South African private equity industry adapting to a changing world

Johannesburg, South Africa

Johannesburg, South Africa

This article was originally produced for the Southern African Venture Capital and Private Equity Association.

South African private equity (PE) and venture capital (VC) industry stakeholders take a look back at 2021 and share their outlook for the rest of the year.

South African PE activity is recovering from Covid-induced uncertainty, with industry players reporting an increase in transactions, which is expected to accelerate into the remainder of 2022.

Jacci Myburgh, co-head of Old Mutual Private Equity (OMPE), says South Africa’s investment environment has improved after years of political concerns, which were followed by the Covid-19 upheaval. OMPE’s main focus during 2021 was to help its portfolio companies recover from the effects of the pandemic and to set them up for future growth. Towards the end of the year, OMPE made an offer to acquire JSE-listed Long4Life with the intention of delisting the company from the bourse. Long4Life owns several lifestyle businesses including Sportsman’s Warehouse, Sorbet and Chill Beverages.

Private equity funds buying either pieces of listed South African businesses or entire companies and delisting them from the stock exchange, is likely to be a continuing trend, according to Lydia Shadrach-Razzino, an executive at law firm ENSafrica. Her firm advised JSE-listed Ascendis Health on the recent sale of its animal health division to Acorn Private Equity. “In addition to delistings, there are also a number of public companies getting rid of non-core assets to private equity,” she adds.

The pandemic and the July 2021 riots in the KwaZulu-Natal and Gauteng provinces had a negative impact on many South African small businesses and put a strain on working capital. Rushil Vallabh, managing director of PE firm Secha Capital, says this situation has created investment opportunities as companies need the capital and operational support.

In the infrastructure segment, there have been relatively few new government-initiated projects with the disposal of existing assets accounting for the majority of deal flows, according to Vuyo Ntoi, joint managing director of African Infrastructure Investment Managers (AIIM). Digital infrastructure has become an important source of deal flow for AIIM and it announced several such investments during 2021: AIIM acquired a minority stake in South African fibre network carrier MetroFibre Networx; invested in a Ghanaian data centre business; and backed Eastcastle Infrastructure, a company specialising in Africa’s telecoms tower sector.

When it comes to PE exits during 2021, Andrew Westwood, a partner at law firm Webber Wentzel, highlights:

  • the sale of private equity-backed glass manufacturer Consol to Luxembourg-headquartered Ardagh; and
  • Carlyle and Ninety One’s exit of logistics company J&J Group to Imperial.

Westwood anticipates a healthy exit pipeline as several portfolio company disposals planned for 2020 and 2021 have been pushed out due to Covid.

Exit opportunities will also be buoyed by returning foreign investor interest in South Africa. Myburgh says international companies are again considering growth opportunities in South Africa due to an improving economy and more political certainty as evidenced by the Consol deal and Heineken’s recent offer to acquire alcoholic beverages producer Distell.

Secha Capital’s co-managing director Brendan Mullen says there are increasing opportunities for the firm to sell its investments on to larger PE funds once they have grown to a certain size. Secha provides capital and boots-on-the-ground human resources support to small-cap companies.

Covid-related international travel restrictions made life difficult for investors who operate in the rest of Africa, such as Andrew Johnstone, CEO of Climate Fund Managers. “Deals can’t be done on desktop analysis alone. The inability to physically meet people and kick the tyres was a big impediment to the ability to transact. The situation has improved, but testing requirements and other logistical issues still present challenges,” he explains.

Johnstone says upcoming elections in several major African countries – including Kenya, Angola, Senegal and Nigeria – present both opportunities and challenges. “There is normally a flurry of activity in the run-up to elections as incumbent politicians want to show the good work that has been done. But then there is also the inevitable uncertainty about what the election outcome will be. Certain government processes also slow down during election periods.”

The rise and rise of venture capital

One of the biggest trends in the South African private capital industry currently is surging venture capital activity, particularly when it comes to fintech investments. “The fintech space is quite exciting. There is a lot happening and I think we are going to see more of it in 2022,” says Lydia Shadrach-Razzino, the executive at ENSafrica who advised payments company Ozow on its recent $48-million series B funding round, led by Tencent.

Clive Butkow, CEO of Johannesburg-based VC investor Kalon Venture Partners, an early backer of Ozow, also reports an eventful 2021. Kalon made a follow-on investment in email security platform Sendmarc; its mobile marketing portfolio company Mobiz raised an additional $4 million; and real estate platform Flow is also fundraising for international growth, to name but a few of the highlights.

Rising zeal for South African start-ups from international VCs is positive for the industry. “I think we are going to see a lot more liquidity in the local VC market, driven by international investors becoming more interested in the commercial opportunities that these tech-enabled high-growth businesses are offering,” notes Alison Collier, managing director of Endeavor South Africa, which makes investments through its Harvest Fund. Harvest Fund, which only launched in February 2021, has already concluded 10 deals into South African-founded tech start-ups, with more than 50% of these rounds led by international VCs. Of the R6 billion ($386 million) Harvest Fund’s portfolio raised in 2021, more than R5 billion ($321 million) was funded by international VCs.

Both Butkow and Collier highlight a trend of South African tech start-ups spreading their wings internationally. For instance, Mobiz will use the money from its fundraising to expand to the U.S.; Carscan, which uses AI to scan vehicle damages and provide repair estimates, now boasts clients in countries such as India, the UAE, Nigeria and Kenya; and Sendmarc is already doing brisk business in several Western countries.

Fundraising: little easy money

In mid-2021, fund manager Metier had a final close, at $156 million, of its Sustainable Capital Fund II, which backs projects in the renewable energy, clean infrastructure, water and waste sectors. Although it attracted several prominent limited partners (LPs), Paul Botha, Metier’s CEO, says the general fundraising environment remains more subdued than it was pre-Covid.

African PE firms could benefit from increased emphasis by international LPs on environmental, social and governance (ESG) reporting and gender-lens investing, according to Botha. While many global fund managers are racing to implement ESG imperatives, Africa’s PE industry has been incorporating them for many years, largely due to influence from development finance institutions, which are significant investors in African funds. Botha says African fund managers should leverage their ESG expertise to attract additional capital.

Despite the muted fundraising environment, Metier will raise its successor capital growth fund in 2022. The new fund has already gathered significant fundraising interest through the Africa Mobile Networks warehousing transaction, other significant current deal flows and the consolidation with fund manager Catalyst in East Africa.

Towards the end of 2021, Climate Fund Managers announced the $675-million first close of its Climate Investor Two fund, which will focus on ocean infrastructure, water and sanitation. Johnstone says while there has been a strong and enduring interest from LPs in Africa as an investment destination, rising interest rates in developed countries could temper enthusiasm for emerging markets.

Ntoi of AIIM also cautions that with higher global interest rates, LPs will require even better performance from PE firms. “Fund managers will have to show high returns as they compete for international capital in an environment of increasing interest rates.”

AIIM is seeing greater enthusiasm from local LPs. In 2021, it completed a capital increase of R5.5 billion ($353 million) for its flagship southern African infrastructure fund, the IDEAS Managed Fund, taking the size of the open-ended vehicle to more than R22 billion ($1.4 billion). “South African pension funds have been key backers of our IDEAS Fund. We didn’t find fundraising very difficult. There is an increased appetite for infrastructure within South African pension fund portfolios,” Ntoi says.

OMPE, which is currently raising its fifth fund, also reports stronger interest in PE from South African institutional investors, even as many international commercial investors remain on the sidelines. “After a strong run, a lot of people are unsure about where listed markets are going to go from here, and some of those investors with foresight are starting to become much more interested in private equity again,” Myburgh says.