The value of BEE in private equity

‘We’re happy to partner with empowerment guys that we can back,’ say RMB Corvest CEO Mike Donaldson and executive Phumi Twantwa.

RYK VAN NIEKERK: Welcome to this special podcast, where we look at some very interesting developments at RMB Corvest. My guests today are Phumi Twantwa, an executive at RMB Corvest, and company CEO Mike Donaldson. Good morning, gentlemen.

Mike, I want to start with you. How big is the Corvest portfolio, and what businesses do you typically invest in?

MIKE DONALDSON: The portfolio sits at just under R8 billion now, as assets under management. We typically invest across the board, so anything. Quite a lot of the time we look at Ebitdas [earnings before interest, tax, depreciation, and amortisation] and anything from sort of north of R30/35 million Ebitda, all the way through to probably R200/300 million Ebitda. So quite a broad spectrum and across various sectors in the industry. We are not sector-specific, but really, we invest across every single industry in South Africa, barring certain specialised industries like underground mining, property, agriculture. Everything else is certainly fair game.

RYK VAN NIEKERK: Phumi, can you highlight a few of your major investments?

PHUMI TWANTWA: Yes. We’ve got entities that we’ve invested in for a number of years, like the Fidelity Services Group, a security group. We have Feedem, Ryk. We have got Accelerate, which is a facilities-management services company. And we’ve got Proconics as well, which is a petrochemicals engineering services company. So it’s a broad spectrum of assets which range, as Mike said, across different industries

MIKE DONALDSON: And across 53 different investments.

RYK VAN NIEKERK: A significant portfolio. Mike, how are these deals typically structured? Do you follow a bespoke type of approach, or is it pretty similar across the board?

MIKE DONALDSON: It is very similar. I think all black empowerment deals today are structured through sort of management companies, and they’re structured through funds, black empowerment funds. Essentially what we’ve done is we’ve funded these black empowerment parties. We’ve got a number of different partners that we’ve been associated with for a number of years, and essentially what we do is we capitalise their businesses. So, we become an LP, a limited partner in their funds. The management company itself, which is empowered, they’re the ones that go out, find investments and they will, by and large, do the investment through themselves.

So yes, we sit in the background as a funder. Clearly, we get involved, and we’ll talk about that just now. But it’s a very vanilla sort of private-equity structure that all private-equity companies in South Africa, especially on the empowerment side, are structured [as]. So, it’s got to carry – essentially the management team works for a carry and those are quite vanilla and standard across the industry.

RYK VAN NIEKERK: What is the typical stake you would take up in a company?

MIKE DONALDSON: It really depends, Ryk. We’ve got some stakes at 15% and some at 90%. By and large, we certainly prefer minority stakes. So, I think our typical range is probably 25 to 49%, and that gives us a sort of meaningful stake in the business with proper influence.

RYK VAN NIEKERK: Phumi, BEE transactions are normally quite complex, especially the funding structures. How do you approach funding and how bespoke are they throughout your portfolio?

PHUMI TWANTWA: Typically, what we would try to do is solve for a solution that the client would want. We would want to keep the transaction very simple, straightforward so that we don’t introduce unnecessary complexities when trying to invest. Already you’ve got an apprehensive seller at times, and you don’t want to bog [them] down with all the detail and the complexity of the transaction.

But our approach is to invest directly in the operating entity. We will sit alongside the entrepreneurs and the management team, and the BEE then has a voice and participation rights and is able to participate in the value-add to grow the business and take it forward.

RYK VAN NIEKERK: Phumi, how do you find companies to invest in? Do people phone you, or do you go out and look for some dynamic businesses that offer opportunities?

PHUMI TWANTWA: It’s a combination of everything you’ve mentioned, Ryk. Given that Corvest has got a long track record in BEE investing, companies do approach us at times and obviously allied to that we’ve got our BEE partners who, we might have mentioned previously, we’ve had partnerships with for quite a long time, and they go out and originate transactions for their own ticket. So, it’s a combination, really, of those things. And sometimes we get introduced to a transaction by a third party who knows that we are quite proficient in being able to facilitate and fund BEE transactions.

