I recenlty returned from a trip to South Afirca where along with a team of students, I engaged in a study of the country's private euqity industry. My next few posts will be comprised of some interesting trends and data we picked up on while there. The first will be on the topic of private equity firms listing as holding companies:
In mid-2011, Brait, the leading South African private equity firm, unveiled a change in business model so dramatic in its structure and scale that it was viewed by many as a seminal moment for the industry. The firm announced it was evolving its business model from being a manager of third party funds to becoming an investment holding company. Instead of only raising private capital from third party investors to fund its private equity investments, Brait would now also raise capital from time to time in the public equity capital markets and invest this capital directly into private equity deals. There had been speculation that Brait was struggling to raise capital from traditional limited partners and that perhaps the holding periods for its investments were longer than what investors were expecting. The new structure allows the firm to maintain the existing strengths of the private equity model while, for the first time, tapping into the strategic benefits of raising funds from the public equity markets. This means there is less pressure on exiting deals within certain timeframes. The move necessitates Brait’s business model changing from a fund management business with annuity income streams (from fees and carry) to an investment business underpinned by the valuation of the underlying portfolio of its assets. As a result, the net asset value (NAV) of the firm’s investments will be the most tangible means through which the firm’s performance can be measured.
Another example of a South African firm shifting to holding company status is Chayton Capital, a global firm with an African agriculture private equity investment arm based out of Cape Town. In early 2012, Chayton sold 81% of its agriculture private equity vehicle, Chayton Atlas Agricultural Company, to South Africa-based investment company Zeder for $46.7million. Much of the capital is set to be released in stages as needed to fund acquisitions across sub-Saharan Africa. Chayton’s focus made it challenging to meet private equity investor’s expectation of a typical five-year investment cycle. Similar to Brait (who invests across multiple sectors), raising capital became more difficult as a result. Holding company status affords firms like Chayton more flexibility with their investment model and can make raising capital easier.
According to South African private equity professionals we met with, more and more firms will list this way in the future, in large part because there are fewer regulatory issues and the pool of available capital is larger. It may even be feasible for first-time managers in South Africa to raise capital via listing as a holding company, either public or private. If more firms choose to list as holding companies, the landscape of the South African private equity industry could be in for a major restructuring, making this trend well worth monitoring.