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Private Equity Impact on South African Economy

This presentation provides an overview of the private equity industry in South Africa, its economic impact, and the effects of the suspension of Section 45. It discusses the role and typical deal structures of private equity, as well as the importance of debt push-down. The presentation highlights the positive contributions made by private equity in businesses and the reasons for its preference over other forms of financing. It also discusses the history and landscape of South African private equity and the potential impacts of the suspension of Section 45.

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Private Equity Impact on South African Economy

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  1. Parliamentary Standing Committee on Finance - Informal Hearings 22 June 2011 J-P Fourie and Mark Linington SAVCA www.savca.co.za

  2. Presentation objectives • Overview of our industry in South Africa • Facts and figures of the industry and the economic impact thereof • Discuss the impacts of the suspension of Section 45

  3. What is private equity? • Typically transformational and value-adding strategies. • Specialised skills and experience. • Reasons for private equity financing • increasing its working capital base; • business expansion and development; • developing new technologies and products in order to grow and/or remain competitive; • to finance acquisitions of other businesses; • to buy out certain shareholders in order to restructure the ownership and management of the business; and • introduction of BEE.

  4. The global playing field…

  5. Most activity is expansion/development-focused Analysis of investments by stage based on cost of investments Source: SAVCA KPMG 2011 Private Equity Industry Performance Survey

  6. BEE investment activity Cost of BEE investments made during the year (excluding Captives – Government) (Rbn) Source: SAVCA KPMG 2011 Private Equity Industry Performance Survey

  7. Third party funds raised are sourced from various geographies Geographic sources of third party funds raised Source: SAVCA KPMG 2011 Private Equity Industry Performance Survey

  8. Employment growth rates of 9% p.a. JSE business’s growth rates of 4% and 1% across all businesses in SA Employment of 5% of SA’s formal sector employees which equates to around 427 000 jobs Average turnover growth of 20%, compared to 18% for JSE businesses Pre-tax profit growth of 16% per annum compared to 14% for JSE businesses Average R&D expenditure growth of 7% compared to 1% for JSE listed businesses 2006 to 2009, Private Equity achieved: Source: SAVCA DBSA 2009 Private Equity Industry Economic Impact Survey

  9. So what is the role/impact of role of Private Equity • In the main, respondents report that private equity has made a positive contribution to their business Source: SAVCA DBSA 2009 Private Equity Industry Economic Impact Survey

  10. Impacts Private Equity • Respondents report that performance in key areas of business had improved since receiving PE or VC backing Source: SAVCA DBSA 2009 Private Equity Industry Economic Impact Survey

  11. Reasons for Private Equity • Respondents were asked if they felt private equity was preferable to other forms of financing and why this was so Source: SAVCA DBSA 2009 Private Equity Industry Economic Impact Survey

  12. Typical deal structure

  13. Make the acquisition more feasible for the investors; Optimise debt security by direct access to assets and cash; Debt advanced to a newly-formed company; Uplift market values of assets; and The legal structures can be simplified. Reasons for debt push-down

  14. History of South African private equity Cost of investments made during the year (Rbn) Source: SAVCA KPMG 2011 Private Equity Industry Performance Survey

  15. Positive sentiment and growth forecasts; World was flooded with liquidity and cheap debt; Foreign bond markets were very active; A handful of deals were funded by means of foreign bonds; Local banks were lending on more generous terms; A few debt packages were tranched (senior debt and mezzanine debt); and Up to 70% third party debt. Landscape in 2006 – 2008

  16. No new foreign bond issues; Mezzanine funding for the big deals has dried up; Local banks have remained very cautious in providing the debt; 50% of local bank debt only in a deal; and Interest rates are in the range of Jibar plus 2% to 4% therefore not excessive. Landscape post 2008

  17. Typical capital structure

  18. In 2006-2008 some deals included mezzanine debt (10% - 15% of capital structure); Not a feature of capital structures post; Shareholder loans are the only subordinated debt; and Exchange control limits the interest rate to prime. SARS toolkit Shareholder loans are limited to a 3:1 ratio; New thin capitalisation rules from October 2011; and Withholding tax on interest from 2013. “Much of which carries a subordinated or junior ranking”

  19. Erodes confidence in South Africa; Foreign investment will go elsewhere; National Treasury and SARS have always been aware of debt push-down – SAVCA engagements in 2006/7; Deals are being abandoned; 18 months will be a significant setback for the industry; No consultation or warning; and Need to restore certainty – SAVCA would like to urgently engage with National Treasury (as per 2007) Suspension of section 45

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