THE latest survey of private equity and venture capital shows that investor interest in the asset class is growing — and no wonder.
Returns on private equity investments have grown by a compound annual 18.5% over the past decade, beating the JSE’s all share index by a generous margin.
There has been a healthy flow of funds back to investors thanks to successful exits by private equity funds from investments in a variety of companies.
Private equity has provided an alternative to a JSE listing or bank funding for companies wanting to raise capital to acquire and expand.
That helps to deepen SA’s capital market and to add dynamism to the funding of private sector investment.
It also provides a more diverse basket of assets that institutional investors such as pension funds can invest in.
In 2015 a record R29bn of new funding flowed into the private equity industry, up from R11.8bn in the previous year, according to a survey compiled by the Southern African Venture Capital Association (Savca), which describes the new fund-raising activity as the "standout theme for 2015".
Almost a quarter of the inflows came from foreign investors, so the industry is attracting foreign investments into SA, which is good for the balance of payments as well as for companies and projects seeking capital.
The industry now has more than R165bn under management, from private sector sources as well as from government-linked fund managers such as the Public Investment Corporation and European and US development finance institutions.
The Savca survey depicts a thriving sector. Yet the trends raise a couple of concerns.
Of concern to the private equity industry itself is that so many of SA’s institutional investors aren’t yet comfortable with private equity as an asset class — even though they stand to earn good returns for their beneficiaries if they do so.
Changes to the investment rules in 2011 allowed pension funds to invest as much as 15% of their assets in "alternative investments", including up to 10% in private equity vehicles.
Yet a Savca survey of pension funds this year found that fewer than half of the pension funds had implemented a private equity programme.
It also emerged that none of the South African pension funds in the survey has a venture capital allocation.
This touches on a second big concern about the industry — which, contrary to what Savca’s name might imply, doesn’t have much to do with venture capital.
Its survey shows that 96% of the new funding was for "late-stage" investments — for established companies with at least a three-year track record that want to expand.
That’s an important market. But it doesn’t provide genuine venture capital for those early-stage, higher-risk entrepreneurial businesses, which SA needs if it is to create more business people, jobs and more competitive markets.
That’s a particular concern in the light of a survey released by Seed Enterprise this week.
That report finds that almost half of the 1,500 enterprises surveyed report they are struggling to access capital.
This is surprising because there should, in theory, be substantial government funding for small enterprises, including startups, through development finance institutions.
Many large companies have also allocated money for enterprise development, and the revised black economic empowerment codes give them even more incentive to do so, particularly if they can fund the development of new black suppliers to diversify their supply chains.
There’s clearly a need for better funding mechanisms for small businesses — with investors who are willing to take more risk. On its own that is not the silver bullet to drive entrepreneurship in SA. But it is one ingredient.
