A robust year for Southern African private equity

By Janice Roberts
Erika van der Merwe

Erika van der Merwe

In a climate of economic and political instability, private equity in Southern Africa has again had a robust year. The region still accounts for about a third of the African private equity market, with the bulk of deal activity (measured both in terms of value and volume) being centralised in South Africa.

“The average deal size for the year across Southern Africa has been around US$250m to US$300m, which is consistent with what we saw in 2015, but still some way off the lofty pre-global financial crisis heights of US$585m,” says Erika van der Merwe, CEO of the Southern African Venture Capital and Private Equity Association (SAVCA). “Statistics show a significant year-on-year increase in deal flow and a general investor philosophy that bigger is not always better.”

More broadly across Sub-Saharan Africa, the latest SAVCA Quarterly Deals Sheet, prepared in collaboration with Webber Wentzel, reflects 140 reported deals in the first three quarters of 2016. A third of these were in South Africa, with Nigeria, Kenya and Namibia also featuring prominently.

East Africa continues to increase its stake in private equity across Africa, led predominantly by Kenya, which has recently changed its institutional investment framework to allow local institutions to invest up to 10% of their portfolio value into private equity.

Private equity deals continue to be spread across a wide range of sectors, with the most prevalent sectors being industrials, agriculture, technology, healthcare, education and consumer goods and services. This is consistent with the growing consumer base across the continent.

“A major theme this year has been the increased trend for auction processes on buyout transactions,” says Brian Dennehy, Director at Webber Wentzel. “In our view, this reflects the increased competition for quality assets and the high levels of liquidity currently in the market. From the seller’s perspective, auction processes can be beneficial in maximising the price, but they can also lead to protracted timelines and multi-phased disposal processes, given the buyer’s focus on managing risk and transaction costs.”

Ethos Capital debuted on the JSE in August 2016, following a R1.8bn oversubscribed public placement. The listing gives the market the opportunity to invest in a diverse pool of unlisted small to medium-sized companies through private equity funds managed by Ethos Private Equity.

Nicole Paige, Partner at Webber Wentzel, notes: “There has been a growing interest from other private equity managers and investment holding companies looking to do similar transactions and access alternative sources of capital that require liquidity, which at times can be a challenge for private equity investments.”

On the fund formation side, she says that managers are exploring the use of evergreen structures – particularly in relation to investments with a long-term profile and fairly consistent dividend yields.

According to Van der Merwe, all indications are that the 2016 trends will continue into 2017, with a good pipeline of deals already spilling over into at least the first quarter of 2017.

Private equity firms that have had some flexibility to defer realisations in light of unfavourable market conditions now will be motivated to dispose of mature investments. On the other hand, strong fundraising over the last two years has resulted in an abundance of committed capital that will be spent by Africa-focused funds.

Visit the official COVID-19 government website to stay informed: sacoronavirus.co.za