Southern African private equity (PE) firms pumped R28.1 billion into investee companies during 2023 – with ventures in the telecommunications and infrastructure services sectors accumulating among the highest number of signed deals.
This is one of the key findings of the 2024 Private Equity Industry Survey, conducted by the Southern African Venture Capital Association (SAVCA).
The annual report provides a snapshot of the state of the PE and funding industry across 16 sectors – identifying key insights, challenges and trends that are shaping the private equity sector in the region.
PE refers to capital investment in companies that are not publicly traded, while venture capital (VC) firms invest in 50% or less of the equity of the companies, it says.
According to the report, despite the pressures faced on the macro- and micro-economic fronts, as well as geopolitical tensions, the Southern African private equity sector remained strong. There was a 43% higher than the previous year increase in PE fundraising in the region, which saw fundraising activity surge to a 13-year high.
Investments by sector show the energy and related sectors had the highest investment deals at 33.6%, followed by manufacturing (12.4%), infrastructure-related services (9.6%), telecoms (6.9%), healthcare (2.9%),mining and natural resources, and real estate (2.8%).
Information technology investments declined from 6.1% in 2021, to 4.9% in 2023.
Infrastructure services include communication, systems, applications, user devices, internet of things, networking, data processing and storage, platforms through which businesses can share content and media, and knowledge management.
Tshepiso Kobile, CEO of SAVCA, comments: “The engines of the PE industry are gaining traction, and all signals point to noticeable growth and even untapped potential.
“On a global scale, PE is up against some serious odds, including economic uncertainty and political upheaval. Locally, the picture looks very much the same, although – true to its reputation for being resilient − PE has continued to push through and demand attention as an asset class, continuing to return capital back to investors and drive impact.”
The report notes 59% of funds were raised from investors outside of SA – an encouraging indicator of the industry’s growing attractiveness to the international investment community and its rapid recovery after a three-year, post-pandemic downturn.
European and US investors made up 45% and 22%, respectively, of investments from outside SA.
The survey found Southern African PE firms are more optimistic about an increase in exit activity in the next six months than global PE firms – 41% of local firms expect an increase of 10%, as opposed to only 24% of global firms that expect the same.
A considerable increase was also seen in the proportion of investments (by number) made by PE firms with funds under management (FUM) of over R5 billion: 58% in 2023, compared to 11% in 2022. Likewise, 51% of respondents reported their expectation of seeing accelerated growth of their FUM, compared to 38% in the previous year.
Deal activity by Southern African PE firms witnessed a slight rise of R0.5 billion in comparison to 2022. Ever since the pandemic, deal-making by PE firms in Southern Africa has remained at similar levels in value and volume terms.
The low level of investment activity could be attributed to the tougher economic conditions with higher interest rates, currency instability of the rand, the energy crisis and political uncertainty leading up to the elections in 2024.
According to the survey, it’s full steam ahead for PE, with environmental, social and governance (ESG) and impact investing leading the charge.
The past few years have seen ESG rise in prominence as an important consideration by PE firms when making investments, and similarly, a key expectation of limited partnerships.
As per this year’s survey, 35% of local PE firms now have dedicated ESG professionals. In addition, 55% of respondents said their fund has a specific impact investing mandate.
“When asked about the elements of ESG that these investors are placing particular emphasis on, 92% of respondents reported their investors require measurement of portfolio company performance against specific metrics. Increased reporting on ESG and the tailoring of investment strategy to meet ESG requirements ranked as second and third most prevalent investor focus areas, respectively,” adds Kobile.
In terms of the social and environmental aspects of PE investments, 66% of respondents said at the top of their ESG policy is adhering to external global sustainability initiatives (for example, principles for responsible investments), with the responsibility for setting ESG priorities placed at the highest levels within the firms (board level).
“These findings are indicative of a PE industry in which ESG concerns have now become embedded in decision-making and are seen as integral to operational success,” states Kobile. “This, in turn, speaks volumes about the ability of the PE sector to contribute to a growing, greener, digitised and more inclusive economy.”
The capacity that sits within PE to foster growth in revenue, employment and EBITDA should never be underestimated, as revenue reported by the PE portfolio companies for the 2021 − 2023 period was impressive, despite a battling economy, states SAVCA.
The report also found that PE and VC firms have so far made an important contribution towards improving the black economic empowerment (BEE) performance of the companies within their portfolios.
Investee companies reported significant improvements on several BEE score-card components: ownership (up 54%), management control (38%), skills development (68%), enterprise and supplier development (71%) and socio-economic development (63%).
Fund managers also reported improving diversity within their boards and teams, with an increasing proportion of PE firms having over 30% women promoted across all levels. A further 62% of PE firms reported having more than 50% black management – up from 60% last year.
Kobile notes the PE sector is transforming the local investment landscape. “In line with SAVCA’s 2024 theme of ‘synergy with collaboration’, we are confident that a truly inclusive and progressive industry, where the unique qualities of all members of our society are harnessed, is well within our grasp.”
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