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Private Equity

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Private equity in Africa: why you need a long-term view

By Private Equity

Despite the hurdles, opportunities abound in Africa for private equity – but innovation and a long-term approach are needed.

In this article, we examine the investment case in Africa, and how the private equity segment can help unlock opportunities for growing businesses and investors alike.

Out of Africa, something new

The African continent has opened up significantly in recent years as a destination for investors. After decades of turmoil and economic mismanagement, many African governments have worked hard at reforming their economies and financial systems, reforms that have led to a general rise in incomes and more attractive markets for foreign investors.

The growth of economies like China and India has also contributed to a rise in demand for commodities, providing an impetus to growth on the continent. There is potential for the continent to grow further, both as consumer demand grows and as an investment in infrastructure rises.

While Chinese investment has grabbed the headlines throughout much of Sub-Saharan Africa, many other countries, such as Turkey and India, have also increased their diplomatic and business presence. This could result in foreign direct investment continuing to rise, with CAPEX channelled into public sector infrastructure and private sector developments. This may create a virtuous cycle of improved incomes and living standards, which should fuel opportunities in the domestic economies and export sectors alike.

Liquidity problems

The opening up of capital markets in Africa has created new opportunities for foreign investors. From an almost total absence of capital markets in much of Africa just three decades ago, a number of countries in Africa now have established stock exchanges, as well as bond and money markets.

However, liquidity remains a challenge for many foreign investors. Apart from the Johannesburg Stock Exchange (JSE), most of the exchanges suffer from low turnover, making this a hurdle for global investors to take up stakes in locally listed companies.

To demonstrate the effect, in July (the latest figures available from the World Federation of Exchanges) the JSE had a monthly turnover of US$370bn, compared with US$44bn (8.4 times) for the Nigerian Stock Exchange, the next largest exchange on the continent, and US$14bn (26.4 times) for the Egyptian Stock Exchange, the third-largest.

Furthermore, many locally-focused businesses prefer to remain private, so many sectors in the economy remain underrepresented on their countries’ exchanges.

Foreign direct investment has grown over the last 20 years, though much of this has been by large multinationals or development finance institutions, either into infrastructure projects or in mining, energy and telecoms. Few locally listed companies have benefited directly from this.

Recent trends in private equity in Africa

Does private equity have a role in mobilising capital in Sub-Saharan Africa? Private equity can be a channel for investors to tap into opportunities in Sub-Saharan Africa. While the numbers can sometimes be volatile, there is a clear rise in interest in the sector on the continent.

According to data from the African Private Equity and Venture Capital Association (AVCA), there were 186 private equity deals in 2018. Compared with 158 deals in 2014 and 2015, this represents a steady increase over the last few years, though still below the 196 deals done in 2013.

Despite the increase in the number of deals in recent years, the total deal values have been on a downward trend in recent years. The total value of private equity deals across Africa last year was US$3.5bn, from US$3.9bn in 2017 and US$4bn in 2016 – and well down from US$7.8bn in 2014. The median size of deals is between US$6m and US$8m, which are small amounts by global standards.

Similarly, the amounts raised to invest in Africa, by limited partners such as pension funds, are also volatile. US$2.7bn was raised in 2018, from US$2.4bn in 2017 – though both are below the amount raised in 2015 (US$4.5bn), according to AVCA.

Can private equity gain traction in the region and contribute to the continent’s growth?

According to Grant Crosby, Investec’s head of fund finance for emerging markets, the fundraising environment in Sub-Saharan Africa has slowed as investors continue to commit to developed market funds, a function of their relative outperformance of late. In addition, the high profile failure of the US$14bn Dubai-based Abraaj private equity fund last year on allegations of fraudulent misuse of funds has also affected sentiment. Abraaj was a major investor in Sub-Saharan Africa and counted among its investors the Bill and Melinda Gates Foundation and the International Finance Corporation.

However there is clear potential in Africa for those prepared to take a longer-term view, says Crosby. The deepening of capital markets in the region, increases in infrastructure investment, growing consumer markets and recent higher commodity prices, all present opportunities for investors to generate returns.

Crosby argues that the historical underuse of fund leverage in the region is also an opportunity for funds, particularly if they are prepared to use innovative structures to mitigate currency risk.

“The sector has a long way to go, but a combination of improving macro and structural issues and innovations should lead to an invigoration of the sector,” says Crosby.

Chetan Jeeva, Investec’s head of specialised finance (Africa), comments that a portfolio approach is required, that takes into account the different legal, business and cultural dynamics in different countries in Sub-Saharan Africa.

“There are idiosyncrasies in each economy, from the way business is done, to the way one funds,” he points out.

Jeeva says it’s often a case of finding lending opportunities that can grow into private equity funding further down the line. Notwithstanding the differences between countries, Jeeva says one often finds that industries like FMCG or technology are dominated by family-owned businesses, with their own, often opaque, ways of doing business. An equity partnership with outside shareholders may not always be attractive for these businesses, he points out.

