The private equity and venture capital industry reached a milestone in 2008 as total assets under management surpassed the R100bn mark.
The size and growth of the industry amplifies the role and significance of private equity (PE) and venture capital (VC) in the financial services sector and the economy. SA experienced significant foreign capital outflows at the dawn of the global financial crisis. This highlighted and reinforced the attractiveness of PE and VC as a source of "sticky" foreign direct investment and investment capital.
2009 will be characterised by low deal flow activity and a tough fundraising environment. Nevertheless, investment opportunities will remain plentiful, particularly in the mid-market, as the downward correction in equity markets provides attractive acquisition opportunities. PE and VC managers are likely to dedicate most of their efforts to nurturing their portfolio firms, as the effect of the financial crisis bites into the real economy.
Follow-on investments will be in abundance as managers aim to strengthen, recapitalise and restructure portfolio companies and possibly finance strategic bolt-on acquisitions.
Regarding fundraising, PE firms with a solid track record and an attractive investment strategy will be the winners, as experienced managers have shown their creativity and adaptability in changing market environments.
Investors are likely to revisit their asset allocation strategies in search of greater yield and liquidity and - pending any material recoveries in the equity markets - this will give rise to a reduction in the capital allocated to alternative assets and in turn PE and VC. Target fund sizes will come under pressure and the all-important final close will be elusive, which may result in a profound restructuring of the SA PE and VC industry and a change in the competitive landscape.
The significant contribution by foreign investors to our industry, and our standing as one of the most sophisticated private equity industries in emerging markets, could alleviate - albeit to a limited extent - the long-awaited contraction in fundraising.
There is hope. Much has been said about the attractive returns of funds invested during economic downturns and some investors may adopt a contrarian asset allocation strategy to PE and VC, increasing and expanding their exposure to the asset class. The global financial crisis has highlighted the need for our industry to expand the network of local investors.
The downward pressure on valuations will continue and earnings visibility remains challenging, limiting exit opportunities. Trade sales will be the most likely exit route.
As we eagerly await the secondary effects on the SA economy of the recessions in most developed economies, opportunities will be plentiful and caution will prevail. These uncertain times also afford our industry a unique opportunity to show our muscle and longevity. Portfolio companies will come to recognise and appreciate the strategic value-add, financial acumen and patient capital that comes with PE and VC firms in your shareholder base.
I'd like to extend my appreciation to KPMG and the FM for their continued dedication and support of Savca.
Cora Fernandez is Chair of the SA Venture Capital Association and deputy CE of Sanlam Private Equity
