News release from South African Venture Capital and Private Equity Association (SAVCA), July 2013
Private Equity a strong, efficient driver of BEE in South Africa
Private equity deals are an important and efficient force for driving black economic empowerment (BEE) in South Africa, as reflected in the large share of transactions within this asset class that promotes transformation.
Erika van der Merwe, CEO of the South African Venture Capital and Private Equity Association (SAVCA), said: “BEE private equity deals – that is, investments into entities that are at least black influenced – represented 58.5% of all private equity investments done in 2012.
A natural facilitator of BEE
“Given the way in which private equity works, it is a natural empowerment facilitator. In the deal-making process, private equity fund managers bring about corporate action that usually entails significant change in the ownership structure.
“This is an opportune time to introduce or change BEE, as it is done as part of the broader deal. Introducing the empowerment partner at a time when careful due diligences, ownership restructuring and strategic realignment is taking place makes for a more efficient process than doing BEE in isolation.”
Moreover, compared with many BEE deals outside of private equity, which usually involve some sort of vendor financing and the dilution of current shareholder value, private equity can introduce funding options that limit shareholder dilution.
“It also allows for creative ways to fund the BEE stake, because private equity by nature involves exploring funding options and introducing new capital into an existing business. This makes the incorporation of BEE funding an easier sell to funders and all stakeholders, “Van der Merwe noted.
Enhancing the quality of empowerment
She added that private equity could enhance the quality of empowerment in some instances.
“Empowerment is not only about ownership, but also about the broader BEE scorecard. As private equity managers usually have material shareholding in their portfolio companies and board representation, they have an opportunity to play a key role in directing BEE implementation within these businesses.
Van der Merwe pointed out that it was particularly relevant in private owner-managed businesses which do not have the pressure of public scrutiny. In these instances private equity brings an institutional mindset, which is beneficial for smaller and medium-sized entities in many respects, including the way in which they approach empowerment.
A large share of private equity deals are BEE transactions
According to the SAVCA/ KPMG Venture Capital and Private Equity Industry Survey of South Africa 2012, the number of private equity investments into BEE entities (defined as entities that are at least “black influenced”) totalled 192 in 2012, with a value of over R6bn.
Further categorisation of these BEE deals shows that 29% were into black-influenced companies, 14.5% into black-empowered companies and 56.5% into black companies.
Fund managers increasingly empowered, too
At the private equity manager level, meanwhile, empowerment progress has been made in the last 10 years.
According to same survey, at the end of 2012 there were R65.8bn funds managed by managers with empowerment credentials (that is, by government agencies or by private sector managers who are at least black influenced). At the end of 2003, the number was R8.7bn. As a proportion of the industry, this signifies encouraging gains: While only 35.4% of private equity funds under management in 2003 had an element of empowerment, this had risen to 75% of funds under management in 2012.
Definitions:
Black influenced: Between 5% and 25% owned by black people and with participation in control by black people.
Black empowered: More than 25% (but less than 50%) owned by black people.
Black companies: More than 50% owned by black people, and controlled by black people.
ENDS
About SAVCA
The South African Venture Capital and Private Equity Association (SAVCA) isthe industry body and public policy advocate for private equity and venture capital in South Africa, representing about R120bn in assets under management.
Its main objectives are to:
• Be a single voice with government, regulators and the public
• Promote the private equity industry to investors
• Educate stakeholders on the positive economic impact of private equity
• Provide high-quality research on the industry.
Distributed by:
Grant Henry
Communications Advisory
+27 82 561 7172
Distributed on behalf of:
SAVCA
Erika van der Merwe, CEO
+27 11 268 0041