Hanna Barry
3 minute read
5 Jun 2014
6:00 am

Private equity punching above its weight

Hanna Barry

Appetite for private equity has expanded 17% in 2013 to a record R162bn under management even as the JSE rollercoaster rockets to unprecedented heights.

Image courtesy stock.xchnge (KillR-B)

And deal sizes last seen in 2007/08 have come roaring back, with investors preferring to put their money into private companies, rather than publicly listed ones.

While this is small change compared to the R1.2 trillion

invested in local collective in-vestment schemes (minus money market and global/offshore funds) at March 31 2014, it is growing steadily, fuelled by the public sector.

The Public Investment Corporation (PIC), overseer of the Government Employees Pension Fund (GEPF) raised 81% of R27.3 billion in private equity in 2013.

Early-stage investments (start-up capital for businesses that have been operating for one to three years) amounted to R8.2bn in 2013, R8bn of which came from the PIC.

“The PIC is currently applying to the GEPF for further funds,” Warren Watkins, KPMG’s head of private equity for Africa, said at the launch of the 2013 KPMG/SAVCA Private Equity Industry Survey.

Over the past two years, funds under management in South Africa have grown 42% to R46.1bn.

Regarded a riskier investment, private equity contains more illiquid assets that are locked in for a longer period.

Still, the 10-year internal rate of return (IRR) after fees on private equity investment for 2013 was 22.1%, contrasted with the JSE’s 19.6% (i.e. publicly-listed equity).

However, private equity underperformed the JSE’s ALSI over a three- and five-year period.

In addition to higher investor returns, economic impact studies show that under the management of a private equity firm, a company’s turnover increases, employment expands and competitiveness is enhanced.

PIC wants more

Almost 60% of the R46.1bn raised in the last two years came from the GEPF.

Internationally, pension funds invest on average 4% of funds in private equity. “In South Africa, we estimate this is around 1%,” said Watkins.

“We except to see more activity by pension funds in the next few years. This is because these investors make decisions based on both investment returns and positive societal impacts. They are particularly interested in the high employment and development characteristics that tend to accompany private equity investment,” said Erika van der Merwe, CEO of the South African Venture Capital and Private Equity Association (SAVCA).

Notably, of the R162bn in funds under management in South Africa at the end of 2013, close to R59bn lies in undrawn commitments – money committed to private equity, but not yet spent.

Those who care are following this “dry powder” closely, a in a bid to find out who has the money and where it is going.

Nearly half of it lies with independents (R27.6bn) and around 39% (R22.8bn) with government (mainly the GEPF).

Largest deals of 2013

At R4.7bn, the largest private equity deal in 2013 was more than three times the size of the largest deal in 2012.

Overall, the average investment deal size increased from R48.9m in 2012 to R72.6m in 2013.

Two of the three largest deals in 2013 went to renewable energy projects – Bokpoort (4.7bn) and SunEdison Boshoff (R2.5bn), made up of a mix of local empowerment and international partners.

Another R3.5bn went to a paint empowerment deal with Plascon, Kansai Paint.