According to John Seymour (pictured), CEO of private equity at Sanlam Investments. the South African private equity market is well established and growing.
Figures from the Southern African Venture Capital and Private Equity Association, show the South African private equity industry had ZAR 171bn ($12bn) in funds under management at 31 December 2018. Allocated capital has risen at a compound growth rate of 9.3% per annum since 1999 and, at 0.8 percent, investment activity as a percentage of GDP compares favourably with most emerging markets.
Mr Seymour thinks this growth is expected to continue, as local institutional investors increase their exposure to the asset class to a level in line with current global allocation. It currently sits at half, and significantly below the regulatory limits in place.
Private equity is increasingly providing access to opportunities that publicly traded equities do not. Similarly to other exchanges around the world including the FTSE, since 1994, the number of domestic publicly traded companies on the Johannesburg Stock Exchange (JSE) has halved, resulting in under-represented industry sectors.
South Africa remains the largest and most developed private equity market in Sub-Saharan Africa. The IMF predicts that the broader continent will be home to 10 of the 20 fastest-growing economies in the period to 2023. Many of these markets cannot, at this stage, sustain large-scale, single-country funds. South Africa-based general partners (GPs) and domestic investee companies provide a mechanism to gain exposure to this opportunity.
At the moment, South African private equity is particularly appealing according to Mr Seymour. The domestic investment cycle has lagged the global cycle. Instead of low interest rates and a recovering public equity market, South Africa has seen higher interest rates and underperforming equity markets. A significant number of businesses can be acquired at attractive prices, at a time when positive signs of economic reform and sentiment change are emerging.
From a trend perspective, general partners are experiencing an increasing need to offer co-investment capabilities to larger, more sophisticated domestic limited partners (LPs). There is an increased focus on embedding ESG throughout the investment process, in particular around labour practices given the high level of unemployment and required skills development in the country.
Given the current business environment, it is particularly important for GPs in South Africa to embed transformational value-creation strategies in the investment process, rather than simply driving incremental operational improvements. This requires investment teams that have the right combination of skills and industry knowledge, as well as deep commercial networks.
