Private equity and venture capital investments gain traction in SA
SA is seeing record flows to alternative asset classes, particularly private equity
The value of funds under management of private equity companies in SA increased more than fourfold in the 15 years to 2017, the Southern African Venture Capital and Private Equity Association’s (Savca) 2018 industry survey shows.
Venture capital investments surpassed the R1bn mark for the first time in 2017.
Private equity and venture capital funding is giving businesses that would otherwise find it difficult to access funding the financial muscle they need to scale up.
Some of the success stories documented by Savca include the Bakwena Platinum Corridor, which has led to investment of about R18m in socioeconomic development projects along the route. In the Free State, the Emfuleni Voerkrale feedlot has roughly doubled each year since launching in 2013. Moreover, affordable rental housing investor, Urban Impact Properties, has provided more than 10,000 student beds throughout SA.
“The value that private equity and venture capital in particular can offer the economy and start-up companies goes beyond the financial measures. What’s very important for us is to show the impact that these investments have,” said Savca CEO Tanya van Lill.
Later this week Savca will honour the most effective deals in this space in its inaugural awards. Companies that received funding in the past year will be judged on their financial performance, jobs created and their effect on social change, among other criteria.
SA is seeing record flows to alternative asset classes, particularly private equity, as investors look for investments that have a low correlation to equity markets. The RisCura-Savca report, which tracks performance of SA private equity, showed that in the first quarter of 2018, the 10-year internal rate of return for private equity stood at 11.5% in rand terms while the all share index delivered 9.7% before fees.
Van Lill says while SA has a mature private equity market, venture capital was picking up. Private equity investments reached a record high of R31.1bn in 2017 and venture capital deals exceeded the R1bn mark for the first time, investing R1.16bn.
Venture capital predominantly invests in early-stage companies and remains small in SA compared to private equity. Fund managers in that space still find it difficult to raise funds as institutional investors see them as too risky, said Van Lill.
“But it is now gaining traction. There aren’t a lot of new fund managers entering the space. But the fund managers that are there are raising a second and third fund,” she said.
Savca figures show that in 2017 about 160 venture capital transactions were concluded, substantially more than 114 deals in 2016. And 27% of the investments came from new fund managers who were not active prior to 2017.
Some of the biggest players who laid the foundation for venture capital in SA are Knife Capital, which managed Mark Shuttleworth’s HBD Venture Capital and technology venture capital fund manager 4Di. In total 57 fund managers were managing venture capital funds last year.
PwC and CB venture capital funding report showed that global funding had increased to $53bn in the third quarter of 2018. However, the US, Canada, Europe and Asia are leading the space and Africa was nowhere to be seen in the report. The African Private Equity and Venture Capital Association’s latest tracker shows that only $900m of private equity and venture capital deals were concluded in the continent in the first quarter of 2018.
Van Lill says they are seeing a rise of specialised funds in the private equity sector as new entrants enter the space and established fund managers break away. Most of the new specialised funds are for infrastructure, health care and agriculture, she said.