CDC backs South African mid-market firms

Emerging markets fund of funds CDC has committed $20 million (€13.6 million) to two South African mid-market growth capital funds taking its commitments in the country to $130 million.

The firm has committed $10 million both to Medu Capital’s second fund which is targeting R600 million (€63.1 million; $92.7 million) and to Horizon Equity’s third fund which is raising R500 million.

Medu has raised R430 million so far and it is targeting a final close at the latest in May 2008 and may be able to close by the end of the year, said Nhlanganiso Mkhwanazi, co-founder and director of Medu. It is backed by South African investment firm Brait which has a 49 percent stake in the firm’s holding company. Brait is also an investor in Medu’s funds.

Horizon is holding its second close this week on R465 million and is looking to complete fundraising by March at the latest.

Medu invests between R30 million and R120 million, while Horizon Equity commits between R10 million and R100 million in each investment.

According to accountant KPMG and the industry body South African Venture Capital and Private Equity Association, the South African private equity industry had R56.2 billion in funds under management in the 12 months to 31 December 2006, an increase of 32 percent on the previous year. US investors contributed 50 percent of funds committed in 2006.

Mkhwanazi said: “Our last fund has performed significantly above our target return of 30 percent per annum.” The fund raised R250 million in 2003 and it has returned investors initial commitment while the underlying assets continue to show good growth, Mkhwanazi said.

The first fund sold Capital Outsourcing Group earlier this year to South African trade buyer Adcorp raising R238 million through the sale of its 70 percent stake. Mkhwanazi said that while terms of the initial deal in 2004 were undisclosed, the firm made seven times its initial investment from the sale.

Both firms have black empowerment credentials to meet the requirements of South African legislation designed to positively discriminate in favour of black professionals to compensate for the country’s apartheid past.

Sven Söderblom, a portfolio director at CDC, said in a statement: “We see an interesting opportunity for South African mid-market focussed funds market given a continued shortage of financing options among local small and medium enterprises in combination with the strong growth of the economy.”