New research reveals the role of private equity and venture capital investors
South Africa’s National Development Plan: Vision 2030 (NDP) serves as a blueprint for progress. Among the most prominent markers of progress are eliminating poverty, reducing inequality, supporting job creation and boosting the country’s competitiveness in the global arena. In this regard, the collaborative efforts of the public and private sectors, as well as the valuable contribution of South Africa’s private equity (PE), private debt (PD) and venture capital (VC) investor community is vital in fulfilling one of the NDP’s key pillars: sustainable investment and growth.
PE and VC investment as a key economic solution
In South Africa, economic growth has been slow for a protracted period. This prolonged downturn has seen the country’s investment rate remain persistently weak, with government investment being in sharp decline since 2014/5.
Accelerating investment, whilst ensuring that all members of our society are meaningfully included, has therefore become an urgent policy priority, but the state cannot realise this goal on its own. To meet the investment challenge, different players are needed at different parts of the investment ecosystem.
Banks and traditional finance providers tend to offer funding to relatively low-risk businesses. But, in a socioeconomic climate in which the majority of ventures in need of funding are early stage, micro- and small businesses, intervention from VC investors who can recognise growth potential, and are willing to take on higher risk, is imperative.
This, according to Tshepiso Kobile, CEO of The Southern African Venture Capital and Private Equity Association (SAVCA) is indicative of the role that VC and PE play in filling a gap in the investor mix, going beyond provision of capital and offering active ownership, mentorship, market access, growth and expansion opportunities.
“VC and PE are tried and tested models to provide aspiring entrepreneurs a ‘foot in the door’ and local businesses much-needed growth capital – thus supporting high-growth firms that are crucial for economic activity, job creation and innovation,” she said.
Last year, SAVCA commissioned research firm, Intellidex (now Krutham) to perform an analysis of the role of PE and VC play in supporting and delivering on national policy objectives. The results speak volumes on how effective the asset class is at ensuring resilience in investee companies through enhanced governance and transformation, whilst also improving the competitiveness and export intensity of South African businesses.
Catalysing job creation
South Africa’s record-high unemployment rate represents a monumental challenge – the country’s socioeconomic future depends on developing sustainable solutions to this problem. It is therefore notable that, PE and VC investee firms tend to experience employment growth that is significantly higher than the national average.
According to the report, this job creation potential became most evident during the pandemic years, when lockdown regulations dealt a deafening blow to the nation’s employment levels. Over this period, national employment growth found itself in the red at -4.2%, while employment growth within PE investee companies stood at 4.2%, an 8.4% difference.
These findings suggest strongly that private equity investee companies can absorb shocks better than companies in the general economy. “These results are also a clear indication of the ability of the industry to stimulate the economy while also supporting national job creation objectives – the two go hand-in hand,” said Kobile.
Speaking to this point, Kobile referenced the reported outcomes of one of SAVCA’s members, which currently has 60 of these high-impact businesses in its portfolio. Collectively, they delivered revenue of R11.6bn in 2022, growing at 78% over the year and raising R8.2bn private capital over the same time period. Together, they employed 18,600 workers at the end of 2022, growing headcount by 39% over the year.
Enabling financial inclusion
PE and VC also make an important contribution towards the government’s policy priority of fostering financial inclusion by giving under-represented and minority groups access to finance.
Traditionally, business owners who run micro-enterprises and small businesses have struggled to access funding – many still do not have access to formal financial accounts in their business’s name and require more than debt products. This has presented a serious barrier to entry for micro entrepreneurs and stands in the way of their ambitions to expand their products and transform their businesses into profitable ventures.
This is where PE and VC come in, with PE focusing largely on expansion and development.
Spurring economic empowerment through transformation
Since South Africa’s first democratic election in 1994, empowerment has been top of the agenda. The guiding policy is reflected most clearly in the Broad-Based Black Economic Empowerment Act and the associated charters that drive transformation in various industries. The financial sector is one such industry, and private equity firms have a specific dispensation.
Evidence gathered by SAVCA indicates that private equity firms have a significant impact on improving the BEE performance of the companies within their portfolios.
According to the survey, investee companies reported significant improvements in several factors, namely ownership (up by 54%), management control (up by 38%), skills development (up by 68%), enterprise and supplier development (up by 71%) and socioeconomic development (up by 63%).
Furthermore, there are several criteria that must be met by a private equity firm before its ownership of an investee company is seen as being held by black people. These requirements create incentives both for private equity firms to improve their black and female ownership and leadership, and simultaneously drive transformation, as well as Diversity, Equity and Inclusion, in their investee companies. This in turn, demonstrates the material role of PE firms in promoting black empowerment and diversity in the economy.
Igniting the engines of innovation
South Africa has aimed to develop a national system of innovation since 1996 when the first white paper on science, technology and innovation was published. In 2019, a revised white paper, published by the Department of Science and Technology asserted that the establishment of this system would rely heavily on fruitful and cooperative partnerships between the public and private sectors.
The study assessed a sample of investee companies to determine the impact that PE investment had on their performance and operations. One finding was that 81% of investee companies introduce new products and services post the investment. While there are no baseline figures to compare this to, it does indicate a high rate of innovation post-investment.
The 2024 SAVCA Venture Capital Survey found that ICT has consistently remained a dominant sector, with the five sectors that attracted the greatest number of VC deals in 2023 comprising Software and related (31%), Fintech (16.4%), Online markets and e-commerce (11.1%), Business Products and Services (6.4%), and Medical Devices (4.7%). Support towards these tech-driven businesses is critical in achieving our aspirations of a digital economy.
“South Africa inherently, has access to a burgeoning pool of entrepreneurs with world-class ideas that address our societal needs. We’ve seen examples of this in innovative disruptors like TymeBank, which has grown to serve 7 million lower-income, previously ‘unbankable’ individuals.
This represents an immensely valuable asset for our country, and we therefore stand to lose out significantly if this talent leaves the country. Retaining and growing this talent base is critical in building the next generation of successful businesses,” concludes Kobile.
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