SAVCA Private Equity Conference 2023: Day two report-back
About 500 delegates joined us on the second and final day of the 2023 SAVCA Private Equity (PE) Conference hosted at Cavalli Estate in Stellenbosch. The programme for the day; built around the theme of “Resilience”, featured a number of engaging panel discussions that garnered the expert opinions of industry thought leaders on various key issues impacting the asset class. Amongst others, these included the role of PE in the growing green economy, the state of exits during turbulent economic times and the implications of South Africa’s greylisting.
The lowdown on greylisting
Kicking off the day’s proceedings was Anthony Altbeker, long-term advisor to South Africa’s National Treasury in a fireside chat alongside Faraz Rojid, the Head of Financial Services at Economic Development Board of Mauritius. Facilitated by panel host and interviewer, Langa Madonko, an Investment Principal at Summit Africa, the discussion saw both contributors share their perspectives on the impact of greylisting and its consequences for fund managers.
To kick off the discussion, Rojid outlined how Mauritius navigated its greylisting by the Financial Action Task Force (FATF), enacted in February 2020. The country faced various levels of scrutiny, including being placed on the FATF’s greylist, followed shortly by the European Union’s listing of Mauritius as a high-risk country. These indictments posed a significant threat to the stability of the country’s monetary system and was a call to action for Mauritius to undertake significant reforms over the 18 months that followed. In 2022, after receiving training and assistance from the EU and FATF, Mauritius succeeded in exiting the greylist and subsequently, the EU’s blacklist. As Rojid emphasised, these efforts required a collaborative approach involving the government, interministerial committees, core industry representatives, banking sector executives, and various other stakeholders.
Similar issues relating to non-compliance led to South Africa’s recent greylisting. Providing context on the lead up to the FATF’s ultimate decision, Altbeker explained that the institution’s 2019 evaluation yielded negative results, with many deficiencies being identified, including 20 non-compliant standards and 11 areas of ineffectiveness. Altbeker points out that the evaluation took place during a challenging period marked by the end of state capture and the introduction of new officials into law enforcement agencies. The deliberate weakening of these agencies and the disestablishment of the Scorpions further exacerbated the situation. Despite these setbacks, some progress has been made since, with the passage of relevant legislation and efforts to improve technical compliance.
However, maintaining sustained convictions and enhancing the country’s capabilities with regards to curbing the financial crime element remain key objectives, particularly in combating terrorism financing and strengthening coordination between financial centres and intelligence agencies. South Africa’s standing within the global community has been affected, as evidenced by its inclusion in the EU’s high-risk jurisdictions list, although its impact on the banking community is yet to be seen. Going forward, emphasis must be placed on addressing the issues highlighted by the greylisting by locking in reforms and improving the country’s systems to tackle these challenges and minimise the associated costs.
A closer look at the state of local portfolio companies
Second on the agenda was a panel discussion moderated by Natalie Kolbe, Managing Partner of Norrsken22, which explored the microeconomic perspective and how portfolio companies have remained resilient in the tough economic environment.
Polo Leteka, Founder and Chairman of IDF Capital, asserted that different sectors have been affected by the adverse conditions in varying ways, in particular loadshedding. Some of these factors include the increasing cost of production due to extended working hours, the need to invest in energy alternatives, and the challenges of hybrid work arrangements caused by energy constraints and traffic gridlocks. Rising fuel costs in Russia and Ukraine, among other variables, have also eroded profit margins.
Adding to the discussion was Nabeela Vally, Business Development Head at Edge Growth, who observed that: “SMEs face several critical challenges, particularly in terms of accessing skills, funding and markets. Many have resorted to rationalising spend and cost optimisation exercises to solve these challenges. In future, exploring non-conventional funding options and innovative approaches to product development and pricing can open up new avenues for financial support. Funders themselves must adopt a mindset of innovation and consider which instruments are best suited for supporting SMEs. With the rise in the demand for working capital, funders need to expand their pool of deals and provide post-investment support to truly add value.”
Darlene Menzies, Founder and Chief Innovation Officer of FinFind, highlighted the pivotal role of strong and robust leadership in the success of entrepreneurial ventures. “The pandemic demonstrated that local entrepreneurs by nature, possess resilience, and despite many difficulties, are able to identify opportunities to explore new revenue streams. Lockdown restrictions resulted in many SMEs shutting their doors, emphasising the need for courageous, transparent, authentic, and strong leadership,” she said.
Patrycja Kula-Verster, the Primary Markets Business Development representative at the JSE, acknowledged that while the Exchange serves as a platform for the largest businesses, they are not immune to the challenges presented by macroeconomic headwinds. On the local front, industries such as hospitality have incurred substantial losses due to their energy-intensive operations. For listed JSE leaders like Sun International, customer service and contingency plans to invest and install energy alternatives to keep operations up and running, have provided much-needed relief.
Rounding up the discussion was Andrew Moffat, the Co-Head of Investment Banking at Investec Bank who explained that surviving times of uncertainty necessitates a “return to basics,” prompting a closer examination of whether the issues faced are cyclical or structural in nature. Here, strong leadership plays a central role in whether portfolio companies are able to navigate these difficult circumstances.
