By Karabo Nkoana, senior investment director at Ke Nako Capital & Thuso Partners
The recently announced private equity deal involving Vox, Frogfoot and Hypa has once again highlighted the strength of South Africa’s private markets. The transaction involved multiple investors and a R14.4 billion ($863.3 million) enterprise value.
This represents significant value creation over the past decade and a half. Private equity’s involvement with Vox Telecom dates back to 2011 when it was bought out and delisted from the JSE in a deal worth R452 million. Private equity firm Metier was part of that transaction, and Vox was one of the investments in their fund I.
At that time, Vox was an internet service provider (ISP) that was struggling to gain significant traction. The addition of network fibre operator Frogfoot allowed the company to build significant scale, as Vox had existing relationships with the market while Frogfoot provided the infrastructure. Together, they could accelerate growth.
All through this journey we at Ke Nako have consistently built up our own conviction around the business because of our longstanding investments into Metier’s funds. We’ve had exposure to the business since the beginning and have seen how it has evolved.
In the most recent deal, we were therefore able to participate at two levels – through an investment into the Metier Capital Growth Fund III, which is one of the larger participants in the deal, and directly via a co-investment using our fund’s own capacity.
This investment is a particularly attractive prospect now because although infrastructure has become a big theme, it’s almost impossible to get exposure to a pure infrastructure play in the listed market. An investor who wanted access to the fibre story, for example, could buy shares in the mobile network operators (MTN, Vodacom etc.), but that would mean exposing themselves to everything else those companies do as well.
The Frogfoot/Vox business is also highly focused on rolling out fibre in underserved areas through Hypa. Which taps into our belief that for most investments in South Africa to achieve commercial success, the impact metrics need to make sense.
The history of this transaction also shows how our investors can ultimately benefit from work that our trusted general partners (GPs) may do over many years and provides a fantastic illustration of how private equity in the country has evolved.
The kind of co-investment we have made now is becoming a more common way for firms such as ours to add value. The reason is that it simultaneously solves two problems in the private equity market.
The first is that GPs like Metier sometimes identify deals that are incredibly attractive, but the cheque size required to participate is too large for them to take on alone. This transaction is a clear example.
In deals of this size, it’s unlikely that a single GP would have the cash to invest the full amount. Even if it did, an investment this large in a single business would probably fall outside of its prudential limits.
The GP therefore need partners with whom they are aligned to provide additional capital. One way of doing that would be to bring another GP as a co-investment partner. A more attractive option is to involve limited partners (LPs) that are already invested in its funds and aligned to its strategic direction to come in as co-investors.
This allows the GP to write a bigger cheque while managing their portfolio construction, as well as maintaining strategic control at a portfolio company level.
The second problem that co-investments solve is on the side of the LPs that invest through our funds.
In private equity, LPs are acutely sensitive to fee burn and often raise concerns over the difference between their nett and gross returns.
Co-investments, however, are generally done on a no-fee basis. That reduces the gap between the nett and gross returns that LPs receive, and therefore improves their outcomes.
The reason we are able to do these co-investments is because of the depth of the relationships we have developed with GPs like Metier. We bring in additional capital that allows them to take participate in larger deals, and in return we are given direct access to their highest conviction investments. In other cases, we may originate the deals ourselves through our extensive network, but will always partner with a trusted GP, serving as an extension of their deal origination network.
At Ke Nako, this is a strategy we have been pursuing since our fund II. In our latest fund, we have a 50-50 split between primaries (fund investments), and our own direct/co-investments.
This approach adds meaningful value to the LPs who invest through us.
The Frogfoot, Vox and Hypa transaction showcases the mutual benefits that private equity partnerships can bring. As Ke Nako we have been able to partner with one of our GPs who have in turn partnered an exceptional management team that has delivered years of outstanding performance. And we have every reason to believe that they will continue to do so, which means continued good returns for our investors.