Parliamentary Standing Committee on Finance - Informal Hearings 22 June 2011 J-P Fourie and Mark...
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![Page 1: Parliamentary Standing Committee on Finance - Informal Hearings 22 June 2011 J-P Fourie and Mark Linington SAVCA .](https://reader036.fdocuments.in/reader036/viewer/2022070404/56649f345503460f94c5221e/html5/thumbnails/1.jpg)
Parliamentary Standing Committee on Finance -
Informal Hearings
22 June 2011
J-P Fourie and Mark LiningtonSAVCA
www.savca.co.za
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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
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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.
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The global playing field…
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Most activity is expansion/development-focused
Source: SAVCA KPMG 2011 Private Equity Industry Performance Survey
Analysis of investments by stage based on cost of investments
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BEE investment activity
Source: SAVCA KPMG 2011 Private Equity Industry Performance Survey
Cost of BEE investments made during the year (excluding Captives – Government) (Rbn)
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Third party funds raised are sourced from various geographies
Source: SAVCA KPMG 2011 Private Equity Industry Performance Survey
Geographic sources of third party funds raised
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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
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So what is the role/impact of role of Private Equity
Source: SAVCA DBSA 2009 Private Equity Industry Economic Impact Survey
In the main, respondents report that private equity has made a positive contribution to their business
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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
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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
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Typical deal structure
Step 2:
Step 1:
Distributions
Repay bridge
Sale of Businesses
Sale of Shares Bridge loan
Target
Sellers Bidco
Bank loan Target
Bidco
Newco
Private equity investors
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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
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History of South African private equity
Source: SAVCA KPMG 2011 Private Equity Industry Performance Survey
Cost of investments made during the year (Rbn)
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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
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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
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Typical capital structure
0%
10%
20%
30%
40%
50%
60%
70%
80%
90%
100%
2006 to 2008 Post 2008
Share capital
Shareholder loan
Mezzanine
Bank debt
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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”
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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