Adam Craker: The company now has a launch pad from which to challenge our foreign rivals. Picture: ROBERT TSHABALALA

Adam Craker: The company now has a launch pad from which to challenge our foreign rivals. Picture: ROBERT TSHABALALA

In a move that promises to shake up SA’s R6.5bn consulting industry, private equity firm Capitalworks has bought control of SA’s largest homegrown consultancy, IQ Business.

With revenues of R500m/year, IQ Business now accounts for 7% of a sector dominated by US and UK-based giants — Deloitte, Accenture, McKinsey, PwC and Bain Consulting.

Adam Craker, IQ Business CEO, says profits have grown by about 20%/year over the past five years, and the company now has a launch pad from which to challenge its foreign rivals.

"We feel strongly it’s time there’s a local alternative to US, European and Indian consulting firms," says Craker, a former executive at Dimension Data.

Part of his plan is to buy other smaller services firms.

"There are lots of smaller players, the 50-person companies, that we’re looking at. But we’ll also consider acquisitions of other services companies — outsourcing or technology companies," he says.

It’s an apposite time for a local player to launch its challenge.

Some of the foreign-owned firms are struggling to maintain margins as they bill clients in dollars, even though the rand has shed 43% against the US currency since 2011.

"Those charging dollar rates have struggled," says Craker. "[But] we don’t have the limitation of reporting to a foreign owner."

With profit margins for consulting firms at about 17% on average, there is still more than R1bn in annual profits up for grabs.

Capitalworks, which has about US$500m in assets, together with its partner, Tiso Investment Holdings, bought IQ Business for an undisclosed sum, believed to be more than R100m.

"Businesses such as IQ that are built on sustainable niches continue to have good growth opportunities, as not a lot of people are focused on investing in the mid-market," says Capitalworks’ Darshan Daya.

The company has launched a number of household names, such as Rhodes Food, which listed on the JSE in 2014 and whose stock has climbed 136% since then.

While investment opportunities seem thin in a country struggling to breach 1% annual GDP growth, Daya says he still sees big opportunities in mid-market companies — those worth less than R2.5bn. "At that level, we’re still finding good deals — businesses that are growing and that have an international relevance and quality. It’s a level just below that of the JSE-listed firms, so perhaps they don’t get huge attention," he says.

Capitalworks and Tiso will hold nearly 60% of IQ Business, while its management partners will own the rest. Eventually, IQ Business may end up listing on the JSE, though Craker says this possibility is still "quite a long way off".

While the sentiment towards private equity soured after the Edcon debacle last year, private equity managers raised R29bn — sharply up from the R11.8bn raised in 2014. Investors are chasing the hefty returns private equity generates — 18.5%/year on average over the decade to 2015. It trumps the JSE’s 14.1% over that period.