Private Equity in Africa has enjoyed a period of positive growth in recent years. This fact was certainly borne out by the findings of the RisCura-SAVCA South African Private Equity Performance Report for the fourth quarter of 2014, which pointed to activity in, and performance by, the private equity sector largely outstripping that of many more traditional investment sectors.
This is confirmed in the latest 2014 KMPG-SAVCA Private Equity Industry Survey where private equity has seen continued increases in investment activity and now also in 2014 a 44.7% increase in funds returned to investors. The African Private Equity and Venture Capital Association also supported this sentiment, placing the total value of private equity deals across Africa in 2014 at US$8.1bn, only just short of the historic high of $8.3bn achieved in 2007.
However, while the steadily increasing numbers, and total value, of private equity deals in South Africa, and across Africa, is a pleasing trend, total deal value is not necessarily the most important metric when assessing the positive impact of private equity.
Rather, the massive potential that private equity transactions offer can only be fully unlocked if all participants in the private equity market recognise that sustainable success is as much about the quality of deals being concluded as it is about the quantity.
Of course, attempting to assess the quality of any private equity deal is a somewhat subjective undertaking, particularly given the broad spectrum of role-players and their requirements. However, while ensuring private equity transaction quality will never be an exact science, there are a number of characteristics that most good quality deals typically demonstrate.
For starters, the best deal is not always directly correlated to the best price. This is particularly true in an environment where private equity opportunities are scarce, which creates higher levels of competition in the market and can artificially skew the price component of the offers presented. While price is a significant factor in any private equity deal participant’s decision, focusing exclusively thereon can end up being a very expensive exercise – for all parties – if other sound private equity partnership elements are lacking at the outset.
While the allure of a high price may make the ultimate decision regarding the best private equity deal offering difficult, an equally important consideration is how likely the chosen private equity partner is to deliver sustainable value add and therefore financial upside in the longer term. Unfortunately, determining this is not as simple as comparing initial deal values. Instead it demands a more subjective approach – one in which chemistry between the prospective deal parties is as much of a priority as price.
While not a tangible or measureable aspect of a private equity deal offering, such chemistry is one of the most important components to consider. This does not imply that the parties to the deal have to be 100% compatible or perfectly matched. It simply means that they need to be able to engage in robust discussions to deliver the best solution for the business. Good chemistry also implies that the respective stakeholders share a compatible vision for the eventual outcome of the deal. All parties need to be able to articulate their idea of what a successful deal will eventually look like and these respective visions, if not identical, must be closely aligned and complimentary.
Another important aspect of this good chemistry is that both parties need to approach the private equity deal as partners rather than merely participants. Without trying to simplify these roles too much, the investor needs to be willing to get involved in the investee’s business, but not to the point of interference. For their part, the investee management has to demonstrate a willingness to accept constructive input with the management and governance of the business if and when necessary. If there is an obvious lack of willingness to do so by either party, the other would be well advised to take their money or their investment opportunity elsewhere – no matter how financially appealing the deal may otherwise appear.
Ultimately, any truly successful private equity deal is one that delivers positive long-term economic, sustainability and governance benefits for the investee company and real returns – whether financial or otherwise – for the investor. If Africa’s focus is then on growing the number of quality-driven private equity transactions that are achieving these outcomes, the true value of the continent’s burgeoning private equity markets is likely to be fully unlocked.
Clive Howell is head of private equity at Nedbank’s Corporate and Investment Bank