Private Equity in Africa: A Force for Good

“What improves the circumstances of the greater part can never be regarded as an inconvenience to the whole. No society can surely be flourishing and happy, of which the far greater part of the members are poor and miserable.”- Adam Smith, The Wealth of Nations

Although Adam Smith, often referred to as the father of modern capitalism, may have not have been a proponent of businesses pursuing charitable activities, he clearly believed in a society of shared value creation.

In order to address some of South Africa’s most pressing social and environmental challenges, a paradigm shift is taking place within the realm traditionally seen as driven by narrow profit maximization. By aligning purpose with profit, private equity (PE) is emerging as a powerful tool that supports long-term financial sustainability, reduces business risk and focuses on value creation for a wider group of stakeholders.

According to the Bertha Centre for Social Innovation and Entrepreneurship’s 2015 African Investing for Impact Barometer, an estimated 70% of funds managed in South Africa, representing USD 480 billion, implement at least one or more investing for impact (IFI) strategies. These strategies include:

• Integrating Environmental, Social and Governance (ESG) factors into investment analysis, valuation and decision-making;
• Investor engagement which seeks to influence a company’s behaviour through proxy voting and board participation;
• Negative or exclusionary screening;
• Thematic investments which focus on investments along the themes of environmental sustainability and inclusive socio-economic development; and
• Impact Investment which is an investment strategy intended to generate positive environmental and social impact alongside financial return.

According to the Bertha survey, ESG integration was the most popular strategy with 71% of assets being managed using in this way. While Impact Investment only constituted 1% of total assets under management at USD 6bn, it has a greater level of impact; and private equity is leading the way within this strategy

Although private equity firms managed relatively fewer assets than the listed asset managers, the survey found that they were generating more impact per unit of assets under management. Thanks to the efforts of DFIs, which have been a major contributor to funding PE mandates integrating ESG in South Africa, PE is now being used as a force for good.

Driving this investment philosophy is the belief that well-managed and well-governed private equity investments can be a powerful driver of improvements in the livelihoods of people living at the bottom of the economic pyramid (BoP). A joint report by SAVCA and the DBSA shows that investee companies increased the number of staff employed both within and outside of South Africa by around 40%.

Private equity is no longer just about growing the bottom line in the short-term; it is about contributing to real business growth, maximising value for society, and increasing returns over the longer term. Beyond job creation, PE is raising operational standards, improving corporate governance and putting South African businesses on par with their global counterparts.

This transformation couldn’t happen at a more critical time. South Africa’s current economic challenges seem almost unsurmountable. GDP growth of a less than 1%, a looming credit ratings downgrade and rising unemployment, means that South Africa’s economy is on the brink of a recession. Targeted investments are

desperately needed in the education, infrastructure, healthcare and agriculture sectors. Unfortunately, the level of investment needed far outweighs the resources available from the public sector, private foundations and DFIs. Private sector resources are needed to bridge the gap; and private equity is paving the way.

SAVCA’s Case Study Compendium showcases how PE investments are contributing to sustainable economic development in South Africa.

For example, in the food and agriculture sector, Musa Capital invested in African Frontier Holdings (AFH), an integrated FMCG group focused on the food industry with investments in farming, processing, manufacturing, distribution, logistics and retail. With the support of Musa, AFH established an Emerging Farmers Programme to provide internships for 50 aspiring black farmers. These farmers will be up-skilled to develop new co-operatives which will ultimately be phased into new farming units.

In the housing sector, Lereko Metier Capital Growth Fund invested in South Point Management, which was established in 2003 to redevelop and manage underutilised inner-city properties to provide affordable, quality accommodation for students. Since the fund’s investment in 2007, South Point’s property portfolio has grown from six buildings to 40, providing housing to approximately 10 000 students.

The renewable energy sector has attracted significant PE investment, which is providing much needed clean energy to the national grid. For example, Inspired Evolution invested in Red Cap, which is developing two onshore wind energy projects in the Eastern Cape. The two projects include the Kouga Wind Farm (KWF) and Gibson Bay Wind Farm (Gibson Bay). The KWF project will generate approximately 305GWh of clean energy per annum, mitigating approximately 220 tons of CO2 greenhouse gas emissions each year.

In education, Milpark Education and Management received an investment from Leaf Capital, which has helped the company grow into a prominent higher education institution with two campuses and over 14,500 students enrolled countrywide.

Even in healthcare, PE is having a significant impact. For example, Medu Capital invested in Medipost Pharmacy, which is the largest courier pharmacy for chronic medicine in the country. The resulting deal enabled Medipost to improve its BBBEE rating from Level 4 to Level 2. It also helped the company establish an additional hub in Cape Town and increase the number of jobs from 408 at investment to 1,300 in 2014 at exit.

The above examples highlight some of the tangible value-enhancing socio-economic impacts of private equity investment across companies and industries. Clearly, PE has a vital role to play in driving inclusive growth and sustainable economic development in South Africa, as well as driving strong, long-term returns for investors.

Contributor Profile:
Adam Bennot is a private equity Analyst at RisCura. He is responsible performing valuations of companies held by private equity funds and funds of funds in Africa. Additionally, he has assisted in drafting legislative policy on education and labour issues for the United State House of Representatives, writing press releases for the House Committee on Education and the Workforce, and researching various investment-related topics on the African continent. Adam holds a Masters in Development Finance (MCom) from the UCT Graduate School of Business and is a level III candidate in the CFA programme.

This article was featured in the INTO AFRICA July edition, with focuses on Private Equity in Africa and is titled Private Equity: Africa’s Trump Card.