“However they may well be willing to fund their expansion plans by using debt. By providing innovative lending solutions, one can hopefully plant the seed for private equity down the line,” he says.

Again, this requires a patient, long-term take on doing business in the region. Jeeva and Crosby both agree that the key is usually strong partnerships with local businesses and financial institutions. And there’s no doubting the rewards for patience in a region that is likely to grow in the coming years.

See the original article here.

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Here’s how to make private equity work for your business

By Private Equity

Is your company a medium-size business and doing well? Does your business have space to grow? Have you received ‘the call’? “Hi, I represent XYZ Private Equity firm, and we have an interest in your business. Can we have an informal conversation about this?”

A Private Equity firm is not like a business brokerage that wants to facilitate a deal to sell your firm to an interested buyer or to find you an interested buyer. ‘Private equity’ in the context of this book refers to firms or funds that use private money to purchase companies. Their interest in acquiring businesses is to expand them, strengthen the balance sheet and sell them.

A Private Equity play involves a set of rules that you may not be prepared for. Knowing the rules will allow you to decide whether you wish to play the game. Played well, there are significant benefits for you that you might not find anywhere else, with paydays that can repeat.

Author Adam Coffey has been on the receiving end of ‘the call’ from Private Equity recruiters several times and didn’t turn them away. That decision has been highly profitable for him, and he didn’t own the company. The opportunities offered by Private Equity are open to senior executives as well as owners, and this should be understood. This book will equip you to ask more educated questions and to make better decisions.

To understand Private Equity funds, think of a Mutual fund which aggregates money from a variety of investors and pools that money together. The fund manager then decides what shares to buy on behalf of the investors in the fund. A Private Equity fund is very similar, but not the same.

Private

Firstly, it is private, so shares in it are not easily traded and capital pledged to the fund must stay there for a specified amount of time. Investors in a Private Equity fund are called Limited Partners.

As the fund finds investments, it will call for the money needed for the acquisition. When a Private Equity firm buys a company, they use the maximum amount of leverage or debt they can, based on the cash flow of the company they are going to acquire.

Private equity differs from Venture Capital funds who typically take a minority stake in an investment that shows potential. Private equity differs from Buyout Funds who purchase a company to control it themselves.

During the 1980s, less than 1% of mergers and acquisitions in the US involved Private Equity. In 2018 that percentage had grown to about 35% and the estimate is that within five years, that number is expected to eclipse 50%.

What is behind this growth spurt is how significantly Private Equity outperforms the S&P 500. In fact, Private Equity funds typically beat most benchmark indices. In the US today there is almost $1 trillion in capital looking for investments, so it is no surprise that the investment vehicle that outpaces the rest would be favoured.

How do Private Equity funds achieve this result?

Put most simply, they buy equity in a company with good potential and good management. To make the purchase they use as little of the Limited Partners’ funds as possible and borrow as much as they can be based on the cash produced by the acquired company. Example: they buy 50% of the company and only put down 20% and borrow the rest. When they want to sell, the debt has been repaid and their 20% down-payment now owns 50% of the company.

To achieve this, they will drive the company as hard as possible, so they can pay off the debt and increase the potential sale price of the company.

There are two metrics they will focus on. One is EBITDA (pronounced as three syllables: e-bit-dah), how much you earn before taking into account how much you must spend of that on interest, taxes, depreciation, and amortization. How much they will pay for your company will usually be a multiple of EBITDA and how much they will be able to sell it for.

The second is IRR, internal rate of return, which is the net return that the Limited Partners whose money was invested in buying your company earned over the time it was invested, expressed as a percentage.

This is important for two reasons and explains a large part of how Private Equity firms operate.

Firstly, they will often want to retain the team that made the company valuable in the first place. The second is that since one of the metrics they use is IRR, time is critical. If it will take the executive team 10 years to grow the company by 30% that is a vastly poorer performance than if the executive team achieved this growth in 5 years.

When you, as an owner, get your pay-out for the company you have built so well over the years, there won’t be time for a well-deserved break in the Bahamas before getting back to work. You will be expected to start the business sprint (not jog,) immediately.

As the owner and/or chief executive, you will be answerable to a board. It is therefore as critical that you do your due diligence on how they will relate to you. Some Private Equity firms are very helpful and will use their vast experience across multiple businesses to assist you to achieve their expectations in terms of EBITDA and IRR. Others might be very uninvolved with only a monthly status call.

How they relate to you, will be relatively hands-off if you perform well and relatively very hands-on, if you don’t.

When the Private Equity firm exits at a premium, your share rises with the same tide. If you are not an owner, but an executive you can also ensure you benefit when that time comes. That is how the author acquired significant wealth without being an owner.

That said, when you get ‘the call’ take it seriously, whether you are an owner or an executive.

See the original article here.

