There has been a string of negative conversations headlining in the US press, blaming private equity (PE) for massive job losses and calling for tougher regulations.
Tanya van Lill
“While we firmly agree that prudent business practices should be a focus area – and that PE firms should apply conservatism to try ensure the capital structures of companies they invest in are able to weather economic cycles – a phenomenon like job losses in the retail industry, which is at the centre of the US headlines, cannot be laid entirely at the feet of PE," says Tanya van Lill, Southern African Venture Capital and Private Equity Association (Savca) CEO.
PE has evolved significantly since the high-leverage era of the 80s, when financial engineering was the name of the game. While cases of over-gearing do still exist, lumping all PE funds together as “bad” would be a grave disservice to the many funds driving real economic growth and bringing about societal impact at a time when South Africa needs it most.
The use of excessive leverage to turbo charge equity returns increases the financial risk of a deal or company and can result in the opposite desired outcome. Excessive leverage presents increased risk. Sensible leverage can be a key driver of return for investors including private equity investors; however, leverage needs to be used in a measured and sustainable way through the cycle.
Van Lill points out that private equity has been a primary channel for development funding for decades – not only in South Africa, but across the continent. “The industry has seen major progression over the years and today focuses on impact measurement and management approaches that strive to make a positive economic impact.”
She notes that the local PE industry is also more aligned to the South African context and the need for job creation and preservation. “We have seen first-hand that when PE is done well, it has a strong multiplier effect. The industry is actively working together and partnering with government initiatives to develop approaches to invest in the local economy and to create jobs.
“Case in point are some of the companies that were recently recognised at the SAVCA Industry Awards including DSES, who started with 12 employees prior to investment and now have 153 employees after receiving PE investment, signifying a 448% growth in employment. Similarly, Aerobotics had 21 employees at first investment, and now has 83 – a 368% growth,” she says.
There is a growing emphasis on the positive social and economic impact that can be achieved through private equity and venture capital investment. The majority of capital being raised in the South African PE market, either from foreign or local investors, has a job creation, transformation/diversity and impact mandate and requires stringent reporting from PE fund managers. This creates an incentive for South African fund managers to focus on these areas, and importantly an ‘intentionality’ around achieving impact through investments – as it is essentially tied into the fund’s objectives.
This means, much like most industries and sectors, not all PE is the same and not all PE is bad either, says Van Lill. “Private equity is varied, and so much depends on the mandate, the strategy and the people behind the PE firms. While not all PE may be universally beneficial, we cannot deny the progress and success that this industry has had and continues to have in driving real economic growth and development across Southern Africa."
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