase in new investments,” comments Watkins.
Private equity fund-raising for the full year ended lower than in 2010, but still generated a healthy R8.3 billion. This was in line with a global drop-off in fund-raising, due predominantly to the cautious investment views of most funders.
The majority (75 percent) of third-party funds raised by South African fund managers came from local sources – almost more than double the 38.7 percent raised locally in the previous year. In addition to the difficult global economic climate, this leap is most likely a result of the change to Regulation 28 of the Pension Funds Act. This clause allows local institutional investors to increase their commitments to private equity funds. “The increase of local investment into the private equity industry certainly comes off the back of the changes to Regulation 28. I envisage that the disproportionate geographic weighting toward locally biased fund-raising is a once off and will return to a 50:50 representation in the next couple of years,” says Watkins.
In another first for 2011, a record R25.7 billion was returned to investors. “Last year, we saw a number of successful exits, which presented a significant reward for investors who waited patiently for returns during the global financial crisis.”
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 less than 25 percent of the industry’s total funds under management.
South African private equity is set to maintain a significant amount of funds under management. Future fund-raising should increase and most predict deal activity will improve.