Industry outlook for 2024: venture capital and private equity in SA

Over the past year, the local private equity (PE) and venture capital (VC) industries have been subject to many of the same challenges that have affected other players in the economy. The ongoing effects of a prolonged economic downturn, the impact of the cost-of-living crisis and socioeconomic issues such as unemployment were just a few of the stumbling blocks that stood in the way of sustained post-pandemic progress. However, PE and VC have remained true to their reputation as resilient asset classes, and they are poised to help the economy charter its way through the current storms. It is with unwavering confidence and optimism that the industry welcomes 2024.

Real challenges met with real resilience

The turbulence of the local economic climate has disrupted the PE and VC market, and the effects have been tangible in recent years. According to the most recent 2023 SAVCA VC Survey, the value of VC deals concluded in 2022 contracted 14.5% when compared to the previous year. Yet, despite the obvious challenges, the PE industry saw the amount of funds raised in 2022 increase by 21%, in comparison to 2021 – although the number of investments remained below pre-COVID-19 levels.

Apart from the economic hurdles faced by both sectors, deteriorating public services and infrastructure has also posed a significant risk to industry growth. Heading into the new year, South Africa is still battling with issues relating to the maintenance, upkeep and staffing of major transportation modes including rail and port. These kinds of headwinds, compounded by ongoing loadshedding, have created uncertainty and hesitancy amongst the general investor community.

In the true spirit of innovation, many of these public service issues represent opportunities for innovation and entrepreneurial problem-solving; and PE and VC are certainly ready to take up the challenge. VC specifically, has seen the emergence of a range of start-ups that are well-positioned for profitability but are also able to intervene and alleviate broader societal problems. Likewise, PE-backed platforms could produce powerful public-private partnerships in addressing these needs and the industry can serve as a source of much-needed risk capital for companies to weather short-term economic storms and position themselves for growth.

To this point, and as revealed in SAVCA's 2023 PE Survey, investments in the infrastructure (36.3%) and energy and related (16.7%) sectors attracted the largest portion of capital once again – a significant increase from the year before. On the VC side of things, ICT – and specifically FinTech – took up the largest portion of all deals still invested by deal value (12.3%). This is testament to the willingness of local entrepreneurs to formulate business ideas around the need to achieve important objectives such as financial inclusion in the region.

Macro trends and market dynamics

Moving forward, legislation can – and will – play an increasingly vital role in attracting investor attention to the PE and VC sectors. Most recently, we saw the impact that changes to Regulation 28 had on allocations from pension funds to PE investment managers. The amendments allowed for a separate and higher allocation to PE assets of 15% – a welcomed increase from 10%.

These developments have boosted sentiment and increased investor confidence, with at least 67% of the 2023 PE Survey respondents reporting increased investor engagement around the impact of these regulatory changes. Following this, over 80% of respondents are expecting increases in allocation as a result.

The evolution of tax legislation, such as Section 23M, which concerns the tax treatment of shareholder loans, is also an area of great focus. SAVCA and other industry bodies will continue to engage with regulatory stakeholders to ensure that policy is optimal for the fiscus but does not detrimentally affect investment momentum.

PE and VC industry leaders will remain focused on the broader macroeconomic climate. Like other investors, the PE and VC sectors are susceptible to major geopolitical developments. For example, in 2022, the onset of the Russia-Ukraine conflict as well as its related geopolitical impacts, caused widespread supply chain disruptions.

More recently, the Israel-Hamas war and related disturbances around the Red Sea and Suez Canal caused further disruption and have heightened the call for more diversified and robust supply chains. This, in turn, could lead to greater demand for South African companies to be brought into global supply chains, attracting more investor appetite to local markets.

Furthermore, the recent end of quantitative easing, coupled with the resurgence of inflation and interest rates in developed markets, has caused a shift in investment dynamics. These dynamics will have a yet indeterminate impact on global appetite for investment in Emerging Markets such as South Africa.

Onwards and upwards

The PE and VC industries are an integral part of South Africa's broader financial services vertical. These industries have the resources and potential to boost GDP and drive economic performance. They can do this through making an all-important contribution to stimulating the job market, augmenting tax revenue, and creating livelihoods for communities. The significant investment into infrastructure-related projects from the PE sector, in particular, has shown the ability to bolster regional development and meeting national climate goals.  

This, coupled with the ability of PE and VC to provide for portfolio diversification as a buffer against risk, makes for a compelling, not-to-be-missed investment proposition.

*Vuyo Ntoi, Board Chairperson, South African Venture Capital & Private Equity Association (SAVCA).