Profit-making idea: Opportunities for private equity to provide funding to distressed South African companies

Johannesburg, South Africa

Many South African companies are currently under severe stress due to the Covid-19 lockdown that was implemented just over four weeks ago. Under the regulations, only businesses deemed as essential product and service providers are allowed to operate. While some trading restrictions will be relaxed from next week Friday, the economy is not expected to fully reopen in the near term.

John Bellew, head of private equity at law firm Bowmans, believes this situation will present opportunities for private equity firms, and in particular mezzanine debt funds, to plug the funding gap experienced by distressed companies. Bellew made these comments during a webinar hosted yesterday by the Southern African Venture Capital and Private Equity Association (SAVCA).

His colleague, James Westgate, a partner at Bowmans, said there are several companies with fundamentally sound businesses that “have been caught on the wrong side of this whole Corona lockdown”.

“We are seeing an opportunity for distressed M&A over the next six months or so … Everybody is putting out fires at the moment, but when we get a bit of breathing space and time to think, I reckon there could be some great returns to be made in the next cycle,” Westgate added.

There could also be opportunities for take-private transactions. Africa Private Equity News recently reported there are many upper-small-cap and mid-cap Johannesburg Stock Exchange-listed companies, which even before the Covid-19 fallout traded at significant discounts to their net asset values. “With the share prices of many good companies being where they are, I think there is a lot of opportunity for takeovers in the public space,” commented Ulrike Naumann, head of Bowmans’ general finance practice group.

Further reading

[March 2020] Kenya-based investor sees opportunity in Covid-19 crisis
[March 2020] Africa: crisis a once in a decade opportunity
[March 2020] Coronavirus will hit African economies hard
[April 2020] South African company ready to roll out low-cost ventilators for the African market
[April 2020] From Chinese meat demand to rocketing citrus prices, Covid-19 not all bad news for South African food producers