Industry slower in 2010, but prospects good

With a strong foundation in place and new regulation governing pension funds in South Africa, the country’s private equity industry is set for growth in the coming years, according to the findings of the latest annual report from the South African Venture Capital and Private Equity Association (SAVCA) in conjunction with KPMG.

The 2010 survey covered 75 funds, represented by 63 fund managers, conducted via a web-based questionnaire.

“This year’s survey has highlighted the remarkable resilience of our industry in the face of difficult market conditions. Not only are we seeing signs of recovery in terms of the amounts raised and acquisitions made, but during the year…quarterly performance reports showed some very positive returns,” said SAVCA’s J.P. Fourie and Warren Watkins, head of private equity markets for Africa at KPMG Services.

Pooled net internal rates of return (IRR) for private equity beat the compound annual growth rate from the FTSE/JSE All Share Index (ALSI), the FTSE/JSE Financial and Industrial Index (FINDI) and the FTSE/JSE Shareholder Weighted Total (SWIX).

According to the RisCura South African Private Equity Performance Report for the quarter ended on December 31, 2010, pooled IRRs over the three-, five- and 10-year time frames were 9.4%, 19.2% and 21.4% respectively (net of fees and denominated in rands).

Total funds under management (FUM) fell to R97.6 billion in 2010 from R105.4 billion the year before, although undrawn capital remained healthy at R31 billion (an 11.4% decrease from R35 billion of undrawn commitments the year before).

Mitigating this fall was the growth of third-party investments in 2010, which rose to R11.1 billion from R3.8 billion in 2009.

More capital was put to work in 2010, however, with R10.4 billion of investments made compared to R7.2 billion the year before.

Average investment deal sizes increased to R19.7 million last year from R11.7 million the year before, although there has not been a return to the jumbo deals seen in 2007.

The number of investment projects declined by 90 to 528 for 2010. Funds returned to investors were also sharply higher on the year before, amounting to R17.3 billion compared with R2 billion in 2009.

Of the R97.6 billion under management, independents (or those who manage funds on behalf of third parties) accounted for R45.8 billion at the end of December (from R48.3 billion the year before). Captives-financial services (who manage on-balance sheet investments funded by a parent or group) accounted for R34 billion (down 14% from R39.7 billion in 2009).

The long-term picture is sound, with the industry achieving a compound annual growth rate of more than 10% each year since 1999, when the first survey was conducted. It has grown from 47 registered companies and funds under management (FUM) of R35.9 billion in 2000 to 75 companies managing R97.6 billion in 2010.

The report notes that while the South African industry is small compared with the US and the UK, it is significant in relation to GDP compared to many other countries, amounting to 3.6% of GDP.

South Africa accounted for 42.4% of funds raised in 2010, with strong domestic support viewed as a positive sign amongst the foreign investor community.

Europe (excluding UK) was the next biggest source of funding accounting for 21.4%.

Private equity has also taken on a significant role in the development of BEE in South Africa, with the majority of projects undertaken maintaining a black economic empowerment (BEE) element.

Fund managers that are black-owned, empowered or influenced held R62.6 billion (64.1% of industry FUM, down from 67.7% the year before) with government captives adding another R12.9 billion, representing 77.4% of total funds under management. BEE codes have brought clarity to the private equity industry thereby making it easier for companies to contribute to this socio-economic process. Copyright HedgeNews Africa – July 2011

 To download the full report click here