The South African private equity industry may appear to be substantial, but is it effective, asks Collins Msimango, associate at integrated equity and debt company Bravura.
The 2004 Venture Capital and Private Equity Performance Survey released by KPMG and SAVCA stated that of the R42.7 billion of assets under management, R14.4 billion remain un-invested.
Furthermore, of the R6.7 billion in investments actually made during 2004 only R0.2 billion was invested in start-up and early-stage investments.
"This leads to questions around the industry`s effectiveness as a funding avenue particularly for venture capital investments, an important but clearly neglected subset of private equity," he says.
"Currently, venture capital funding is so negligible that it borders on being non-existent."
Msimango attributes this to the fact that, in general, private equity players adopt an overly cautious approach to investment.
He says that, while a cautious approach is understandable, given the fact that investors` expectations have often not been met in the past, venture capital is vital to the support and development of SMMEs, a component of the economy which forms the foundation of economic and employment growth.
"In my view, the private equity industry has a responsibility to cultivate and nurture economic growth."
Msimango says it is time that private equity players move away from number-crunching to a more holistic approach. He says this should include non-financial strategic input and mentoring services to the management teams of underlying investments, especially in the area of venture capital investment.
Linked to this, Msimango says risks on investments could be mitigated and shareholder value created by private equity players expanding their own skills base.
"Including individuals in their organisations who have true operational and managerial experience would put these companies in a position to, among other things, offer mentoring, strategic and marketing support services to the companies they invest in."
Furthermore, performance standards and measurement for both investors and management should be set from the outset, to ensure all parties are aware of what is required of them during the investment period and that the intended outcome is achieved.
Given that the private equity industry in SA is relatively young, it is important that private equity companies look to more developed markets such as North America and Europe to leverage off the experiences in these countries, Msimango advises. Specifically, the industry needs to develop measurement models that will enable it to quantify and price risk appropriately. This could be achieved using data collected both locally and abroad, he says.
Finally, Msimango says exit strategies for private equity investors should be stipulated at the outset of any private equity investment.
"By specifying the instruments that will be employed to facilitate a smooth exit whether through debt instruments, put or call options or otherwise, private equity companies can ensure greater certainty not only for themselves, but also for the target company which needs to plan around such an exit and the possible introduction of a new shareholder(s)."
He adds that in the light of the depressed initial public offering market, private equity companies should look into exiting their investments through black economic empowerment as another viable option.
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