The Private Equity Industry in South Africa in South Africa 2023

Introduction

Private equity funds under management have increased, but value and number of investments has slowed since 2018.

Returns have also been falling recently. The slowing global and local economy is likely to mean a tougher 2023 for fund managers. South Africa’s grey listing and ratings downgrades are other challenges. Pension Funds Act amendments, which came into effect in January 2023, could help increase investment in venture capital and in infrastructure. The local venture capital sector has boomed recently.

Opportunities

Amendments to Section 28 of the Pension Funds Act could spur investment in infrastructure and private equity.

An increasing number of local venture capital companies are making investments in startups in the rest of Africa. Investment in infrastructure public-private partnerships, in particular digital infrastructure and renewable energy, both locally and in sub-Saharan Africa. Section 12B of the Income Tax Act, which provides tax deductions for investors that invest in renewable energy. The delisting trend, and ongoing emigration offers local private equity firms an opportunity to snap up companies. The development of alternative online funding platforms, such as equity crowdfunding. The SA SME Fund is looking to raise new funding to invest in funds, including venture capital funds, that in turn invest in SMEs.

Outlook

While the private equity sector has long proven resilient, the country’s low growth outlook is likely to continue to suppress investment. Assets under management continued to grow, but the number of transactions was not growing at the same rate, with too much capital chasing too few transactions, which could create an investment bubble.

Exit from investments to offshore players is becoming more difficult and scarce. Grey listing could limit South African fund managers’ ability to raise capital from offshore investors. Investment appears to be slowing in the venture capital sector after the recent boom.

Report Coverage

This report covers the private equity sector in South Africa including venture capital and SME funding.

It includes information on the size and state of the sector, investment and corporate activity, funds under management, funds raised and returns, notable players and developments, including regulatory developments which could result in new investment trends. There are profiles of 28 companies including RMB Corvest and RMB Ventures, Metier, African Rainbow Capital, Hlayisani Capital, Vantage Capital and the SA SME Fund.

Strengths

Private equity supports socio-economic development.

South Africa’s well-established private equity industry is the most mature and sophisticated in Africa. The industry plays a valuable role in nurturing and catalysing the growth of SMEs. The resilience of the private equity and venture capital sector which operates in a tough environment.

Threats

Cybersecurity risks.

Emigration makes it more difficult to hire quality managers to lead portfolio companies. Funds under management are increasing faster than investments, which could result in a bubble building, with too much capital chasing too few investments. Grey listing could limit South African fund manager’s ability to raise capital from offshore investors. Loadshedding threatens to drive down the growth of portfolio company investments. Other African countries are surpassing South Africa in venture capital investments. The weakening domestic macroeconomic environment, with the possibility of further credit rating downgrades.

Weaknesses

There is a shortage of auditors which makes it more difficult for private equity firms to timeously track portfolio investments. Although the investor base is expanding, the asset class remains under-utilised, with local pension fund allocations still well below the (new) permissible threshold of 15%. Exchange controls often necessitate South African startups having to register and move offshore to raise venture capital. Returns on investments have slowed in recent years. The industry is relatively small in comparison with developed markets. There is a lack of follow-on funding for venture capital investments