There's new activity in the world of private equity - an industry that saw rapid growth with equity markets a decade ago.
Renewed optimism is reflected in the new investments being made by firms - leveraged buy-outs are bringing assets into private equity funds. On the sales side, there is a new corporate appetite for growth through acquisition. That provides private equity firms with the opportunity to exit long-held investments.
"Markets have definitely picked up," says Ethos CE André Roux. "If I look at the number of deals we're looking at now compared with 12 months ago, there are certainly at a lot more. But more importantly the quality of those deals, in the context of being able to convert them into potential transactions, is much greater. So we are quite bullish about the future."
Brait private equity MD John Gnodde agrees. "The past three to four months has seen the highest level of activity for four years."
Many of SA's biggest independent firms, such as Ethos and Brait, say they will need to start looking for capital again next year. Smaller funds say the same. And new funds, particularly those backed by empowerment players, are springing up. After four years of declining fundraising by the industry, the optimism indicates a turnaround.
"In the earlier days, we used to turn down many early-stage ventures or overpriced deals touted by unrealistic entrepreneurs," says Rowan Williams, director of later-stage fund i-Capital. "We don't see those opportunities anymore. The investment opportunities we come across are reasonably priced and have a solid track record."
Unfortunately, some firms will not be around for the good times. Gensec, which was the third-largest player in the market, is selling its private equity business, thanks to a change in strategy by parent Sanlam. Corpcapital, a smaller player, is also wrapping up its private equity business.
The optimism will not revive the heady days of the 1990s, when billionaires were created overnight after private equity investors publicly listed their investments with great success, pocketing huge cheques along the way. Often, the listings benefited more from irrational market behaviour than strong business cases. Consequently, the private equity industry has become more serious.
Relative to other markets, private equity in SA is fairly well established. As a percentage of GDP, it beats most European countries. Last year, it had US$3,7bn in investments. The industry is dominated by so-called captive funds - insurers, asset managers, banks and others, which invest their own capital into private equity. Captive funds hold R20,5bn of the pie. Independents, which invest third-parties' money, held R12bn last year.
Private equity is an important component of the economy. Reflecting that, government has more than R8bn (at cost price) invested in private equity funds - an amount that has grown rapidly in the past few years. It does so primarily through the Industrial Development Corp, the biggest player in the industry.
Private equity is an important home for investment cash because it offers a way to diversify a portfolio of investments, lessening the risk, though private investors have only limited ways to access private equity funds. It is guided by listed equity markets, but the historic returns have been far higher than the JSE Securities Exchange. SA is just beginning to include private individuals in private equity funds, thanks to two retail-focused private equity fund of funds offered by Sanlam and Momentum, with high minimum investment criteria.
The term private equity now defines an array of different types of investing, with one thing in common: investment targets are not publicly traded.
That's why Riaan van Dyk, who runs a private equity fund of funds for Momentum, describes private equity as "liquidity arbitrage". It's about taking underpriced publicly tradable companies, giving up the opportunity to easily trade ownership and placing them in private funds, with a long-term investment view. Investors sacrifice liquidity to earn a better return. Typically, private equity funds take a 10-12 year view and target returns of more than 25%/year.
Most private equity investments (especially when measured by value) are mature businesses and a change of control will provide new opportunities. Recent action has been dominated by the delisting of publicly traded companies such as the two biggest of 2002 - Ethos's purchase of Dunlop (R795m) and AMB Private Equity Partner's buy-out of Servest (R297m). For managers, private equity offers an alternative to frustrating public markets.
But private equity is inevitably linked to the public markets. "There is a strong correlation with what is happening in the broader equity market. The state of that market affects buying and selling opportunities. One may argue that at the low end of the market there must be wonderful buying opportunities, but market psychology is not conducive to concluding transactions, it's extremely defensive," says Roux.
So the renewed optimism in the industry is partly because of a turn in market sentiment as a whole. Even mainstream public equity investors are starting to see a better market in listed equity, led by the Dow Jones rally of the past six months.
A big area of growth is empowerment funds of two types: black controlled private equity firms; and traditionally managed funds with an empowerment mandate. Important new funds have been launched such as Tiso Capital, Cyril Ramaphosa's MCI, Tokyo Sexwale's Mvelaphanda Fund and J&J/Old Mutual fund joining the empowerment sphere alongside empowerment players such as Kagiso Ventures. The empowerment players have brought a lot of new funding into the industry, even while traditional firms were fading.
Private equity funds aim to add value to an investment by providing an active management role and delivering expertise that can take a company to new heights. Early-stage private equity firm Business Partners has a database of retired senior managers it can second to investments to play a mentoring role. Even large established company investors such as Brait have a list of expert advisers to help its investments negotiate the obstacles.
"Private equity is not passive investment, it's active," says Business Partners MD Jo Schwenke. That makes it different from the debt funding a bank provides - the first port of call for most entrepreneurs. Furthermore, private equity investors are not focused on security. It is more important to find a group of strong managers with a great idea, in the case of venture capital, or established cash flow, in the case of private equity.
