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Funds raised last year for investment in local private equity deals shattered all records, according to a survey by KPMG and the Southern African Venture Capital Association (Savca).

May 31, 2007

By Ethel Hazelhurst

Johannesburg – Funds raised last year for investment in local private equity deals shattered all records, according to a survey by KPMG and the Southern African Venture Capital Association (Savca).

The survey of 44 entities, managing 71 funds, shows an increase of R11.2 billion, almost as much as in the previous five years combined.

The inflow boosted funds under management by 32 percent to R56.2 billion.

“If you assume that every rand will be coupled to R2 of gearing, then R78 billion is available for investment,” said Eduard Garcia, a director at Brait private equity.

Significantly, 50 percent of last year’s funding was from US sources, making the US the biggest provider of foreign funds to South Africa.

“South African sources have contributed 45 percent of all funds raised to date and not yet returned to investors,” said the Savca-KPMG report.

Funds under management grew at a compound annual rate of 9 percent over the past seven years in which the survey had taken place.

Investment spending by private equity companies increased to R6 billion from R4.5 billion in 2005.

“The figure excluded deals, [such as] those involving retailers Edcon and Shoprite that were announced in the fourth quarter of last year but remained conditional,” said Nick Matthews, a director KPMG’s corporate finance practice.

The Edcon deal has subsequently been finalised, while the Shoprite deal has been rejected by shareholders.

Investment in entities that are black owned, empowered or influenced rose 23 percent to R3.8 billion last year.

The survey reveals that, at the end of last year, the funds had R26 billion in undrawn commitments for future investment, 63 percent more than the R16 billion available at the end of the previous year.

Mthuli Ncube, the director of Wits Business School and a professor of finance, said the global private equity boom could run another three years.

Ncube said there was a steady supply of companies willing to be taken out of stock exchange listings.

This is particularly the case in the US because of the requirements of the 2002 Sarbanes-Oxley Act.

But it also applies in other countries because, globally, the compliance requirements imposed on listed companies were becoming more onerous.

Ncube said demand for suitable acquisitions would stay strong as long as the environment of low interest rates and low inflation continued to maintain high liquidity levels in global financial markets.

And in South Africa, the valuations were still relatively favourable, which should attract offshore investors.

Ncube said: “The boom is being given additional impetus by sovereign fund managers, [such as] those of Abu Dhabi and Kuwait, and particularly by the entry of China, with a fund that is reported to be worth $300 billion [about R2.1 trillion] for private equity purposes.”

Garcia said Citibank estimated that $575 billion had been raised globally for private equity. “If you include the gearing, that means $1.7 trillion is available.”

He said: “Expected investment performance and diversification benefits have been powerful drivers.”