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SA’s private equity industry growing despite sluggish economy – report

There was more fund growth in 2018 than in 2017, says Savca CEO.

NOMPU SIZIBA: The Southern African Venture Capital and Private Equity Association, Savca, released its annual report on what’s happening in the private equity space. It found that funds under management had grown to R171 billion at the end of December 2018, which represents a compound growth rate of 9.3% since 1999 – when the survey started.

Well, to give us an idea of what’s happening in the private equity space, I’m joined on the line by Tanya van Lill. She’s the CEO of Savca. Thanks very much for joining us, Tanya. What does the private equity survey reveal about the growth of investment over the last 20 years or so?

TANYA VAN LILL: Nompu, what we’ve seen is that there was more fund growth in 2018 in comparison to 2017. So, it seems there are more investors that are re-visiting investment portfolios and investing in South Africa, despite some economic and political turmoil that we’ve experienced of late. And what we’ve also seen is an increase in the number of investments that our members have made. Over R35 billion was invested in various sectors in 2018.

NOMPU SIZIBA: What sort of sectors were people investing in?

TANYA VAN LILL: If I look at the cross-sectors, retail and services remain at the top, in terms of the top five sectors. Energy and related came in as number three, receiving over 14% of the investments. And interestingly, an increase in investment came from the healthcare sector, and initially real estate, which is also usually in the five.

NOMPU SIZIBA: What about things like start-ups? Is there much appetite for those?

TANYA VAN LILL: There definitely is a lot of appetite for start-ups, but in this particular survey our focus was on private equity, which is more the later-growth-stage investments. And then in September we’ll be launching our VC [venture capital] survey, which looks more at the early-stage investment space.

NOMPU SIZIBA: Oh, the venture capital stuff, understood. And then your report talks about the return on investment, basically. Just tell us about that.

TANYA VAN LILL: The funds that were returned to investors was over R15 billion, and this includes both dividends and loan repayments, as well as realisation of assets – so where the investors actually sold their stake in the assets and returned the funds with some profit back to the investors. Despite the economic climate that was still very strong in 2018.

NOMPU SIZIBA: When we talk about raising funds, where is the money sourced from? Is it from high-net-worth individuals, organisations? Where does the money come from, and typically what sort of arrangements are there in terms of the length of time that money can be invested before a return should be expected by investors?

TANYA VAN LILL: Well, for private equity the institutional investors are mainly where funds are based, and these institutional investors can be sovereign wealth funds, pension funds, endowment funds and so forth. For 2018, over 56% came from within South Africa while the rest came from Europe, the US and the rest of Africa. The main source of funding came from development-finance institutions.

If we look at the venture capital sector or the early stage sector, they mainly raise funds from high-net-worth individuals and family officers.

NOMPU SIZIBA: So, what are your observations around the level of activity of private equity on the African continent, other emerging market countries and the kind of sectors that look right for investment in those?

TANYA VAN LILL: There is a lot of activity happening on the continent, especially in East and West Africa. We’ve also seen some really big deals happening in Egypt and North Africa recently. And the kind of sectors that people invest in has to do with giving people access to products and services that they wouldn’t necessarily have.

We’ve seen a lot of agri-tech or agri-related investments taking place in suretech, fintech. They are giving people convenience and value-for-money kind of solutions, which is what we are seeing on the rest of the continent.

NOMPU SIZIBA: Despite the weak economic dynamics in South Africa, like you say, a lot of funds were still raised last year. But for this year, what’s the outlook for private-equity investment for the balance of this year and beyond?

TANYA VAN LILL: We think it’s still going to be strong. I think the investment drive that was started last year by the presidency’s office has really contributed to the fund-raising efforts. And, as long as we continue with policy certainty, I think our members will be in a position to continue to raise funds and invest those funds – not only in South Africa but on the rest of the continent – because everyone is also looking for growth elsewhere, other than just in our country. So, I do think there is still opportunity for the sector to grow, and there is a lot of capital out there looking for big deals.

NOMPU SIZIBA: What are the arguments around being invested in privately-listed entities using private equity as a better prospect, as opposed to being invested in companies listed on the JSE or anywhere else in the world? Although, it’s probably best to have exposure to both of them.

TANYA VAN LILL: It’s always good to have a diversified portfolio and have exposure to various asset classes, listed and unlisted.

But in the unlisted space someone would choose this as part of their portfolio, to diversify and get access to companies that wouldn’t necessarily be listed on the stock exchange or even industries that you wouldn’t see on the stock exchange.

But it’s not only about the financial returns, because globally we are seeing that private equity is currently outperforming the listed markets. However, we find that a lot of investors that are looking to private equity want to invest with an “impact” mandate. So they want to see financial returns, but also that that money is being used for good, impacting the companies and the communities around them positively.

NOMPU SIZIBA: Yes, because I suppose when you are looking at a listed company, for example, even though they may have those type of ESG [environmental, social and governance] policies in place, sometimes because they are so big they may not necessarily have the type of impact that an individual investor would want to see coming from that company.

TANYA VAN LILL: Exactly. With the DFIs, or development finance institutions, being the backbone of private equity on the African continent, they come with a developmental lens. They want to see impact. So ESG and measuring ESG has always been at the forefront for the private equity sector.

NOMPU SIZIBA: Tanya, I understand that in a bid to boost skills and assist segments of our community who have traditionally been left out of certain spaces, South Africa has introduced a new fund manager development programme. Just tell us a bit about that.

TANYA VAN LILL: That’s correct. As part of our transformation strategy, one of the first products we are bringing to market is a fund manager development programme, which is aimed at first-time fund managers – black-owned and female-owned fund managers – and the aim is to help them through the first few phases or months of establishing funds. Our research has shown that they battle with fund-raising, they run out of working capital and they need the necessary coaching workshop and mentoring to be able to run a fund from end to end. That’s what our programme is going to offer them.

NOMPU SIZIBA: Our thanks to Tanya van Lill.

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