Why South Africa could be an attractive base for foreign private equity funds

South Africa’s vibrant private equity industry, with local firms managing more than US$14 billion of funds, includes a large proportion of managers actively shifting focus to Sub-Saharan Africa for investment opportunities.

J-P Fourie

J-P Fourie

Recent changes in legislation are paving the way for South Africa to serve as the investment hub for local and foreign managed private equity funds looking to harness the potential of the African continent.

Developments favouring the industry have included elimination of exchange controls requiring private equity funds to seek Reserve Bank approval on a deal by deal basis for transactions outside of the common monetary area of South Africa, Namibia, Lesotho and Swaziland.

Now, private equity funds are only required to gain upfront approval for foreign investment and thereafter provide annual reports on the fund’s draw downs and realisations.

Tax laws have also been amended to avoid subjecting international investors to local taxation. This eliminates the need for dual local/foreign fund structures and the associated administrative and legal costs.

It also makes it easier for foreign fund managers, whose local presence is essential for doing continental deals, to be based in the country.

The South African private equity industry weathered the financial crisis well with very little distressed debt in comparison to other markets, due predominantly to the lower levels of gearing.

On a macro level, South Africa’s economy is recovering, with growth expected at more than 2.3% in 2010 thanks to sustainable fiscal and macro-economic policies, a robust and well regulated financial services sector and swift actions by the central bank.

Of course the infrastructure spend for, and foreign currency in-flows from, the FIFA Soccer World Cup haven’t done the country any harm either.

As a gateway for investment on the continent, South Africa offers foreign fund managers a favourable environment based in the continent’s largest and most vital economy.

J-P Fourie is Executive Officer of SAVCA. This article was first published in EMPEA’s Private Equity in Sub-Saharan Africa research report.