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An investment that is giving better returns than the JSE

Private-equity picks up the pace.

CAPE TOWN – Beyond the high profile goings on of JSE-listed companies, is another asset class which over a three to ten year time horizon has delivered better returns to investors than the JSE.

This is SA’s private-equity industry, which has about $14bn invested in mainly South African firms. However, unless investors are buying and delisting a company, or exiting an investment via a JSE listing, the industry tends to operate under the radar.

It has delivered returns of 11%, 21% and 22% over a three, five and ten year time horizon, compared to the 2%, 15% and 17% return of the JSE’s all share index, according research conducted for the SA Venture Capital and Private Equity Association (SAVCA) by KPMG.

The industry is quietly regaining the momentum it lost after the markets crashed in 2008. There is a definite uptick in activity,” says the head of SAVCA, JP Fourie. “It has not regained the levels we saw in 2006 and 2007, but it is on the up.” Recent activity includes new acquisitions as well as exits.  Both sides of the equation are significant. “Many private-equity companies plan to exit their investments after about seven years, but the recession has made exits difficult,” Fourie says.

The biggest exit this year was probably Actis and Ethos’s of Savcio, the largest privately-owned electro-mechanical provider of maintenance and repair services for rotating equipment and transformers in Africa for an estimated $500m. Another high profile exit was Ethos’s recent listing of sports retailer Holdsport. Other exits include venture capital company, PoweredbyVC’s sale of process improvement software company CSense Systems to GE Intelligent Platforms earlier this year and of mobile financial services provider Fundamo to Visa for $110m in July.

Sometimes it is the deals that don’t get concluded that make the bigger headlines, like Capitau’s aborted bid for Avusa, or Trinitas Private Equity’s equally abortive effort to acquire and delist technology company Mustek, together with its management.

“The big deals make the headlines because they are not concluded, but there are other deals that go unnoticed,” says Fourie. On the acquisition front a consortium led by Ethos bought investment holding firm Universal Industries in a R1.3bn deal; while UK-based private-equity firm CVC Capital Partners has acquired a controlling stake in Richard Branson’s Virgin Active.

There is also ‘smaller’ deal activity. Ascendis Health, a subsidiary of Cape based private-equity company Coast2Coast, has acquired garden care business Efekto, as well as the direct selling nutraceutical and beauty products business Sportron for R260m.

“Deal flow is picking up, but completing a deal still takes longer than it used to,” says Cris Dillon, COO, Coast2Coast. “The companies we look at are often owned by management or a founding family. While they are cash generative and profitable, many have seen earnings fall off in the past year or two – so they would rather wait for earnings to improve before selling the business.”

Ascendis Health operates in the health and lifestyle sector and includes brands like Natura, Foodstate, Bioter Health and FitFlop in its portfolio.

Dr Karsten Wellner, CEO of Ascendis Health, says Efekto, which was once part of the Dow Chemicals stable and includes the Wonder brand, offers scope for good growth. “The company has a range of around 500 products and will be extending this further into the organic gardening sector.”

The Landbank and mezzanine financiers Vantage Risk Capital, provided part of the funding for the transaction. It was Vantage Risk Capital’s seventh mezzanine investment and the first one to be partnered with Coast2Coast. “Efekto’s ambitions to expand into African markets such as Zambia and Ghana are of great interest to us as we expand our own African footprint,” says Luc Albinski, Vantage managing partner.

Locally based (though not necessarily locally funded) private-equity players are also increasingly hungry for pan African investments. Emerging Capital Partners, together with Investec recently invested $52m in tower infrastructure company IHS, which has a footprint in Nigeria, Ghana and South Sudan. It counts chip mobile network operators MTN, Airtel and Etisalat among its customers. 

Similarly, the Johannesburg based Phatisa Group which operates a network of offices in sub Saharan Africa, has led $10m investment in a Sierra-Leone based palm oil milling company Goldtree.

The funding round has been supported by the Finnish Development Finance Institution and the Goldtree management. The deal values Goldtree at $20m and is Phatisa’s first investment from its African Agricultural Fund, which reached its first closing at $151m in 2010.

The capital will bolster Goldtree’s plans to build a new mill. “The investment will have a huge development impact on the immediate community and Sierra Leone as a whole,” said   Duncan Owen, managing partner at Phatisa.

A number of funds have completed their capital raising processes and are now looking for new investment opportunities. According to Fourie, these include Africa Infrastructure Investment Managers which closed at $500m and Helios Investment Partners which closed its fund at $900m. Apparently it is the largest Africa-focused fund ever-raised. 

“This is an inflection point,” says Fourie. “And it’s looking good.”

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