The general consensus is that the outlook for private equity (PE) is optimistic, although still requiring careful monitoring and prudent weighing of any opportunities. The recent uptick in sentiment is due to a number of factors, including the formation of the Government of National Unity. The drop in the interest rates and a more stable electricity supply have added positive sentiment to the market and, along with other positive factors, will drive economic growth.
Value retention and growth remain key measurements within any business, and private equity firms always look not only to achieve value through an acquisition, but also to ensure organic growth within the business to demonstrate subsequent value. To enable this, many businesses concentrate specifically on core deliverables, and strive to become the leader in their industry by carving out a niche for themselves and doing what they focus on really, really well. In this way, they not only retain current customers, but are then also able to gain market share from lacklustre competitors.
Other opportunities to foster growth include dealing with any structural issues within a business. Often, management teams require real discipline and rigour to see growth and increase value. We are often sounding boards for the team, as an external viewpoint can bring clarity for those within the business. While we can share learnings from other companies within our portfolio and previous experiences in various aspects of the business, our core expertise lies in assisting with further expansion through acquisitions, additional liquidity, and capital structure decisions.
South African PE takes a positive view to investing in local companies, and this is particularly useful for those businesses seeking to expand through bolt-on acquisitions. This method to consolidate and build value within a business means that by centralising administration, complementary cross selling and implementing operational best-practices can rapidly grow EBITDA and margins, assuming the right cultural and strategic fit of the businesses.
The 2024 Deloitte Africa Private Equity Confidence Survey found that agriculture, manufacturing, financial services and healthcare remain core sectors of interest, aligning with Africa’s growing needs and offering potential for both financial returns and positive social impact. We have invested in a number of these sectors and found that, in order to grow, businesses are required not only to deliver, but also to include additional value-add services. Key success factors include reducing the commoditisation of a business’ products or services to differentiate themselves from competitors in the market, and ensuring a sustainable business model which is defensive against external market and competitive factors. Africa is expected to continue to be the world’s second fastest-growing region in 2024, after Asia. Africa’s real GDP growth is forecast to increase from 3.7% in 2023 to 4.1% in 2025 and 2026.
In the current market, meaningful returns may require a slow and steady approach, combining calculated risk and tenacity. Longer investment cycles have become the norm within the PE sector. We have always seen ourselves as longer-term investors, open to long-term partnerships, particularly appreciating the challenges of the local economy.
In this regard, an additional misperception may perhaps lurk in the market: that PE is somehow resolute on the short term, and bound to a limited period in which to realise an investment. Whilst the very nature of PE requires investments to be made with an exit in mind, our approach ensures that a business is able to develop until the time is right to sell. This allows us to focus on growth and exit investments at the most opportune time for all stakeholders, without time pressure.
While the next 12 months are uncertain in terms of how political and environmental risks will continue to impact the global and local economies, both established businesses and entrepreneurs can seek the best possible outcomes by utilising private equity as a vehicle for growth. The SAVCA 2024 Private Equity Industry Survey reported that, overall, resilience and growth shown by portfolio companies during a period with difficult macro-economic conditions is proof of the PE sector’s ability to actively support their portfolio company management teams and, in numerous cases, enable them to achieve rapid EBITDA growth.
We see more opportunities in the market and believe that private equity can continue to enable local businesses to grow, whether organically or through an M&A process. But finding the right partner – now that is key to ensure success.
Liz Kolobe is a Partner | Agile Capital
This article first appeared in Catalyst, DealMakers’ quarterly private equity publication.
DealMakers is SA’s quarterly M&A publication
www.dealmakerssouthafrica.com
