Energy and infrastructure investments top 2023 Private Equity Survey

Johannesburg - The high inflationary environment has led to the imposition of strict monetary policies, both locally and abroad, in a bid to curb rising prices and maintain sustainable levels of employment. Notwithstanding the pressures faced on both the macro-and micro-economic fronts, concerns over global recession and geopolitical tensions, Southern African private equity (PE) firms countered the mooted global trend in fundraising activity (which declined by 13%), shifting investments towards secular sectors – in particular, the infrastructure and energy sectors.

This was one of the key findings to emerge from this year’s Southern African Venture Capital and Private Equity Association (SAVCA) Private Equity Industry Survey, an annual report conducted in partnership with EY. The results of the survey, which were informed by responses of 49 PE firms operating in Southern Africa, were released at an event last week. The survey revealed a 21% increase in PE fundraising in the region – which takes this activity closer to the more favourable pre-pandemic levels.

PE proves its resilience in difficult times

Commenting on the overall survey results is SAVCA CEO, Tshepiso Kobile highlights the power of credible information in providing stakeholders with a reliable overview of the state of PE, particularly as it relates to how the industry has fared within the economic turbulence of the past year. In a nod to SAVCA’s theme of ‘Resilience’, which has guided its communications and strategic approach for 2023, she notes that PE firms have not only achieved decent exits (which grew in value and number), but further supported their investee companies in navigating the volatile environment. For the first ever, the 2023 survey reports on the performance of portfolio companies, reflecting variable performance across the sectors in employment growth, revenue and EBITDA.  

“We are encouraged by the positive sentiment in the market, with a sizable number of respondents expressing optimism that the remainder of 2023 will see a healthy amount of deal flow. Interestingly, our findings were that whilst large funds (i.e., FUM of over R5bn) contributed the most to the increase of 21% in funds under management (FUM), PE firms with less than R500m FUM were very active.”

Kobile advocated for increased allocations from local institutional investors, to mitigate risk and in recognition of the inherent ability of Southern African PE and VC firms to provide expansion capital at scale to local companies, channel funding into infrastructure and technology, with resultant effect of employment creation and innovation to address societal challenges.”

Infrastructure investments on the rise

According to the survey, Southern Africa’s infrastructure sector received the majority of invested capital, with just over 36% of total investments in 2022. This year marks the return of investment into the sector to pre-pandemic levels, with 34.7% of investment having gone into infrastructure in 2019. Typically, secular sectors such as infrastructure have proven robust and are able to preserve value, despite fluctuations in the broader economic landscape.

These are positive prospects in light of President Ramaphosa’s Keynote Address at the Sustainable Infrastructure Development Symposium in 2021, where he was quoted as saying: “An investment in infrastructure is an investment in people. It is also an investment in the future of our country. It is about improving lives, providing access to clean water, affordable electricity and decent homes.”

Executive Director and Fund Principal of Mahlako Financial Services, Mitesh Pema, provided his insight on the state of infrastructure investments: “The sector has and continues to present a huge opportunity for investors due to the significant gaps that exist in the region. In particular, energy, logistics, transportation, and telecommunications are key infrastructure areas where capital allocation can and is making a significant difference on the ground. Investors need to be mindful that patient capital is key when it comes to infrastructure, as it does not convert as timeously as other investments. However, the positive impact they will and can have on the broader economy and society are well worth the wait.”

To this end, the PE industry continues to prioritise, within the policy frameworks and thematic leanings, both the commercial viability of investments as well as their inherent impact. As the survey found, the proportion of respondents with impact investing mandates currently stands at 57%, an impressive increase from 45% in 2021. These findings, as well as the sector spread of current investments, suggest a much-needed intersection between South Africa’s own immediate needs as a country (and Southern Africa’s as a region) as well as its socioeconomic imperatives, both of which can be addressed with bolstered and targeted investment.

Commenting on the rise of ESG and impact investing as a priority for PE firms was Partner at Adenia Partners, Florent de Boissieu: “For us, ESG is a crucial component of any investment, and is a must for PE in Southern Africa and the continent as a whole. In fact, when compared to more developed PE markets like Europe and America, PE funds in Africa have actually been at the forefront of driving ESG for many years. Going forward, it is essential that we remain at the forefront of supporting the impact investing imperative and gain access to robust data from our portfolio companies so that tracking and reporting can be done in a more streamlined process.”

Need for continued partnerships to address pressing challenges

Energy emerged as the second most prominent investment sector, overtaking Retail in the 2021 survey, and garnering more than 16% of total investment. Investment into energy and related sectors is likely to continue on an upward trajectory, as particularly South Africa continues to grapple with the ongoing energy insecurity.

For Kobile, these findings point to a clear alignment between PE investment outcomes and national policy imperatives, as demonstrated in a recent dialogue that was facilitated by SAVCA between infrastructure funds and Operation Vulindlela representatives. At this engagement, the latter shared progress being made on economic reforms, and the parties agreed to the need for more engagement, with a particular focus on private sector driven funding model that catalyse the success of reforms underway. PE firms’ affinity for renewable energy and the need for investments in energy throughout the region, as the sector seeks to remove the undue pressure of loadshedding currently facing households and businesses alike.

“Whilst loadshedding, which has undermined the path towards post-pandemic recovery remains one of our most pressing infrastructure issues, we are acutely aware of the need for progressive policy development and funding interventions to address water and logistics sub-sectors. Against the backdrop of the amendments to Regulation 28 of the Pension Funds Act, which most survey respondents expect to translate into increased allocations in the next 12 – 24 months, PE has a golden window of opportunity to take up space within traditional investment portfolios, given its diversification benefits,” she says.

In a South African context, these developments come as we position our country to become a potential global exporter of green energy, with major investments set to boost our green hydrogen capacity. Green hydrogen or the ‘Big Frontier’, along with its counterparts in the realm of energy innovation and renewable energy, are set to derive a myriad of benefits for GDP growth and further investment potential.

“We are hugely grateful to SAVCA members who have responded the call to participate in the survey, this year and in previous years, panelists who helped contextualise the findings, as well as EY for journeying with us to this important milestone. As we continue to deepen the knowledge of broad stakeholders on the asset class through our various activities, we hope that this will expedite the realisation of the optimistic outlook expressed by survey respondents.” Kobile concludes.