Private markets

Private markets investing in South Africa has enjoyed a higher profile over the past year as listed markets have continued to deliver muted returns, and investors have begun to look for diversification. In addition, the increased focus on infrastructure investments from government, and the emphasis on public-private partnerships to achieve both investment returns and social impact targets has created an important role for private markets fund managers. That said, increased allocations to unlisted investments are yet to come from South African institutional investors, and offshore investors in recent years have only been active in some niche areas of our unlisted markets.

From the perspective of black fund managers active in the private markets space, they have continued to experience the challenges of long fundraising cycles. There have been new allocations to black funds over the past year, mainly driven through specific programmes of retirement funds designed to increase the share of capital managed by black fund managers. However, the notable absence of the PIC in making new fund allocations, the continued absence of local DFIs from fund investing, and the increasing reluctance of offshore DFIs to invest in South Africa focused funds have contributed to such long fundraising cycles.

 

The COVID-19 environment has also affected private markets, both from the perspective of impact on deal making and portfolio companies, as well as prolonging fundraising. Managers are being asked by investors to focus on existing portfolios and delay new fundraising until portfolio companies are better positioned to ride out the economic impact of the pandemic. Practical difficulties in creating new contacts and performing due diligences have also lengthened investment cycles, in addition to the valuation uncertainty that the pandemic has created. On the positive side, many managers were quick to adapt processes, and go back to the negotiating table to structure more downside protection and revised deal pricing into their agreements.

 

SAVCA now counts 49 full members as black fund managers, with a total of R53 Billion of reported commitments. This continues the positive trend of transformation within the private markets investment industry, which has made great strides in recent years. Twenty firms completed our survey this year, which have raised a total of R19.3 Billion across 30 funds, representing both an increase in participation and AUM from last year. While the overall asset size is encouraging, it is important to note that the universe of participating firms’ AUM is highly skewed, with a long tail of managers currently subscale. We view the post-COVID-19 environment as a favourable one for private markets investing as a result of them scarcity of capital in the market. Companies with strong financial backing and access to good strategic thinking will be well positioned to gain market share and prosper in this environment. In our engagement with appointed and prospective black managers, we continue to be excited by the opportunities identified and deals executed. In general, we are pleased with the way that managers are adapting to incorporate the current risk environment, and to include more earnings protection into their deal structuring.

 

While there are certainly challenges for black private markets managers, as a cohort they continue to do deals, build track record and find opportunities to invest. We are proud to partner with many of them to achieve good outcomes for our clients and the economy.

Introduction

R19.3 Billion

Total capital raised by 20 firms across 30 funds

67%

Of total capital is in first generation funds

75%

Of firms operate in the mid-market, and none operate in the large buyout space

52%

Median size of largest investor in current fund

75%

60%

OUR FIRM

Of managers are currently raising a fund

Of capital raised is from local retirement funds

85%

Of managers said there is a need for formal incubation of new managers

4

The median size of investment teams

65%

Of managers were on their first fund, 15% on fund II and 20% on Fund III or later

R850 Million

Median AUM of those managers who have raised capital

5%

Capital raised from DFIs

91%

Of capital raised is from local sources, with the balance split between North America and Europe

81%

Of black staff are at partner/principal level, 74% at associate level and 90% at analyst level

15%

Of managers see the current regulations as supportive to new black entrants

82%

Of all staff employed are black South Africans

90%

Of firms integrate and contract ESG and transformation approaches with investors and portfolio companies

91%

Of capital raised is from local sources, with the balance split between North America and Europe

81%

Of black staff are at partner/principal level, 74% at associate level and 90% at analyst level

15%

Of managers see the current regulations as supportive to new black entrants

82%

Of all staff employed are black South Africans

90%

Of firms integrate and contract ESG and transformation approaches with investors and portfolio companies

COVID-19 impact

FINANCIAL IMPACT

Biggest concern raised by 75% of firms

60%

Of firms implemented cost containment measures such as cancelling bonuses or reducing salaries

90%

Of firms believe that investors will be more focused on the SDGs in a post COVID-19 environment

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