Absa Capital, runner-up in the 2009 SA Venture Capital & Private Equity Association (Savca) and KPMG survey, has given notice of its potential to become the fourth significant player in the local private equity industry.
"We do believe that in the SA market there is room for another player of significance," says Absa Capital Private Equity managing principal André Pieterse.
The process of rewriting the mandate began about three years ago, he says.
In 2008 the unit was involved in the only two delistings of the year: environmental services group EnviroServ Waste Management and Kwikspace Modular Buildings. The delisting of Kwikspace, the largest manufacturer of prefabricated structures in SA, began last year and was concluded in February.
However, the ambitions of the unit have not been without their setbacks. Absa Capital Private Equity indicated to the market its intention to raise a buyout fund about a week before Lehman Brothers announced its bankruptcy. Since then, the global credit crunch has hugely reduced the total pool of capital available.
Private equity funds have another problem, which Pieterse describes as "the denominator effect". As stock markets have plunged, the relative size of the alternative investment portion of fund managers' overall books tends to increase. This is not necessarily because they are actually increasing in absolute value, but because everything else is falling faster, he says.
Typically fund managers can only devote a maximum of 5% of their total portfolio to "alternative investments", into which private equity falls. But with the decline in the value of traditional equities in these portfolios, the alternative investments portion of the portfolio now looms larger and constitutes a bigger proportion of the total.
As fund managers usually can't invest more than 5% of their portfolio in these alternative investments, it's been a backbreaking task to raise capital for a fund.
Pieterse says the total size of the private equity fund is a bit of a moving target and the bank now expects to finalise its new fund next year.
Despite this, he remains confident that there is room for one more player at the private equity top table, along with Actis, Brait and Ethos. In part, this room has been created because the big international buyout funds have had their enthusiasm dampened by the financial crisis.
With big international players absent and the local market expanding - albeit slower than in the past - the time is ripe for competition to increase among local players, says Pieterse. "As a proportion of emerging economies, the private equity market in SA is quite large. But as a proportion of the total market in developed economies, the industry in SA is very small."
That said, the private equity market needs to recover, and Pieterse says his unit won't be looking to do a deal for the next three to six months. However, the JSE and overseas markets are cheap, trading on undemanding price-to-equity ratios. And it is for this reason that he says there is still potential for big deals.
