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Is this private equity's moment?

The asset class has been under-utilised in South Africa. Will the Covid-19 crisis change that?

Is this private equity's moment?

In developed countries governments have introduced enormous stimulus packages to support businesses affected by the Covid-19 crisis. In the US, this assistance runs into hundreds of billions of dollars.

South Africa’s fiscal position simply doesn’t allow it to act on anywhere like the same level. The country is therefore in desperate need of other sources of capital, and this creates a potentially significant opportunity for private equity.

‘The lockdown has provoked an extreme episode of institutional destruction,’ said Nick Hudson, CEO of private equity fund Sana Partners during a recent seminar hosted by the Actuarial Society of South Africa. ‘We think we are in for a 10% to 15% decline in the economy. With that go four million-odd jobs, maybe one million of those on a semi permanent basis. So it is institutional destruction on a scale we have never seen before. Not even in war time has it been this severe.

‘That makes the value-add potential extraordinary,’ he said. ‘What we have now is an unprecedented requirement for capital formation to take place. And private equity, because of its positioning in the spot where most of these job losses have been happening – small and medium enterprises – is absolutely crucial.’

Growth capital

He added that while private equity firms are used to being involved in replacement capital, this is a time for extending growth capital ‘to put companies back on their feet’. While the initial focus from government and initiatives like the Rupert Family’s support for Business Partners has been on extending credit, Hudson said that many entrepreneurs have no appetite for taking more loans because of the personal risk involved.

‘They face personal devastation if their businesses don’t make it,’ said Hudson. ‘Equity is a much friendlier option for them. The private equity industry should be stepping up, taking stakes in businesses, and putting growth capital into those companies to reverse the declines they have suffered over the last few months and will continue to suffer for many months to come.’

This month already Ninety One, in partnership with Ethos Private Equity, and Sanlam Investments both announced new products specifically aimed at providing urgent financing to businesses affected by the pandemic. Private equity forms part of both initiatives.

Infrastructure

Last week the government also held the Sustainable Infrastructure Development Symposium to discuss how to generate sustainable investment into infrastructure projects the country needs to support longer term growth. Key to that is engaging private capital.

‘Government is ultimately going to look for private sector partnerships to reignite the economy in a post-Covid environment,’ said Fatima Vawda, MD of the 27Four group of companies.

In a note released after the symposium, Janina Slawski, head of investment consulting at Alexander Forbes Investments expressed similar sentiments.

‘For some time investors have been indicating that it is not a lack of capital but a lack of investment opportunities that has been retarding investment into infrastructure,’ she said. ‘The symposium brings a promising pipeline of “shovel-ready” investment opportunities that will accelerate the release of this capital, leading to potentially massive positive spin-offs for South Africa at this time of great need.’

There is no question that the pandemic has been a catalyst for this.

‘We required Covid-19 to push people towards having the complex discussions around how we can reignite public-private partnerships, and look at blended finance approaches,’ said Vawda. ‘There is just too little private equity investment in South Africa, particularly in the impact investment component.’

Investment opportunity

Critical to the success of any initiatives will however be getting support from large asset-owners. The utilisation of private equity by institutional investors in South Africa has remained fairly limited.

However, there are reasons that this could be shifting.

As Vawda pointed out, the performance of the local listed equity market has been disappointing for some time. Investors are therefore increasingly open to alternative sources of return.

There have also been a number of corporate scandals involving JSE-listed companies that have dented investor confidence. At the same time, the governance of state-owned enterprises has been a material issue on the bond market.

These are combining with a growing focus by institutional investors on ESG considerations, and a desire to support economic development more broadly as the country recovers.

‘We are looking for mechanisms that can promote long-term sustainability, particularly around ESG considerations, and add value to the economy,’ said Vawda. ‘I think private equity can play a phenomenal role in unlocking that value.’ 

 

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