Growth equity a fast-growing segment in private equity

Amir Regev of Nedbank Private Equity explains the attraction of fintech company Entersekt for investment.

JEANETTE CLARK: Nedbank Private Equity has been investing in a broad range of companies in South Africa for the past 25 years. In its portfolio of investments you will find companies such as Entersekt, Tracker and Q Link, or past investments in retail and consumer goods companies such as Sportsmans Warehouse and Outdoor Warehouse.

Joining us today to talk specifically about growth equity and the role it plays in helping businesses that just need capital for that next step is Amir Regev, senior associate at Nedbank Private Equity. Amir, let’s just start with the following: what exactly is growth equity?

AMIR REGEV: Thanks, Jeanette. It’s good chatting today. Growth equity lies somewhere at the intersection between venture capital and private equity, carrying elements of both and ultimately offering the best of both worlds.

So these sorts of businesses often mature from the venture-capital growth cycle, and may be on the edge of [achieving], or have achieved, profitability. However, further investment is required to really maximise on these growth opportunities.

So if we look from a global perspective, growth equity has become one of the fastest-growing segments of the private-equity industry, and it certainly is a segment that we are paying very close attention to.

JEANETTE CLARK: Speaking about growth equity, Nedbank was an early investor in Entersekt. What attracted you to that business? What makes it a good example of what growth equity can do?

AMIR REGEV: I think, just to give you an overview of Entersekt in a nutshell, Entersekt [is a] South African-born global fintech company which helps financial institutions authenticate transactions without friction.

There were multiple aspects which attracted us to the business, and I think starting off was really the technology. Entersekt offered a world-first transaction-authentication solution back in 2012, which enabled customers to approve internet banking transactions without the use of SMS one-time passwords, which have inherent security flaws.

Second was the sector in which they focus. People are increasingly transacting digitally, using either PCs or mobile devices, and there’s a need to make the digital world a safer place while also making it easy for the customer to transact. So where we stand today … the business is currently securing in excess of one billion transactions per month.

Third was just the global appeal, the global opportunity. The South African banking system has consistently been rated one of the most advanced and more functioning in the world, and the successful uptake of the technology by southern African banks gave us comfort that this was an exportable solution with global appeal.

And then finally, it’s just the scalability of the offering, where a software business can achieve exponential growth without necessarily a compensating increase in its cost base.

JEANETTE CLARK: It definitely sounds like an exciting business with lots of potential for growth. Did this impact the capital requirements at all? What are some of the key considerations when you look at growth deals?

AMIR REGEV: We’ve been invested in the business since 2013 and over the subsequent years the business has conducted multiple capital raises. That’s both been from existing shareholders as well as new ones. That was really to enable the business to continue expanding its product-innovation roadmap and accelerating international growth. The most recent capital raise was concluded as recently as December 2021, where Accel-KKR, an American technology-focused private equity firm, invested in the business.

In terms of consideration, I believe alignment is a key aspect where there needs to be a mutual understanding and alignment of interest between ourselves and the company.

To break it down, firstly, [there] is really the vision or the investment thesis. What are the business’s goals and where does management ultimately want to take the business?

That leads to the second aspect, which is the further capital requirement which the business needs to be able to execute on that vision. There are also further considerations with regard to that: whether you have the appetite and/or the ability to follow on in those rounds or, alternatively, what is the potential impact of dilution?

Amir Regev, senior associate at Nedbank Private Equity.

And then, finally, I believe one of the key aspects is really allowing sufficient time to enable management to execute on that vision. Fortunately we, as Nedbank Private Equity, are an on-balance-sheet investor, which enables flexibility in terms of our investment-holding period, where we don’t have the pressure to exit an investment after a five- to seven-year period as a third-party fund would. So nine years later we remain invested in Entersekt and we are certainly excited about their next phase and their growth journey.

JEANETTE CLARK: So, as an investor with this example of Entersekt, what did Nedbank Private Equity bring to the table? What was the value-add during the investment period?

AMIR REGEV: I think capital is the obvious one, where we invested initially, and we did follow on during a later round. But we believe our value-add extends beyond merely being a capital provider. You touched on the point earlier with regards to Nedbank Private Equity having 25 years of experience that’s been gained across multiple sectors and looking at multiple businesses. We typically look to utilise those learnings, those industry insights and best practice, across the portfolio.

Where it also makes sense, we look to leverage off the portfolio as well as the bank wherever possible. So in Entersekt’s case, it was really working with the bank, where they were able to test and refine new products and technologies before they commercialise them to the broader market.

We also always look to promote partnership and collaboration among our portfolio companies, as well as within our wider networks.

And then, finally, from a transformation perspective, for the fourth consecutive year Nedbank has successfully achieved a Level 1 BEE contributor status, and that would ultimately flow through into the companies [in] which we invest.

JEANETTE CLARK: It definitely sounds like you’ve got a strong focus on partnership when approaching any investments.

AMIR REGEV: That certainly is a key pillar in our philosophy where we typically look to co-invest alongside like-minded partners, as well as management teams. Typically those have been the types of relationships which have worked best for us, so that is an approach that we certainly look to continue driving going forward.

JEANETTE CLARK: Amir, we’ve had two tough years in terms of the impact of Covid-19. Playing in the growth-equity space, are you currently seeing some exciting opportunities present themselves?

AMIR REGEV: It certainly is an attractive asset class, and it does enable us as a business to diversify to an extent away from the traditional type of private-equity assets. We [are] actively seeking new opportunities and are bullish on the asset class. Based on what we’ve seen thus far, opportunities have spanned both across SA and the rest of the continent, and we’ve been seeing businesses predominantly in the fintech and the edtech space, but there are businesses across several other sectors as well.

JEANETTE CLARK: Well, let’s hope that the right opportunities present themselves in the coming months and years, leading to more success stories, such as Entersekt.

That was Amir Regev, senior associate at Nedbank Private Equity, talking to us about the fast-growing segment of growth equity in the private-equity sector.

Brought to you by Nedbank CIB.

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