Is private equity gaining hold in Southern Africa

dollar bills

While private equity is an alternative route to fund development in southern Africa, it remains a relatively new concept that is less pursued in many southern African countries. Part of this is because not many countries have had robust regulation and policies in place to regulate the private equity. However, things are bound to change.

“Looking at the big picture [it is clear] private equity has the potential for further growth in the southern Africa region and the continent,” said the chief executive officer of Southern African Venture Capital and Private Equity Association (SAVCA), Erika van der Merwe.

Erika van der Merwe, CEO of the South African Venture Capital and Private Equity Association (SAVCA)
Erika van der Merwe, CEO of the South African Venture Capital and Private Equity Association (SAVCA)

Although Van der Merwe acknowledges that private equity “is still very new and under developed in southern Africa [compared to] South Africa where it is good,” she points at new development in countries such as Namibia where she believe private equity is going to be the next thrust especially given the amendments to increase the amount of money that pension funds and asset managers are required to invest in the local markets. The threshold is at 35 percent of the assets but discussions are ongoing to increase the threshold from 35 percent to between 40 and 50 percent of the asset, which must be invested locally mostly in unlisted assets.

“In Zambia there are no regulations in place yet, but we are speaking to regulators and pension funds to look beyond the normal funding routes,” she says. This is in addition to the benefits of diversification of the countries’ economies by strengthening and growing smaller private and unlisted companies, and their contribution to job growth, van der Merwe said.

SAVCA is a South African association that, among its core objectives, works to promote the venture capital and private equity profession in the region. It represents the profession at national and international level and develops and stimulates professional and transactional venture capital and private equity investments throughout southern Africa.

Van der Merwe was in Windhoek recently to attend the launch of Eos Capital report that tracked Namibia’s economic performance and related social aspects from 1991 to 2014. At its core the report encourages private sector participation in spheres where government investments lag behind, or require additional funding which the government – currently beset by high debt levels – would not be able to shoulder by itself for the next three to five years.

Private equity is one way the private sector can get involved, especially in a country such as Namibia where the legislation obliges companies to invest domestically a portion of their savings and pension funds.

On whether SAVCA see new regulatory requirements imposed by Central Banks and Competition commission as too stringent to allow for required access to funds from private equity firms, Van Der Merwe said: “We welcome regulations but we also seek appropriate regulations. Regulations are not yet to extent where it is crippling at all. There are new regulations on the reporting side [financial reporting] and competition but certainly it is not that crippling at all.”

Granted the perception of private equity firms is that of cut-throat entities that swoop in on a family owned or small business and slice it up for maximum profit. However, Van der Merwe assures that the private equity is a professional sector and is not practiced the same as it is in the developed world. “There is different between how it is there and the emerging markets. But also private equity is a process where in the end the business does well and yes it is a painful process and PE is not for everyone,” she says.

Her advice to SMEs and entrepreneurs who want to consider private equity funding is to first “have a conversation, do own due diligence, look at what they are offering, what else comes with the capital. Are they going to help you make a better business, what are the incentives that come with, such as the skill, better management? In the end, ask yourself is your business going to be better after that?”

The report by Eos Capital points out that Namibia’s economic gains over the past 26 years should serve as a confidence booster in the country’s long-term economic prospects and should, particularly for the private equity sector, serve as an encouragement to help close the development gap – especially in infrastructure, which obviously government cannot do by itself.

Eos Capital’s executive chairman, Johannes Gawaxab, presented the report which found that, for instance, the Namibian economy is now valued at US$10 billion, or just above N$150 billion as of 2015. It was pegged at N$141 billion in 2014, up from a meagre N$7.4 billion in 1991.

Population growth increased from 1,4 million people in 1991 to 2,2 million people in 2014.

In addition, market capitalisation of over N$1.3 trillion – from a figure of just over N$8 billion in 1992 – has made the Namibian bourse the second largest in the region, behind South Africa’s, although most of the listing on the NSX are dual listings.

Gawaxab summed up the report’s finding by saying: “Our economy in Namibia is doing quite well, even though it is a small economy.” Of course there are challenges, given the debt levels that have increased to 37 percent of the Gross Domestic Product (GDP), way above the country’s threshold of 35 percent of GDP, and the rising levels of inequality.

These challenges though should not overshadow the investment potential of the economy, he said.

“It seems the focus is too much on the negative and short-term issues, whilst an assessment of a nation’s performance requires also a long-term perspective as it takes time to build up institutions, to catch up with the backlog and to alleviate poverty,” Gawaxab said.

Eos Capital is registered as an unlisted investment manager compliant with Pension Fund Regulation 29. Launched in mid-2015 Eos aims to bring “new life to portfolio investments through capital, operating model, strategy and management support, which allows them to grow to their full potential”, while the goal of the special purpose vehicle, Allegrow Fund, is to “rapidly grow the investment made into it.”

Source: The Southern Times