Still wanted: Smart, strategic private equity deals


The past three years have reset benchmarks in private equity and debt markets. Whereas there was previously far more “easy” money to be had, the economic downturn has brought with it an increasingly realistic and sober approach to investment, and an appreciation that one can no longer expect to achieve the same level of gearing.

Despite this, however, local private equity (PE) deal activity and price expectations remain positive. With average PE ratios on the Johannesburg Stock Exchange (JSE) still high, local investors continue chasing after comparatively few deals – driving up prices. While we’re seeing a variety of drivers behind the most recent deals, as well as those currently in the pipeline, it’s clear that PE investors have their eye on long-term returns, and an appetite for any smart, strategic deal available in the market.

Regarding the issue of funds available, Martin Coetzee, director, RMB Corvest, notes that many local PE funds cut back on deals at the start of the recession, “Some of these funds are now at the point where they are ready to deploy this money. We’re thus seeing many of the larger players become more active in the market, especially now that the fundamentals are supporting deal-making.” He adds that the recovery of valuations on the JSE has additionally offered companies an ideal exit strategy: “Certain trade players are already making use of this option and selling off non-core businesses while they have the opportunity.”

Mike Donaldson, director, RMB Corvest, maintains that BEE (Black Economic Empowerment) and BBBEE (Broad-Based Black Economic Empowerment) also cannot be discounted as a key driver of local deal activity in the current market: “Within RMB Corvest’s stable alone we’ve seen the majority of our most recent deals include an element of BEE in the transaction. Certain companies that haven’t yet complied with empowerment requirements and need to improve their BEE credentials are making enquiries as a result.” Adding to this, mature BEE investors are also making their presence more felt in the market: “Many are starting to sell off some of their equity to the next generation of BEE shareholders. In so doing, they’re realising the wealth created by their original deals and creating a new source of liquidity that these businesses can simultaneously tap into.” Donaldson explains that the capital generated by this type of PE sale is then often reinvested by the BEE players in strategic investments based on a longer term horizon than typical PE investment timeframes.

A high demand for liquidity is providing additional impetus for many BEE deals. “With debt markets remaining tougher to access, many companies are choosing to rather use equity as a means of generating much needed liquidity to fund expansion and/or working capital,” says Donaldson. “This is correspondingly creating points of access and entry for PE, as well as newcomer BBBEE investors. It’s also allowing these companies to use PE to fuel long-term strategic growth in their industries.”

With local PE outlook seemingly positive for 2018, smart investors will undoubtedly remain on the lookout for strategic deals that will add long-term returns to their portfolios – and chase these accordingly. “Appetite for deals will continue to be tempered by the strategic value of what’s on offer,” says Donaldson. “And, while there’s seemingly every reason to invest at present, it’s ultimately all about one’s long-term return on investment. Investors therefore need to do their homework, understand the sector and market where they will be playing, and seek out the right PE partner before making a decision. In this way, they will be properly equipped to chase the right deals – and ensure they add strategic assets to their portfolios.”