South Africa: Down, but not out

As European buyout figures show a nascent recovery, the South African market seems stagnant. Last year saw just one exit of note, with new deals also very slow to materialise. The current state of the market is the topic of discussion at today's unquote" South Africa Private Equity Congress, held in association with the South African Venture Capital & Private Equity Association (SAVCA).

The industry has been abuzz with interest in emerging markets, so why has this not transferred to intense interest in South Africa? External factors such as political unrest elsewhere in Africa may dampen prospects. "Private equity investors must ask themselves post-Egyptian crisis whether they have taken political and social concerns seriously enough. It wasn't a concern two months ago, but is more likely to be now," points out Bruce MacRobert, director at Brait Private Equity, speaking at the Congress this morning in Cape Town.

Economic indicators also create challenges for South African private equity. GDP growth for South Africa in 2010 was 2.9%, vs 8.7% for the BRICs. The gap narrows slightly for this year, with 2011 forecasts at 3.5% and 8.6% respectively, against 4.8% as a global average. "Therefore the challenge for South African GPs is to position South Africa as an attractive destination for funds when the numbers make it seem pedestrian," according to MacRobert.

So why look to the country? "The perception is that South Africa is very competitive and a difficult business environment. The reality is the opposite," MacRobert says. Indeed: according to Warren Watkins at KPMG, a typical buyout in the US or Europe is intermediated 99% of the time, with around 70 bidders (financial and strategic). In South Africa, the average is just five.

This may be the reason the country continues to provide handsome returns for investors. "South African funds have historically shown good returns, and have long operated in low GDP-growth environments," MacRobert says. "There is no reason why this should not continue."

The deal landscape is changing. Take-privates, once a popular deal type in the country, are waning in prominence. MacRobert cites 2008 as the last time a sizeable P2P took place, begging the question whether there have been more failed P2P attempts than successful delistings on the Johannesburg Stock Exchange. To boot, monetising them is not always that straightforward since exits are often discounted if relisting. "So you may be buying at a premium and exiting at a discount," he points out.

The good news is that industry players are increasingly upbeat. KPMG conducted a poll this morning of the event's 300 delegates, and more than a third were confident the country is on the road to recovery. Nearly two thirds expect dealflow to increase in 2011, with 56% expecting to focus on new deal activity this year, rather than focusing on refinancing existing investments or nursing portfolios. This is up markedly from just a third at last year's unquote" event.

"The industry is a little bit down, but certainly not out," Watkins concludes.

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