When the country’s largest and most ambitious private equity (PE) deal goes wrong, it can’t reflect well on the rest of the industry.
As much as local PE businesses say that Boston-based Bain Capital, which acquired control of Edcon in 2007, was not "one of us", it was the most visible example of a PE firm in action.
Now, PE investors are rightly concerned that other companies owned by their funds are on the brink of implosion.
PE is a growing industry, with R205bn under management — about three times as much as SA’s hedge fund fraternity manages.
If there is an impending crisis at PE’s epicentre in Fricker Road, in the Johannesburg suburb of Illovo, it is well concealed. But the ripples could go a long way.
In the past, PE in emerging markets was dominated by development finance institutions such as the International Finance Corp. Now 56% comes from pension funds, so individual retirement savings are on the line.
At least over 10 years the 18.1%/year internal rate of return has been well ahead of the 12.6% of the all share index. However, with public markets so strong over the past five years, PE’s 13.4% annual return was just behind the 13.8% of the all share index.
The period from 2009-2011, following the financial crisis, is considered the lost years of the PE industry, as returns were so low.
Heleen Goussard, head of PE at consultant RisCura, says PE should provide an illiquidity premium of as much as 4%/year extra as funds are tied up for 10 years. But she says the past five years have included accelerated investment into the rest of Africa, which is more difficult to compare against the JSE.
Erika van der Merwe, CEO of the SA Venture Capital & Private Equity Association, says that of the R29bn raised by PE last year, R5.7bn was earmarked for SA.
Goussard says investors can be confident that there won’t be another blowout on the Edcon scale, as there are no dedicated leveraged buyout funds in SA. "But it is a tough environment," she says, "especially for funds trying to raise dollars. Just six funds closed [completed their fundraising] in the whole of Africa in the first half of 2016."
One of the industry’s founders, Metier partner Thierry Dalais, says all seasoned PE practitioners have experienced blowouts, though usually with rather less visible companies than Edcon.
"But even if we had wanted to, we were unable to design a highly leveraged buyout on that scale and structure, and to attract investors in a way that perhaps only Bain Capital, with its legendary Bain magic, could do," he says.
Dalais says the SA industry is, by comparison, vanilla and much less aggressive.
"As Metier, we follow a growth style, as many of our peers do. We align with management and help them to build their businesses. We are not there to do hostile takeovers or devastate businesses to make money."
Metier is one of the few businesses to benefit from Edcon’s woes, as its portfolio company, Retailability, bought Edcon’s discount womenswear chain Legit.
One leveraged buyout managed by local players Actis and Ethos was of the Alexander Forbes employee benefits group. It proved to be a much more reliable cash generator than Edcon, and was able to make some chunky disposals to keep the wolf from the door. But this meant cutting the business in half, as the original Price Forbes corporate insurance broking operation was sold to global giant Marsh.
Capitalworks partner Darshan Daya says that back in 2006/2007 — before the financial crisis — the world was awash with cheap debt. With hindsight, he says, this introduced additional financial risk.
"This approach has never been appropriate for the midmarket sector where we specialise," says Daya. "We are more likely to buy businesses out of listed companies than to buy them out altogether. Recently we bought Murray & Roberts’ asphalt and building products businesses, as well as Adcock Ingram’s scientific group."
PE plays a crucial role when companies want to divest noncore businesses. But Capitalworks also invests in nonlisted companies, most recently taking a R340m stake in catamaran builder Robertson & Caine, capital to help it drive its international ambitions.
And all the large private equity firms in SA aim to partner with underlying company management, not — in the classic PE model — to replace it.
The Edcon debacle has not put PE firms off retail by any means. Van der Merwe says retail accounted for almost 16% of the R10.5bn invested last year, second only to financial services and ahead of infrastructure and manufacturing.
We align with management and help them to build their businesses. We are not there to do hostile takeovers or devastate businesses to make money