Private equity has struggled with its reputation ever since Barbarians at the Gate was published in the late 1980s. At around the same time Michael Douglas won an Oscar portraying Gordon Gekko in Wall Street. Henry Kravis, founder of global investment firm KKR, was portrayed in the book (a film followed) as another follower of the "Greed is good" philosophy, buying companies, firing most of the workforce and living in luxury off the massive profits. The book focused on the biggest deal to date: the buyout of cigarette and biscuit giant RJR Nabisco. Of course that isn’t the way to attract investors in the age of responsible investing, especially in the developing economies of Southern Africa.
And there is still a conflict between the long-term stewardship normally expected of shareholders and the private equity "clock". They usually put a coat of paint on a company and sell it on within seven years.
Right now hedge fund managers are likely to be better associated with greed, which might explain why hedge fund industry assets in SA are about R40bn while private equity assets were R184bn at the end of 2019. Capitalworks, one of SA’s top five private equity firms, has made a bid for hedge fund business Peregrine and it will be interesting to see what culture clashes emerge.
Not that all private equity deals have succeeded. Edcon’s highly leveraged buyout led ultimately to its business rescue. The main investor, Bain Capital, simply didn’t understand the SA market.
The African Private Equity & Venture Capital Association is still run, colonial-style, from London. It should move to Joburg
In another case, Alexander Forbes needed time as an unlisted business because it was licking its wounds after a scandal where it skimmed profits from its pension fund clients. The private equity consortium appointed Edward Kieswetter (now head of the SA Revenue Service) as the Mr Clean to bring a higher purpose back to the business. Unfortunately, he had to sell many of the crown jewels, including corporate insurer Guardrisk.
Now, we are in the part of the cycle where small caps are being delisted, though not always by the private equity industry itself.
Private equity investments make up 0.5% of GDP compared with 0.3% in China and 0.01% in Russia, according to the SA Venture Capital & Private Equity Association (Savca).
Almost as if the industry is answering the call from President Cyril Ramaphosa, it has sharply increased its infrastructure investments from 6% to 35% of its new equity and loans. Investment in retail has fallen from 17% to 4% of the total, though it does include R600m by Old Mutual Alternative Investments to buy control of Footgear, which operates through value marts and middle-market malls.
Purists might argue that Savca is stretching the definition of private equity by including Business Partners, previously the Small Business Development Corp, which has a portfolio of small business loans of R2.7m on average. Its 287 new outlays made up almost half of the year’s deals.
Larger deals will often involve foreign-based investors — the large Canadian pension funds regularly co-invest in private equity deals. Helios Investment Partners in London is an experienced hand in Africa, best known for its investment in cellphone towers.
The SA private equity industry is very sophisticated and, at close to $10bn, a fair size. So it is time that the African Private Equity & Venture Capital Association moved to Joburg. It isn’t even based in Africa but is run, colonial-style, from London. If Africa is going to take control of its fate, this is a small but important step.
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