GREG CAMPBELL: Long-term sustainable financing solutions can speed up business growth

The SA business sector has had to weather numerous challenges over the past three years, including the severe disruption to business continuity brought about by blows to global shipping and supply chains caused by the Covid-19 pandemic, the civil unrest in Gauteng and KwaZulu-Natal in July 2021, and more recently the severe floods in the latter province.

On a global scale the invasion of Ukraine by Russia has, and will continue to have, far-reaching societal, humanitarian and economic consequences.

Looking ahead, SA faces several headwinds. The country is entering an upward interest rate cycle to curb inflationary pressures in the economy, we can expect further load-shedding as Eskom struggles to maintain its ailing power infrastructure and the unemployment rate remains abysmal. The “recovery”, in which the country grew 4.9% in 2021, added no new jobs.

It is against this backdrop that we have observed many SA businesses scaling back on expansionary capital expenditure in the past two years, opting rather to pay down their debt, resulting in companies’ balance sheets reflecting high levels of surplus liquidity. As we emerge from the effects of Covid-19 companies are actively seeking new avenues for growth and diversification and ways to judiciously deploy surplus liquidity to ensure their long-term sustainability.

In April 2020, the Competition Commission indicated that it expects a surge in mergers & acquisitions after the pandemic has taken its course. This is a global expectation, with analysts suggesting the financial crisis caused by the pandemic will create so-called alpha companies — large, mature and cash-flush companies that are in a strong position to effect acquisitions. This trend has been noticeable among SA’s unlisted corporates, with increasing signs of corporate activity, including consolidation in certain sectors and where corporates are seeking to dispose of assets that are no longer core to their future strategy, and where a nimble and agile management team may be more effective in turning around an underperforming operation.

Increasingly, we are observing clients making acquisitions to further integrate themselves in their value chain or acquiring businesses that are complementary to their core business and future strategy. We have observed significant growth in the unlisted corporate segment, specifically companies with an ebitda of more than R75m and revenues between R1bn and R5bn, which are actively looking to scale and grow.

The unlisted midcorporate market segment provides a wealth of opportunity for domestic lenders that are equipped to help entrepreneurs grow their businesses. They could use innovative debt-financing solutions to boost their operations, whether organically or inorganically, through completing acquisitions that are synergistic and earnings accretive, meaning they boost the acquiring company’s earnings per share. This also creates opportunities to back management to secure equity stakes in the business with a view to future succession and in time to facilitate complete exits by the founding shareholders.

Transformation

The SA private equity industry over the years has continued to grow, and today there are more than 175 members managing assets to the order of R200bn. They have supported many founding shareholders to crystallise value and simultaneously bring in their own representatives to complement management teams who have the insight, energy and passion to help take the business to the next level. Private equity also provides an opportunity to facilitate meaningful transformation by bringing in black investors who share a common vision for the business and can assist in opening new avenues for growth and opportunity.

Today, there are numerous examples of exceptionally well-managed privately owned businesses that require support from banks and the wider private equity community to carry and guide them through their next level of growth. We believe financiers have an obligation to provide financing for a successful, sustainable and transformed future.

Let’s put our money where our mouths are and be part of the solution that transitions SA to a resilient future.

• Campbell is head of specialised finance at Nedbank Commercial Banking.