The unique world of private equity among owner-managed enterprises

By Private Equity

Having a strong network and building trust is crucial for owner-managed enterprises (OMEs) in South Africa to attract private equity investment, partly due to the extra time it takes for deals with OMEs to be completed. This is according to new analysis of the OME sector by FTI Consulting.

The survey comes in light of the crucial role that OMEs are playing in developing the South African economy. Aside from a handful of South African OMEs that have grown into global conglomerates, most OMEs in the country belong to the mid-tier category, which is a key pillar for the country’s economy.

The OME sector overlaps to a large degree with the small and medium enterprise sector (SME), which is home to approximately 90% of all South African businesses, employing more than half the workforce. As South Africa looks to carve a way back to strong economic growth, many have realised the importance of the sector’s welfare.

OMEs are increasingly turning to the consulting industry for support with business strategies – particularly in the burgeoning digital sphere – while some have suggested that the sector should be granted special regulatory liberties to establish themselves. One strong avenue for growth is drawing private equity wealth.

FTI Consulting reports that OMEs face a sea of obstacles when it comes to making private equity deals, from the business as well as from the regulatory sphere. In the latter domain, challenges appear primarily with respect to increasingly tight governance requirements that have emerged recently.

Private equity firms demand a high standard of governance practices, which can hinder OME growth due to limited resources. Investors also demand significant changes to internal structures and functioning, which can pose a considerable challenge to owners, who are used to being in control.

Another issue that the sector appears to be facing is that OMEs are struggling to determine the valuation of their own firms, making it a challenge to draw concrete proposals. Completing a deal with an OME also takes a significantly longer time than it does with a larger corporation.

As a result of all these factors, the metrics that drive successful private equity deals in the OME sector differ considerably from those governing large transactions. OMEs require a personal approach, based on demonstrated trust in order to secure a long-term investment.

“Relationships, work ethic and a cultural fit are essential factors of the long-term success of these partnerships,’ writes John Geel, Managing Director and Head of Corporate Finance at FTI Consulting. OMEs must also have a particularly strong set of business indicators to successfully attract investors.

‘Private Equity Investors also recognise that they can bring immense value to these types of businesses not only through corporatisation, improvements in governance as well as access to funding, but also through ‘softer’ issues and knowledge transfer in the day-to-day management of the business,’ continues Geel.

The personal side to transactions in the OME sector is demonstrated by the fact that nearly 80% of all OME private equity deals originate from some kind of personal professional network, while just over 20% originate through the advice of a corporate finance advisor.

See the original article here.

Rockfin Wealth Management holding tie

Rockfin acquires Infinity Strategic Solutions

By Private Equity

Rockfin Wealth Management have entered into a definitive transaction with Infinity Strategic Solutions a leading Cape Town Financial Planning practice that originally started in Gauteng some 14 years ago. The acquisition of the clients and books of business from Infinity further underpins the growth strategy of Rockfin and the Transformation Capital Group in the wealth management landscape. Ongoing stringent compliance and taxing practice legislation continues to hamper the ability small to medium size practices to exist in the market. Rockfin sees continued consolidation of independent brokers and financial planners as a key strategy for growth through acquisition and are well positioned to leverage these transactions which brings to date the completion of five acquisitions in the past 2 years says Mike Eslick – Managing Director.

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PFP Changes Its Name to Rockfin

By Private Equity

We are proud to announce the approval by the Financial Services Board of our newest FSP’s brand name change. Provision Financial Planning will henceforth be known as Rockfin Wealth Management.

As you know by now, PFP was acquired in 2015 by Transformation Capital Group, instantly adding to our expertise through increased levels of experience and greatly expanding our available range of products and services. We have subsequently decided to incorporate PFP and certain other acquisitions into the newly-formed company, Rockfin Wealth Management (Pty) Ltd.

My-Fin Financial Services, traditionally the financial services arm of Transformation Capital Group, will henceforth function as our product creation house and online marketing vehicle, while Rockfin Wealth Management will be our direct consumer facing identity from where our expert financial planners will operate.

The name change and rebranding from PFP to Rockfin simply reaffirms our commitment to dynamic growth and development, all the while keeping in mind the needs and expectations of – and benefits to – our valued clients.

If you have any queries, questions or requests, please feel free to email us at admin@rockfin.co.za, or contact us by phone on 086 135 4107.

We look forward to continuing our relationship with you, our valued clients.

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TCG Acquires PFP

By Private Equity

TCG Acquires PFP, a 20 Year Old Financial Planning Practise in Cape Town

TCG has acquired Provision Financial Planning (PFP), a 20 year old Wealth management and Financial Planning practise in the Western Cape.

Other acquisitions are also on the cards as part TCG’s strategy to grow the financial services arm and footprint says Executive Director Mike Eslick. The acquisition will compliment existing services in the Western Cape provided by Beehive technology and consulting.The TCG brand and a physical address will now provide our customers a local office to call on when necessary.

TCG has established its initial offices in Parklands as it searches for a permanent address in the Century City area.