In the midst of a turbulent global economic landscape, South Africa’s private equity (PE) industry has shown remarkable resilience, setting a new benchmark with its fundraising activities in 2023. According to the recently released 2024 Savca Private Equity Industry Survey, conducted by the South African Venture Capital and Private Equity Association (Savca), the industry saw a significant uptick in fundraising, reaching a 13-year high. This resurgence is particularly noteworthy given the challenging macroeconomic conditions that have characterized both local and international markets over the past year.

A Surge in Fundraising Despite Economic Headwinds

The 2024 Savca Survey, which analyzed the 2023 period, revealed that funds raised by South African PE firms soared by 43% compared to the previous year, closing at an impressive R28.1 billion. This surge in fundraising is a clear indicator of the industry’s growing attractiveness, not just locally but also on the global stage. In fact, a significant 59% of these funds were raised from investors outside of South Africa, signaling a strong vote of confidence from the international investment community.

European and U.S. investors were particularly active, contributing 45% and 22% of the foreign investments, respectively. This influx of international capital highlights the global appeal of South Africa’s PE sector, which has managed to recover and thrive after a three-year downturn in the aftermath of the COVID-19 pandemic.

Navigating a Complex Economic Environment

The remarkable fundraising success of South Africa’s PE industry comes at a time when the global economic environment is fraught with uncertainty. High-interest rates, inflationary pressures, and geopolitical tensions have all contributed to a challenging investment climate. However, South Africa’s PE firms have demonstrated an ability to navigate these complexities, driven by a strong business sentiment that persisted throughout the year.

As 2024 has been dubbed the “ultimate election year,” with significant political events taking place both locally and globally, PE firms were under pressure to make strategic decisions amidst an unpredictable economic climate. Despite these challenges, the industry has shown resilience, leveraging opportunities to secure capital and make impactful investments.

Optimism in the Face of Global Pessimism

One of the most striking findings from the Savca Survey is the marked optimism among South African PE firms compared to their global counterparts. While the global PE industry has been grappling with concerns about economic downturns and reduced exit opportunities, South African firms have remained bullish on the prospects for growth. According to the survey, 41% of local PE firms expect an increase in exit activity over the next six months, compared to only 24% of global firms who share this outlook.

This optimism is further reflected in the growth of Funds Under Management (FUM) among South African PE firms. The survey noted a dramatic increase in the proportion of investments made by firms with FUM exceeding R5 billion, which rose to 58% in 2023, up from just 11% in 2022. Moreover, 51% of respondents reported expectations of accelerated growth in their FUM, a significant increase from the 38% reported in the previous year.

ESG and Impact Investing: The New Frontiers of PE

Environmental, Social, and Governance (ESG) considerations, along with impact investing, have taken center stage in South Africa’s PE industry. The Savca Survey highlighted that ESG concerns are no longer just a peripheral consideration but have become integral to the decision-making processes of PE firms. A growing number of firms now employ dedicated ESG professionals, with 35% of respondents indicating that they have such roles within their organizations.

Furthermore, 55% of the surveyed firms reported having a specific impact investing mandate, underscoring the increasing importance of sustainability in investment strategies. The emphasis on ESG is driven by both investor demand and regulatory pressures, with 92% of respondents stating that their investors require the measurement of portfolio company performance against specific ESG metrics. This focus on sustainability is not just a trend but a fundamental shift in how PE firms operate, as they seek to align their investments with global sustainability goals.

The Role of Private Equity in South Africa’s Economic Transformation

Private equity in South Africa is not just about generating financial returns; it is also playing a critical role in driving socio-economic transformation. The Savca Survey and the #InvestingForGrowth analysis, commissioned by Savca and conducted by research firm Intellidex (now Krutham), provide compelling evidence of the positive impact of PE on national policy objectives such as job creation and Broad-Based Black Economic Empowerment (B-BBEE).

The #InvestingForGrowth analysis revealed that while national employment growth was in the red at -4.2%, PE investee companies bucked the trend, reporting employment growth of 4.2%. This is a clear indication of the sector’s capacity to foster job creation even in a challenging economic environment. Additionally, the analysis found that PE and venture capital (VC) firms have made significant strides in improving the B-BBEE performance of their portfolio companies, with notable improvements in ownership, management control, skills development, and socioeconomic development.

Driving Diversity and Inclusion in the PE Sector

Diversity and inclusion have become key priorities for South Africa’s PE industry. The Savca Survey found that there has been a noticeable increase in the representation of women and black professionals within the sector. Specifically, an increasing proportion of PE firms reported having more than 30% women promotees across all levels, while 62% of firms reported having over 50% black management—a rise from 60% in the previous year.

These findings highlight the industry’s commitment to fostering a more inclusive environment, where diversity is seen as a strength that can drive better decision-making and business outcomes. This focus on diversity is not just a moral imperative but also a business necessity, as firms recognize the value of diverse perspectives in achieving long-term success.

The Future of South African Private Equity: Challenges and Opportunities

Looking ahead, South Africa’s PE industry faces both challenges and opportunities. The global economic environment remains uncertain, with potential risks including rising interest rates, inflationary pressures, and geopolitical tensions. However, the resilience demonstrated by the industry in 2023 suggests that it is well-positioned to navigate these challenges and capitalize on emerging opportunities.

The continued focus on ESG and impact investing will likely drive further innovation and growth in the sector. As PE firms increasingly align their strategies with global sustainability goals, they will be better equipped to attract capital and deliver long-term value to investors. Additionally, the industry’s commitment to diversity and inclusion will be critical in ensuring that it remains competitive in a rapidly changing world.

Conclusion: A Beacon of Resilience and Growth

In conclusion, South Africa’s private equity industry has shown remarkable resilience in the face of global economic uncertainty. The significant increase in fundraising, the growing focus on ESG and impact investing, and the industry’s commitment to diversity and inclusion all point to a sector that is not just surviving but thriving. As the world continues to grapple with economic challenges, South Africa’s PE industry stands out as a beacon of resilience and growth, offering valuable lessons for other markets around the globe.

With the foundations laid in 2023, the industry is well-positioned to continue its upward trajectory in 2024 and beyond. As Tshepiso Kobile, CEO of Savca, aptly noted, “The engines of the PE industry are gaining traction, and all signals point to noticeable growth and even untapped potential.” The future of South African private equity looks bright, and the journey ahead promises to be one of continued innovation, impact, and success.

photo source: Google

By: Montel Kamau

Serrari Financial Analyst

16th August, 2024