22 Jan 2015

Financial Mail
22 JAN 2015

THE headline return from SA private equity stands up well against the listed markets. Over 10 years to September 30 2014 the internal rate of return has been 18.5%, almost matching the JSE all share index’s 18.8% in what has been an extraordinary decade for equity returns.

But timing is critical when it comes to investing in private equity. Funds that started before 2005 have done substantially better than those started since. The average annual returns of funds started between 2000 and 2004 (known as their vintage year) has been 37.9% but those started in 2005 or 2006 gave a return of just 9.8%.

SA Venture Capital Association CE Erika van der Merwe says that funds started in 2005 or later are still in mid-cycle, with management fees still playing a significant part in determining fund returns. “And there is no doubt that the returns available before the 2008 global financial crisis have tapered down.”

But she says that there was a great improvement in 2014, in terms of deal making, exits and fund raising.

Alexander Forbes, with a market cap of R12.2bn, was the flagship relisting of the year. Other notable exits were Capitalworks’ listing of Rhodes Food, now worth R3.5bn, and Metier’s sale of Surgical Innovations to listed Ascendis Health.

Purchases just in November included Actis’s buying of shoe retailer Tekkie Town for R700m.

There was also a secondary (private equity to private equity) deal in which Ethos sold Tiger Automotive to Carlyle and Old Mutual Private Equity for more than R1bn.

The first private equity deal of the year has been concluded. Ethos has acquired control of AutoZone, the 188-branch motor parts after-market retailer and wholesaler. It has bought the interest held by private equity firms RMB Corvest and Zico Capital. Ethos partner Christo Roos says that the remainder of the shares will be held by AutoZone management and BEE investors, which are still to be chosen. “We like the AutoZone model as 151 of its stores are wholly owned (its main competitor, Midas, has a franchised model), which means it can command its own fate.”

The price of the deal has not been disclosed.

Private equity remains a difficult asset class for retail investors and smaller pension funds to access. Even the Old Mutual private equity funds of funds, designed for retail investors, requires a minimum investment of R100 000. Investors will have to see if the proposed Ashburton fund of funds (from FirstRand) will be any more accessible.