View from South Africa

Driven by strong macroeconomic performance and well developed corporate governance standards, GPs in South Africa’s private equity industry are feeling bullish. Judy Kuan reports.

Over the roughly fifteen years that private equity has existed as an asset class in South Africa, the country has undergone fundamental change, say local GPs, most notably on the macroeconomic front. Government statistics show real GDP at market prices increased by 4.9 percent last year – following an increase of 4.5 percent in 2004, and interest rates are currently levelling out at around 7 percent. Better management of the fiscal deficit and the improving foreign reserve position have also led to greater stability in the South African Rand.

On the political front, South Africa has demonstrated higher stability, led by a government that is focused on building an economic platform to spur the country’s development. Evidence of the political will to push the country forward can be seen in the government’s plans to spend R370 billion (€50 billion, $60 billion) on infrastructure development in the upcoming years.

According to John Gnodde, CEO of private equity at South African investment group Brait, these improvements – combined with the booming consumer mass-markets and influx of foreign investment – have created an attractive environment for private equity investments.

South Africa’s economic growth, rising consumer demand, and boost in infrastructure spending have made most sectors ripe for investment, says Gnodde. In addition, South Africa’s regulatory system and corporate governance codes are “up there with the developed markets,” observes Gnodde.

“There are great prospects for the private equity market; that’s why you see more players here,” he says.

Gnodde notes that the cost of capital has changed in the last 12 to 18 months, driven by dropping interest rates, as well as the opening of the European debt markets as a source of funding. “As the cost of capital has changed, it allows one to do more sizeable transactions,” he says. “Valuation levels have moved up in the last two years, but this is a function of the cost of capital and the high growth rates.”

Given these drivers, Brait, along with other local and international private equity groups active in South Africa, have plenty of reason to look forward to a busy year in 2006.