The role of resilience in successful deal making
During the panel discussion on resilience in deal making, moderated by Lydia Shadrach-Razzino, Partner at Baker McKenzie, the importance of robust screenings and the difficult task of “saying no” when necessary was emphasised by Sindi Mabaso-Koyana, Managing Partner at AIH Capital. For many capital allocators, this process requires restraint and discipline to walk away from deals that may not be favourable. This, as Edmund Higenbottam, Managing Director of Verdant Capital explained, is the sentiment shared by his firm, which requires a “ruthless” approach to investing.
For Trishanta Dheepnarayan, Director and Principal at Metier, many fund managers felt compelled to hold onto assets for longer than anticipated due to the pandemic, resulting in a difficult market for exits. Since the pandemic years, deal screening and due diligence processes have therefore become more rigorous, with extended timelines and a deeper evaluation of information.
Adding another “r” adjective into the mix of descriptors was Kasief Isaacs, Head of Private Markets at Mergence Investment Managers who explained that engagements with management teams have become more “rigorous,” with a specific focus on evaluating their ability to absorb inflation-related cost escalations.
Impact investing and long-term sustainability
The next panel discussion, which explored sustainable investing and the role of private equity in driving investment in the green economy, was moderated by Shahed Hoolash, Managing Director at Vistra.
As Sam Pokroy, CEO of Sanari Capital asserted: “Private equity funds have a higher degree of influence over their portfolio companies compared to listed companies, making them well-positioned to drive change.” Given the imminent displacement of millions of people in 2030 as a result of climate change, it is Pokroy’s opinion that climate resilience should be a cornerstone of investment strategies in the industry as a whole.
Adding his perspective was Christopher Clarke, Managing Partner at Inspired Evolution Investment Management, who highlighted two key attributes in sustainable investing: active ownership and stewardship. He later addressed the pressing need to make progress towards addressing the energy crisis in Africa, with 600 million people lacking access to electricity. At the top of this agenda is the provision of affordable and reliable energy solutions for rural communities. He believes that overcoming this hurdle will require innovative financing models and a combination of fierce determination and innovation.
Also speaking on the topic was Charles Buchanan, who is part of the Strategy and System Sustainability team at Ernst & Young. He discussed the role of ESG-led policies in mitigating risks and driving value, using examples such as the implementation of improved labour policies, recruitment strategies, and safety measures to improve operational efficiency and profitability. “We need to stop living off the earth’s capital and start living off its interest,” he said.
Fadi Bassir, Investment Manager at British International Investment (“BII”), discussed the significance of sustainable/ green investing, noting that as a generalist investor and capital allocator, every investment is assessed from a climate risk and opportunity perspective by BII. This approach is becoming mainstream across the entire finance value chain. To this end, aligning with the Paris Agreement and genuinely incorporating climate finance as a generalist (or focused fund manager) aligns well with investor mandates.
South Africa has committed to playing its part in working towards a net-zero reality, according to Janice Johnston, Climate Change Financing Advisor at JET IP PMU in the Presidency of South Africa. Concluding the discussion, she emphasised the importance of taking a systemic view of sustainable investments, considering the interdependencies of environmental, social, and governance factors. She also suggested that every business, regardless of its product or service, needs to reflect on its status and embrace the transition to a sustainable model. Finally, she acknowledged that the issue of climate crisis is a pressing concern and will further accelerate the focus on sustainable investments in the private equity environment going forward.
What’s the deal with exits?
Also on the agenda was a panel discussion on ‘exits during turbulent times,’ moderated by Gergana Ivanova (Associate Director at EY), which focused on unpacking the factors that have impacted the exit environment. It was noted that there was a declining trend in returns to investors and the value of exits from 2016 to 2021. However, this trend turned around in 2022, with a rise in both the number and value of exits, which was seen as a positive development.
During the discussion, Florent de Boissieu, a Partner at Adenia Partners noted that recent times have seen a shift in focus to a smaller base of General Partners (GPs), with fewer GPs receiving larger investment amounts. This, as he explained, will have implications for liquidity within the market.
On a positive note, Hale Matsipa, Founder and CEO of Kleoss Capital, expressed his confidence that offshore account holders, as well as high-net-worth individuals (HNWIs), both local and those who have emigrated, will continue to be willing to invest in the market, in addition to the involvement of strategic investors and credit funds backing South African entrepreneurs.
According to Dustin Graham, Managing Partner of Benchmark International, adding to the turbulence of the times is the increasing use of AI-tools in the due diligence process; the intention being to enhance diligence efficiency, but in reality, it provides analysis and data that tends to lead to further traditional diligence procedures to corroborate and fully understand. This has time and cost implications for this stage of the deal cycle which further promotes fatigue, and in some cases, an opposite outcome to that intended.
Luc Albinski, Executive Chairman of Vantage Capital, raised concerns about the inventory turnover rate in the private equity industry. But, as he believes, all is not lost. In his experience, there is an advantage to be gained from deal fatigue. Illustrating this point, he shared a specific case in Morocco where his team’s French-speaking capabilities allowed them to close a deal with a francophone management team.