RYK VAN NIEKERK: Mike, how important is BEE in the private-equity space?

MIKE DONALDSON: It’s absolutely critical, Ryk. You cannot run a private-equity business these days without having a very good sort of BEE solution. There are international funds that manage to do it. But I think 40% of our portfolio sits right now directly through empowerment. I think it’s absolutely critical for the future, both for SA and private equity. I think the industry has to transform and it is transforming. And I think the million-dollar question in private equity is the value-add, and if you don’t have that solution or you can’t provide that funding, you really are going to be on the back foot. So, it’s absolutely critical that you have it.

RYK VAN NIEKERK: Phumi, there must be hundreds, if not thousands of opportunities. You’ve made 53 investments, or the portfolio consists of 53 investments. How many players are in the space, especially looking at BEE as one of the criteria for investment?

PHUMI TWANTWA: There are a number of players in the market currently. I think it’s close to 50 currently who have a BEE offering, or who are doing black-empowered transactions in the market. So, there are quite a number of guys, Ryk, outside of the traditional incumbents who are in the private equity space.

RYK VAN NIEKERK: Mike, what are your criteria for investment? It seems that you can take the cream of opportunities, because there are so many, as Phumi has said. What are the main criteria you look at before making an investment decision?

MIKE DONALDSON: I think the way you’ve expressed it, Ryk – I wish it was that easy where we can take the cream. We certainly can’t. I think it is a competitive space, as Phumi says. There are a number of players who’ve got capital. I think there’s been a lot of money being put into private equity over the past 10 years. So, you know, our criteria – yes, we’ve got to be very particular in terms of what assets we like. As I said, we are sort of non-sector focused. So, if things are making, we look at our management team first and foremost; I think that’s the prerequisite in private equity. We’ve got a good management team that’s making profits, and it’s certainly got a long track record, that’s something that would become very attractive to us. Unfortunately, that becomes attractive to all the other players in South Africa. So, it then becomes about what other value-adds you can do as a team to make sure that you are first in that queue.

RYK VAN NIEKERK: Phumi, how operationally involved is Corvest in the underlying investments?

PHUMI TWANTWA: We look for a strong management team and back them directly. We want to ensure that we don’t interfere in the day-to-day running of the businesses. Ours is to make investments on behalf of the FirstRand Group. That’s our vocation, and the management’s vocation is to run the businesses that we invest in. We try to keep that line as separate as possible. Obviously, where our expertise is relevant, we will come in and assist the management teams.

MIKE DONALDSON: I think we like management to do what they’re good at. Where we do get involved is at a strategic level. So, we sit on all those boards. From a strategic point of view, I’d like to think we’ve got a good sort of industry-sector knowledge across the board with all the portfolio of investments. I would try to add value really strategically, financially and structurally. And that’s probably where we try and put most of the influence. But when it comes to the day-to-day running, we want our management teams to handle that.

RYK VAN NIEKERK: What are the typical investment terms, because private equity obviously is aimed at exiting investments in a period of time. How many investments have you excited, and what are your norms? So, when do you exit?

MIKE DONALDSON: If you think what we’ve done over the years, I think we’re on about 230, or something like that, investments that we’ve made. And we sit on a portfolio right now of about 53. We try and exit these things every five to seven years. Sometimes it’s not possible. Given that we are on the balance sheet, we can afford to hold these assets for longer. And something like Fidelity Security we’ve held for 30 years. That’s definitely not the norm. The norm is typical that we want to turn and churn the portfolio probably every five to seven years, if we can, Ryk.

RYK VAN NIEKERK: What is the plan with Corvest? Obviously, it’s housed within FirstRand, which is an established financial services business. Are there any plans to maybe move it out of FirstRand, maybe a listing of sorts?

