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Private Equity: Africa for Sale?

Written by: World Economic Forum

Article Overview: Leslie W. Maasdorp, Vice-Chairman, Absa Capital and Barclays Capital, South Africa, a Young Global Leader, opened with the remark that it is very clear the private equity industry has experienced unprecedented growth. But this activity is also attended by concern, he said, both from regulators and those who foresee the possibility of newly acquired companies becoming saddled with debt.

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Private Equity: Africa for Sale?

Leslie W. Maasdorp, Vice-Chairman, Absa Capital and Barclays Capital, South Africa, a Young Global Leader, opened with the remark that it is very clear the private equity industry has experienced unprecedented growth. But this activity is also attended by concern, he said, both from regulators and those who foresee the possibility of newly acquired companies becoming saddled with debt.

Nick Pagden, Head, Investment Banking, South Africa, Citi, South Africa, said the key question is: "How sustainable is all of this activity?" A secondary inquiry asks why all this money is coming to this asset class. Private equity far outperforms other asset classes. The boom in private equity has even seen participation by governments. An interesting and important characteristic is the correlation of private equity with debt: for every dollar of private equity investment, four to six dollars are raised on the debt market.

Jon Hamilton Zehner, Senior Country Officer, JPMorgan, South Africa, noted three characteristics of private equity: low interest rates enabling the leveraging up of returns to equity; its attraction to areas of strong economic growth, such as South Africa; and conservative balance sheets of target companies in the case of South Africa. Zehner said that public market investors are not inclined to invest in companies exhibiting a large degree of leverage. Private equity, on the other hand, will accept this and the risk that goes with it.

Brian Molefe, Chief Executive Officer, Public Investment Corporation, South Africa, a Young Global Leader, commented that in the United States, with the advent of private equity, regulators tightened the screws and then required more disclosure. The outcome was that going private became more attractive. Molefe also said that Africa stands to gain from any capital inflow, but the question arises: "If private equity comes and takes over a listed company in order to enhance that company’s performance, then why was the current board managing the company not taking measures before that to achieve the same object?" He said that, chances are, shareholders are turning a blind eye to problems within the companies in which they have invested. Molefe suggested that a frenzy of activity in private equity is taking place now but, in the future, there might be a spectacular collapse.

John Gnodde, Director, Private Equity, Brait, South Africa, said that private equity represents investment of a long-term nature, typically seven to ten years. It is a model that usually results in growing the particular business, not necessarily taking money out of it, and the creation of jobs. Private equity can grow companies faster and stronger, Gnodde said. When going into a business, Brait investigates every aspect of concern. Furthermore, because 70% of the capital to be injected into the business is foreign, foreign standards have to be followed.

Gnodde also referred to the takeover of the Kelly Group. The company had been mismanaged and misdirected, he said. His company bought the Group, fired existing management and brought in a new team. That team was told that its members were in the company with its new owners, and this steered management in the right direction for the benefit of the company. Options that were "upside only" became two-way options and the company became more profitable. Private equity also has the advantage of being able to insist on representation within a company at many different levels where these are of concern. This sometimes means participation in such areas as budgeting and debt collection.

Martin L. Kingston, Executive Deputy Chairman, NM Rothschild & Sons, South Africa, said that US$ 400 billion was raised by private equity in 2006. This was up 29% on the previous year. Of that amount, only US$ 33 billion went into emerging markets. There are three reasons for this: portfolio diversification, attractive risk-adjusted returns and investment in growing markets. Kingston said that 20% of investors are considering investing in emerging markets, and they have reservations about the size of the market and the regulatory environment.

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Article Tags: absa, asset classes, balance sheets, barclays capital, capital inflow, capital south africa, chief executive officer, current board, debt market, degree of leverage, global leader, jon hamilton, listed company, low interest rates, market investors, private equity industry, private equity investment, public investment corporation, target companies, unprecedented growth

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