Private Equity worth R55 billion

15 December, 2006 at 9:45 am | Posted in Companies | Leave a comment

South Africa’s private equity groups will manage assets worth an estimated R55 billion by the end of this year, but the Southern African Venture Capital and Private Equity Association (Savca) says the sector’s contribution to the economy has not received much attention.
Private equity funds, which invest in unlisted companies with the intention of extracting maximum value from such entities, have become significant players in South Africa. Savca estimates that its assets will increase by 25 percent on last year’s R43.9 billion by the end of the year. Last year private equity funds invested R4.9 billion in 761 transactions and returned R4.4 billion to investors, with the bulk of beneficiaries being pension fund members.

A research paper presented recently by Momentum showed that returns from South Africa’s private equity funds yielded an extra 18 percent a year premium relative to listed equities over a 13-year period. In developed markets the premium was reported to reach up to 55 percent a year. Savca chairman Mutle Mogase said the media had focused more on the high-profile deals being pursued by private equity investors, but the industry was also creating new enterprises.

Savca research shows that private equity funds, including assets managed by government-funded private equity investors, are estimated to contribute 2 percent to gross domestic product. UK studies have shown that employment growth in companies backed by private equity was faster than in companies on the FTSE-100 and FTSE-250 indices. Such benefits were likely to be seen over time in South Africa, Mogase said. Savca executive officer JP Fourie said the sector had about R25 billion in uninvested funds. Some of this money could be invested in the deals that are reportedly being sought by private equity.

Companies that are already in negotiations include retailers Edgars Consolidated Stores and Shoprite, financial services group Alexander Forbes and glass manufacturer Consol. While none of these deals has been concluded yet, it is estimated that should they all be successful, their combined value would be R55 billion. Fourie said the use of debt financing in private equity deals made them more accessible to black empowerment. The risk tolerance made it possible to fund entities from which banks and other funds shied away.

A recent study by consultancy Monitor and the University of Cape Town found that in more than a third of cases, firms would have faced closure or limited growth without private equity funding. Mogase said although the local banking and legal environment was sound and certain, regulations on unlisted assets capped the ability of institutional investors such as pension funds to increase their participation in private equity deals. Such investors can allocate a maximum of 5 percent of their funds under management to unlisted assets.



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