Black economic empowerment (BEE) has emerged as an important driving force in the recent growth of the private equity industry. Both in terms of their own empowerment status and the rising number of investments they are making in black-controlled companies, private equity firms are boosting BEE.
Athol Williams
The latest annual KPMG survey of the SA Venture Capital & Private Equity Association (Savca), says funds under management by BEE private equity managers increased from R27,1bn at the end of 2005 to R38,3bn last year (41%).
This represents 83% of total industry funds under management - up from 76% in 2005. Of the BEE funds under management, over 60% is with "fully empowered companies" (defined by the financial sector charter as more than 25% black ownership).
The remainder is held by firms with a black shareholding of between 5% and 25%. This category includes most of the country's financial services companies such as the big banks and life assurers, termed by Savca as captives, that have extensive private equity divisions that are funded off their balance sheets. By 2010 the banks will have to raise their black shareholding to more than 25%, in line with the financial sector charter.
Most of the large independent firms, headed by Brait and Ethos, are "fully empowered" - with Ethos being 51%-owned by a consortium that includes Sphere Private Equity. Brait is 26%-owned by a consortium of four black groupings and chaired by former Business Unity SA CEO Bheki Sibiya.
Investment in empowered players such as Brait and Ethos, or the funds they control, also earns investors BEE points in terms of the financial sector charter.
Clearly, SA's bluechip firms such as Brait and Ethos, and increasingly the global private equity giants, will come to dominate the large deals that have started to materialise this year.
But it is in the area of medium-sized businesses that black-controlled private equity looks set to have a major impact. The average BEE deal was a mere R11m last year, only slightly up on the R10,7m for 2005, according to the KPMG survey. This reflects the large number of deals done by Business Partners (formerly the Small Business Development Corporation), which regularly accounts for about two-thirds of all private equity deals by number, though the average deal size can be as low as R250 000. If Business Partners' deals are excluded, the average deal size in 2006 rises to R24m (2005: R21m).
Private equity can also play a more meaningful role than other more traditional forms of BEE funding, as this asset class is traditionally more "activist" in nature. Private equity firms tend to be more hands-on in their investment, which is critical for many BEE players as they try to gain greater operational experience.
Furthermore, private equity investors tend to receive their returns based solely on the cash flow of the company they have invested in. Thus their fortunes are tied to that of the company and not reliant on volatile equity markets, which have been the downfall of many BEE companies.
Investors also find more comfort in investing in BEE firms via the private equity route as they believe the risk is limited by the hands-on approach adopted by private equity investors.
A number of private equity players have released plans to increase their investments in BEE groupings. Sanlam Private Equity recently announced the launch of four major funds that will focus on BEE companies. The company plans to raise a total of R2,7bn, of which R300m will be earmarked for small- and medium-sized enterprises (SMEs) - companies with a turnover of less than R20m/year. It will partner other private equity players, such as Decorum and Ethos, in these ventures.
Sanlam says the role of the SME Fund is "to assist with the hand-holding process and to ensure that the businesses can stand on their own feet".
Earlier this year Business Partners announced it is to invest R6,6bn in 6 600 SMEs over the next five years. This is roughly what it has spent on SMEs over the past 25 years.
The money will be raised through borrowings and funds from state-owned development finance institutions such as the Industrial Development Corp (IDC) and the Development Bank of Southern Africa, as well as from third-party managed funds. Government-owned institutions, such as the IDC, the National Empowerment Fund (NEF), the Umsobomvu Youth Fund and the Public Investment Corp (PIC), are also increasingly focusing their investments on SMEs.
The KPMG statistics may understate the extent of black influence in the industry: in contrast to official BEE legislation they do not regard investments by the state firms as BEE.
Not only is the PIC the largest single investor on the JSE, it also has a private equity arm, the Isibaya Fund, with a portfolio estimated to be worth R20bn.
"It is important to note that the BEE private equity statistics exclude government captives, which are obviously significant BEE investors. Thus their important contributions have not been included in our data," says Marco Dias, associate director of KPMG corporate finance.
The funds under management by government captives amounted to just over R10bn at the end of December 2006, up from R7bn a year earlier.
Another factor that suggests an increasing BEE impact on the industry is that many of the black-empowered private equity firms still have large funds left to invest. Of the funds under their control, R21bn remained undrawn at the end of last year, up from R10bn in 2005. Though not all of it will necessarily be directed at BEE-related deals, Dias says: "The investment of undrawn facilities will continue to have a positive impact on future investment activity, especially as SA businesses strive to meet the targets in the various BEE charters."
Investments by empowered private equity firms are already rising - from 287 deals valued at R3,1bn in 2005 to 332 valued at R3,8bn last year, according to the survey. KPMG says total BEE merger and acquisition activity in SA remained flat last year at R56bn, illustrating that private equity BEE deal-making is rising at a faster rate than total BEE transactions.
Just over a third of the BEE private equity deals last year were in mining and natural resources (R1,31bn), followed by financial services (R370m) and manufacturing (R274m).
To date, mining has attracted R1,82bn of total BEE private equity investments; financial services R1,73bn; IT R1,7bn; services R1,37bn; and manufacturing R1,24bn.
In terms of the type of capital provided, investment in BEE activities last year reflected the overall industry trend - more than R3bn of funds invested were allocated to expansion or replacement capital, with only R800m going to buyout or venture capital.
Industry commentator Athol Williams, of private equity consultancy Taurus Associates, says private equity has a long way to go to be truly empowered.
"There certainly is a lot of noise and the industry is starting to move in the right direction, but it falls short in key areas; it doesn't do enough to further management competence and is simply not investing enough in BEE companies," he says.
Williams says many private equity players still see BEE as a "marketing opportunity" and bring in black investors as minority equity holders. "Furthermore, whether investing in white or black companies, the industry has focused on financial engineering for its returns rather than contributing to more efficient management of the operations. It should be hands-on and provide backup to black and white entrepreneurs. That would be a long-lasting contribution to BEE," he says.
Savca CEO J P Fourie says many of the legal changes being introduced through the BEE codes will bring about "greater empowerment in the industry as we have now achieved a large degree of regulatory certainty".
Employment equity is an aspect of BEE in which progress has been slow. At the end of 2005 about 30% of the 329 professionals working in the industry were black; in 2006 the figure had risen to 35% of 351 professionals, according to the survey. An area of concern is the low number of women in the industry - only 66 at the end of last year, even though this was a 14% annual rise.
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