Managing portfolio companies most effectively

Follow-on deals exceed new private equity investments – survey

This article was originally published by Engineering News. It was written by Idéle Esterhuizen and was published on 22 May 2012. 

While the number of private equity deals declined from 547 to 521 last year, the value of investments increased by 32.2% to R15.6-billion, the latest KPMG and Southern African Venture Capital Association (Savca) venture capital and private equity industry performance survey showed on Tuesday.

Of the R15.6-billion invested, R8.6-billion went into follow-on investments, with the remaining R7-billion targeting new investments.

Follow-on investments outweighed new investments

KPMG private equity clients and sectors head Warren Watkins said 2011 was the first year in which the proportional value of follow-on investments outweighed that of new investments.

“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,” he commented.

The South African private equity industry, which is small in comparison to the US and the UK, increased 1.4% to R115.8-billion worth of funds under management, including captives, independents and private equity investment holding companies.

Global overview

Investment activity by independents represented 0.17% of South African gross domestic product (GDP). This compared well with the UK figure of 0.75% and the US’s 0.98%. Israel boasts the highest percentage at 2.05%.

Of the Brazil, Russia, India, China and South Africa nations, only India saw a higher private equity contribution to GDP of 0.33%. China achieved 0.14%, Brazil 0.01% and Russia 0.08%.

Watkins said the undrawn commitments portion of funds under management in South Africa amounted to R34.1-billion and was expected to continue to drive efficiency in local capital markets. It also prepared the industry to capitalise on future investment opportunities as they present themselves.

“Increasingly, more funds will be spent north of our borders. As soon as the market returns to its confident past, we can expect an increase in new investments,” he added.

Investment in South Africa

Of the R34.1-billion of undrawn commitments, R17.1-billion was available for exclusive investment in South Africa, marking a fall from R18.2-billion in 2010.

“Generally in South Africa captives have made up a high percentage of the invested funds in the industry, but because of regularity challenges, particularly in banking, bigger players such as Absa and Standard Bank are drawing back and moving their funds out of the proprietary investment category,” said Savca executive director Malcolm Segal.

Private equity fundraising generates R8.3-billion

Although R3.1-billion lower than in 2010, private equity fundraising for the full year still generated a healthy R8.3-billion.The majority of these funds were for later stage investments.

The decrease in funds was in line with a global drop-off in fundraising, owing predominantly to the cautious investment views of most funders.

Segal pointed out that in South Africa funds further declined as a result of fewer opportunities in the country. “There is a structural problem in the South African economy that is inhibiting the creation of opportunities and that are retracting capital for venture,” he noted. Segal attributed the structural challenges largely to strict regulations in the country, rendering opportunities outside South Africa more attractive.

Watkins added: “There exists a general view in the market that Africa, with its population and urbanisation, represents great opportunities going forward; the population is expected to double by 2050 and Africa is said to be at the high end of the market.”

Local pension and endowment funds account for 75% of third-party funds

Of third-party funds raised by South African fund managers 75% came from local pension and endowment funds that contributed R3.6-million. These funds also accounted for the majority of overall funds, about R8.37-billion raised locally.

“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 fundraising is a once off and will return to a 50:50 representation in the next couple of years,” Watkins said.

In the past, 2.5% of the funds under management in pension funds were allowed to be invested in private equity; however, late last year this leapt to 10%.

“This has happened quite late in the year and we have yet to see the full effect of it.

“The change in the regulation has awakened some fund managers to the idea of increasing and looking at private equity as a real asset class; we might see significant growth going forward,” Watkins predicted.

Additional report findings

Further, a record R25.7-billion was returned to investors in 2011.

The report also showed optimistic results for black economic empowerment, as investments classified as nonempowered accounted for less than 25% of the local industry’s total funds under management.

Watkins explained that the overall growth showed in the survey was attributable to South Africa being somewhat buffered from the impact of global recession, in comparison with other markets.

He added that South African private equity was expected to maintain a significant amount of funds under management, with future fund-raising anticipated to increase and activity to improve.

“There is a lot of momentum in the market, it has shown good economic growth and potential that will continue,” Watkins said.

Segal said local industry had to be commended for its achievements to date. “We can be proud of local industry. In terms of funds under management we do not stand out, but we have succeeded in being a catalyst for transformation,” he emphasised.

The survey represents over 90% of total South African private equity funds by value.

This article was originally published by Engineering News. It was written by Idéle Esterhuizen and was published on 22 May 2012. 

David Okwara

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