Private equity strong driver of empowerment in SA – Savca

Private equity deals are an important and efficient force for driving black economic empowerment (BEE) in South Africa, the South African Venture Capital and Private Equity Association (Savca) has said.

It noted that this was reflected in the large share of transactions within this asset class that promote transformation.

“BEE private equity deals – that is, investments into entities that are at least black influenced – represented 58.5% of all private equity investments in 2012.

“Given the way in which private equity works, it is a natural empowerment facilitator. In the deal-making process, private equity fund managers bring about corporate action that usually entails significant change in the ownership structure.

“This is an opportune time to introduce or change BEE, as it is done as part of the broader deal. Introducing the empowerment partner at a time when careful due diligences, ownership restructuring and strategic realignment is taking place, makes for a more efficient process than doing BEE in isolation,” said Savca CEO Erika van der Merwe.

Further, she pointed out that, compared with many BEE deals outside of private equity, which usually involve some sort of vendor financing and the dilution of current shareholder value, private equity can introduce funding options that limit shareholder dilution.

Van der Merwe added that private equity could also enhance the quality of empowerment in some instances.

“Empowerment is not only about ownership, but also about the broader BEE scorecard. As private equity managers usually have material shareholding in their portfolio companies and board representation, they have an opportunity to play a key role in directing BEE implementation within these businesses.

According to the Savca/ KPMG Venture Capital and Private Equity Industry Survey of South Africa 2012, the number of private equity investments into BEE entities – defined as entities that are at least “black influenced” – totalled 192 in 2012, with a value of over R6-billion.

Further categorisation of these BEE deals shows that 29% were into black-influenced companies, 14.5% into black-empowered companies and 56.5% into black companies.

Black-influenced companies are defined as those that are between 5% and 25% owned by black people and where there is participation in the control of the company by black people.

Black-empowered companies are those that are between 25% and 49% owned by black people, while black companies are more than 50% owned by black people and controlled by black people.

Meanwhile, Savca pointed out that empowerment progress had been made at the private equity manager level in the last ten years.

According to same survey, at the end of 2012, there were R65.8-billion in funds managed by managers with empowerment credentials. This was in comparison with R8.7-billion at the end of 2003.

Savca stated that this signified encouraging gains. While only 35.4% of private equity funds under management in 2003 had an element of empowerment, this had risen to 75% of funds under management in 2012.