MIKE DONALDSON: I’d like to think private equity is still a very important asset class for RMB and for FirstRand, and it really was the foundation of where FirstRand started. The founders were from an investing space. I think they loved private equity. So, we certainly don’t see FirstRand ever wanting to get out of private equity. As I say, I think it does very well for the group, and it’s a good sort of diversification for the rest of the lending businesses. So, as far as we’re concerned, as long as we are making profits and getting the returns, we can’t see anything changing. I guess the crystal ball is always difficult to read, but, right now, I think it’s a very important asset class for the group.

RYK VAN NIEKERK: Phumi, we are currently living in a Covid-19 world, which has changed the business environment significantly in a very short space of time. Do you think Covid-19 offers private equity opportunities which are more significant than what we’ve seen prior to the pandemic outbreak?

PHUMI TWANTWA: Absolutely, Ryk. I think it does offer its opportunities, certainly, but it would be naïve to think that they’d be easy opportunities to take advantage of. The market obviously is experiencing a downturn alongside Covid, and that then comes together to provide a setting where there is capital that will be required by the market, and private equity is best placed, I think, to be able to come in and take advantage of those situations by empowering management teams to run and grow their businesses by providing capital and, of course, empowerment into their businesses.

RYK VAN NIEKERK: Mike, who are the major empowerment parties you back?

MIKE DONALDSON: We certainly do look at a number of different parties. We have our historical sort of relationships. We’ve got a long pedigree of partnering with good partners. And we’d like to think we’re happy to partner and look to the future with empowerment guys that we can back. We don’t have one preference, and we’d like to think we are sort of agnostic when it comes to empowerment.

RYK VAN NIEKERK: Relationships, I believe, and partnerships must be critical in this industry.

MIKE DONALDSON: Absolutely. I mean, I think these are even more important than the management teams themselves that we back. And if you’ve got a good relationship and a good understanding in terms of where the sort of value-add lies, and the responsibilities, I think that’s been key to all our success in empowerment.

RYK VAN NIEKERK: Phumi. Mike, thank you so much for your time today and good luck with your investments. I think they play a very important role in economic development in South Africa. We need thriving businesses, especially in that mid-cap space, because they are the businesses that employ people – and employment is one of the major problems we have in this country. So, thank you so much for joining me.

That was Phumi Twantwa, an executive at Corvest, and Mike Donaldson, the CEO.

This has been a special Moneyweb and RMB Corvest podcast.

RMB Corvest is a private-equity company and a subsidiary of FirstRand. The company provides private-equity finance for established mid-sized companies of between R50 million and R1 billion rand in established markets across sub-Saharan Africa. Corvest specialises in management and leveraged buyouts, development capital and funded BEE solutions.

Brought to you by RMB Corvest.

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Mike reckons: “I think the industry has to transform and it is transforming”. The truth is somewhat more sinister than Mike’s mere thought. Industry, entangled in racial bureaucracy, is obligated to select its staff based on race or sex rather than ability. Companies that don’t are legally hamstrung in their ability to operate and with whom they may do business. In an increasingly competitive international arena BEE has been an unprecedented disaster. South Africa has largely become deindustrialised by the ANC and other countries are eating its lunch. Even Western Australia, one state in Oz, produces more gold than South Arica. Manufacturing is dead e.g. clothing and those that survive do so by means of subsidies (car industry) or import tariffs (poultry). The fact that a country thousands of miles way can make a bulk product such as cement, stick it in a ship and transport, import and sell it in SA for cheaper that the South African item, speaks volumes. Financial and human capital have fled and continue to grow other faraway economies. Why do people entertain this tripe? Simply because they can make money out of financial distortions or need to do so to survive. Companies need BBE compliance and will construct certain schemes of arrangement such that BEE parties come on board (getting something for nothing i.e. any upside of the deal), banks lend the money and shareholders carry the can when it goes belly up. This lowers returns and raises risks. This chases capital away exacerbating unemployment, reducing returns, reducing tax and making everyone poorer. Viva ANC.

Oh lovely, moneyweb deleted my comment about BEE

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