Company showcase – a testament to better horizons
In a true showcase of industry resilience, two portfolio companies and their respective GPs were featured at the conference. Kleoss Capital showcased Bandag Southern Africa (Pty) Ltd, while Heritage Capital showcased General Profiling Pty Ltd in an interview conducted by Thiru Pather, Principal of SA SME Fund.
Zain Laher, Partner at Kleoss Capital, discussed their long-standing relationship with Bandag since 2015 and highlighted the importance of building trust and rapport over the years. Laher spoke to the business’s growth and the strategic pivot they made during the COVID-19 pandemic, which allowed them to consolidate the market and expand their operations.
Xolisile Ntanzi, Chief Financial Officer and Partner at Heritage Capital, shared the challenges that General Profiling faced as a family-owned business established in the 1970s. Ntanzi highlighted their focus on investing in people and bringing in professionals to streamline processes and diversify their customer base. Despite the difficulties caused by external factors, such as the weak rand, Ntanzi celebrated the determination of their sales team and their ability to work across the value chain. Both interviews underscored the significance of strong management teams, strategic decision-making, and the ability to adapt and innovate in challenging circumstances.
A finishing thought on the future of PE
The last panel of the day, which explored ways in which to strike the balance between challenges faced by institutional investors and asset allocation, was moderated by Fulufhelo Makwetla, Managing Director of Thirdway Investment Partners.
Theriso Pete, Associate Principal – Multi-Management at the Public Investment Corporation, (PIC), highlighted the importance of diversification and supporting both first-time and experienced GPs. Theriso also touched on the impact they have made by supporting black fund managers in South Africa.
Janina Slawski, Head of Investments Consulting at Alexander Forbes, discussed the importance of asset liability models and the potential for great returns during times of instability. She also mentioned the need to provide liquidity and access to private markets for smaller pension funds, which may lack the resources to investigate investment opportunities directly. “Collaborative efforts, such as fund of funds, can provide shared due diligence and workload to make it easier for smaller pension funds to access private markets,” she said.
For panelist, Phathutshedzo Mabogo, Deputy CIO of Eskom Pension and Provident Fund (EPPF), good commercial returns will always be a priority in addition to impact – where regional private market investments can meet this requirement, they will (and should) be considered. Adding to this, Mardé van Wyk, Principal Consultant – Private Markets at 27Four, explained that the idea of “responsible investing” extends not only to the question of impact but the obligation that fund managers have to fulfil yield requirements.
Concluding the discussion, Christian Roelofse, Investment Officer – Private Equity at FMO highlighted the importance of ensuring that their investments contribute to reducing inequalities and promoting job creation. He also asserted that impact and returns can coexist, and critical selection is key to achieving both.
An inspiring send-off
During his keynote address, Richard Sutton, Founder of Sutton Health, described resilience as the ability to proactively adapt to change mentally, physically, and emotionally. To this point, he shared inspirational findings on individuals who have risen above their circumstances, drawing insights from examples of several Olympic gold medalists. These individuals have willingly chosen to embrace challenges and adversity as part of their journey. Sutton shared the findings of a study that focused on the experiences of twelve highly accomplished athletes. He identified seven psychological characteristics that set these athletes apart and contributed to their personal resilience. Among these traits are viewing stressors as opportunities for growth and mastery, and maintaining motivation even when faced with formidable competition. Sutton encouraged the audience to reflect on these characteristics and develop them within themselves, striving to become the best versions of themselves.
Useful, shareable insights
Ending the event on a celebratory note, SAVCA’s CEO Tshepiso Kobile announced the #InvestingForGrowth campaign, which was officially launched at the conference with the release of 2 research reports, produced in partnership with Intellidex. These reports followed a diagnostic assessment that had been made into the perceptions of various stakeholders around PE and VC, with an aim to provide data that can be used for constructive engagement with primary stakeholders. The first report provides a comprehensive outline of the role of PE and VC in delivering public policy objectives. Elaborating on a few of the key findings, Roy Havemann, CEO of Intellidex South Africa, noted that PE and VC were well positioned to address policy imperatives of economic growth and unemployment. Positive shifts were also being made in the regulatory space with the introduction of the COFI bill.
The second report assesses the case for institutional investment in PE and VC, highlighting that PE fund managers act as agents of social change, with a significant portion of investments in recent years going towards infrastructure projects. On the topic of loadshedding, Kobile highlighted that the reports discuss the potential of PE as a conduit to accelerate private sector investment in new capacity through renewables, to drive innovation in demand side management, and grow SMEs along the value chain.
Intellidex made a call to industry players to participate in the campaign by sharing data available on the website, as well as engagements that will be scheduled.
These reports can be accessed and downloaded here
Until next year
With the closing of another successful PE Conference, SAVCA wishes all attendees safe travels and looks forward to engaging with professionals across the board as the industry looks forward to ‘closing the deals and making the exits’ that keep the PE industry alive and well within the local landscape.