Private Equity in South Africa Continues to Grow –

JOHANNESBURG, South Africa – Several South African private equity funds are gearing up to take advantage of the ruling African National Congress’ post-Apartheid privatization efforts, as well as the country’s infrastructure opportunities and growing entrepreneurial activity.

One of the biggest players is Ethos Private Equity Ltd., formerly known as FirstCorp Capital Investors Ltd., which expects a September close for FirstCorp Capital Fund IV on some $400 million to $500 million, said Chief Executive Andre Roux.

The group has made private equity investments in South Africa for 15 years and has attracted domestic and overseas capital, including U.S. backers such as the California Public Employees’ Retirement System, the State of New York and HarbourVest Partners, Roux said.

Conservative estimates say there are some 30 private equity firms in South Africa, most of which are focused on late-stage growth companies and buyouts.

Although traditional American early-stage investing remains largely unpopular with South African private equity firms, some groups are shifting from buyouts to create industry-focused funds that invest in private companies. Archway Venture Partners and Brait Technology and Innovation Fund I, another IT fund affiliated to the prominent buyout group Brait Capital Partners, are just two examples.

Greg Beech, a managing director of Real Equity Propriety Ltd., a private equity subsidiary of the Real Africa Durolink investment bank, also sees the trend developing with Praxis Capital, a health-care focused fund.

At press time, Beech was preparing to market a sophomore fund to invest in medium-size private companies with R5 million to R20 million ($812,000 to $3.25 million) in pre-tax revenues.

The group in 1997 raised its first venture fund, the R150 million ($24.35 million) Real Equity Trust, with plans to use the modest vehicle to establish a track record. It is now fully invested in nine enterprises, and Beech expects two or three portfolio companies to go public on the Johannesburg Stock Exchange in the next year. Indeed, Beech projects the vast majority of the fund’s holdings – 90% of the companies – will go public rather than be sold.

The follow-on fund, likely to be called Real Equity Trust II, will target about R300 million ($48.7 million), mostly from South African investors, he said.

“Things have developed quite rapidly,” said Beech, who makes a conservative estimate of some R10 billion ($1.62 billion) in committed capital under management and about R3 billion ($487 million) invested annually in South African private equity opportunities.

Cycad Financial Holdings, a publicly listed private-equity firm that spun out of Genbel Securities Ltd. a little more than a year ago, plans to add to that figure. The group takes minority equity stakes in service industry companies with intellectual capital, including information technology, financial services, tourism, media and education enterprises, said Executive Director Alun Frost. Companies must be operational for three to four years and have achieved some critical mass before Cycad will invest, he added.

Cycad was listed in March on the Johannesburg Stock Exchange for a public offering that raised R140 million ($22.73 million). The rationale was that as a publicly traded firm, Cycad would more easily obtain backing from investors such as South African pension funds, which are not permitted to invest in unlisted companies. Both Beech and Frost view the Johannesburg stock exchange as a preferable exit strategy for their portfolio companies rather than a trade sale.

In light of South Africa’s post-apartheid affirmative action policies, Frost said the country’s white workers have become more inclined to start their own companies because working independently is more attractive than working for a large corporation. At the same time, black entrepreneurs have more difficulty securing capital and their businesses tend to be smaller than those that would interest his firm, Frost said.

But Hamet Watt of New Africa Advisers has his eye out for Black entrepreneurs, including those who were educated abroad and have the management skills to start new companies in sub-Saharan Africa.

Watt is part of a team that will manage the $350 million-targeted New Africa Infrastructure Fund, the largest single fund sponsored by the U.S. government-backed Overseas Private Investment Corp. (OPIC). The vehicle, $227.5 million of which will come from OPIC and the remainder from private investors, will be managed by New Africa Advisers with its parent company, Sloan Financial Group and infrastructure specialist Taylor-DeJongh. Fund raising is expected to begin in September.

The vehicle will look for deals with a pan-African slant, including opportunities resulting from government deregulation and privatization. Although the fund does not have specific country allocations, Watt estimated some 30% could be invested in South Africa.

The New Africa Infrastructure Fund will devote some 30% to 40% of the fund to telecommunications and some 20% to 40% to energy deals. Transportation deals are expected to win 10% to 20% of the fund, and the remainder will be split among environment and water deals, sanitation enterprises and other infrastructure businesses.

Watt expects the fund to back about 15 companies and co-invest with other entities, with strategic sales and public offerings as their likely exit strategies. The vehicle will be marketed to domestic and foreign investors, including companies that seek entry to Africa for strategic reasons, he said.

New Africa Advisers continues to invest its first private equity fund, the $120 million OPIC-sponsored New Africa Opportunity Fund. Having closed in August 1997, it is about half invested.

Among its portfolio companies is Africa Broadcast Network, a South Africa-based television station that provides free programming to stations throughout the continent and sells for-profit advertising. Watt said he sees a lot of black entrepreneurs obtaining funding, many of whom were educated abroad.

The Infrastructure fund will back quality companies regardless of an owner’s race, although the fund aims to provide black empowerment, he said.