SUMMIT TV: Looking at private equity trends across the globe, it’s generally been a difficult period for raising investment funds. You have a new fund where you raised $800m — it’s a difficult time, so why now?
NGALAAH CHUPHI: I think it’s clear that private equity is maturing as an asset class here in South Africa, and more importantly into the rest of the continent as well. If you look globally, private equity has been around for a while, since the 1970s. From our own perspective we started back in 1984 when we were part of a bank. In 1992 we started raising money from third-party private investors, or 92 Fund or Fund 2. We have grown quite significantly since then, raising Fund 3 in 1996, which was the first time we externalised the investor base and raised money mostly in North America. At that time the fund was comprised of about 30% external and 70% South African investors. We invested that quite quickly and then in 1998 we started raising Fund 4, where we raised $358m, which was double the amount we raised in Fund 3. Clearly that was also a tough time — if you remember in 1998 there was the crisis — and in 2005 we raised our Fund 5, which was $750m, and we’ve just concluded Fund 6, which is $800m.
STV: So you’ve come a distance since 1992 when you started your first fund — what are the major trends that you’ve seen as far as private equity goes? You said it’s a maturing industry here in South Africa but what are you observing?
NC: The trend is mostly around accepting this is a legitimate source of capital to fund enterprises — so for sellers of businesses that are looking for ownership change this is an area they can tap, and more importantly management teams that are looking to grow their businesses are becoming more and more comfortable in coming to a private equity fund manager to source capital to fund their businesses. That trend has become quite well accepted. What’s also important is the asset class, from a returns perspective, has also been quite attractive to investors — so investors are now coming into private equity because the returns are superior to the relative benchmarks that are normally the publicly traded markets.
STV: What are investors looking for?
NC: The profile of a private equity investor is significant numbers are public pension funds, followed by corporate pension funds. Then we have funds of fund managers that are people that aggregate funds from smaller pension funds, then there’s high net worth individuals and endowments like universities that have investment arms. What they are looking for is to diversify the assets they have under management and provide that to different pockets of managers that can create value for the underlying. If we look at who are the beneficiaries of our efforts that’s the policy-holders in the corporate pension funds, pensioners that are in public pension funds, also ordinary people represented by the sovereign wealth funds.
STV: You’ve raised $800m in South Africa — why South Africa in particular? Looking at recent developments, whether that’s labour or politics, there is a bit of unease so are you concerned about that?
NC: A good question. In the first instance the kind of investors that we speak to are medium- to long-term investors in nature, so they would look beyond the noise. Clearly in their view they have seen South Africa and the rest of Africa as an attractive destination. This is driven mostly by the search for growth, where clearly South Africa has been growing moderately at between 3% and 4% the rest of Africa is growing above 6%. They’ve backed Ethos, which they believe is the right kind of manager that they can access that growth. It is, as you point out, a very challenging time, but we have a track record having been around 29 years and we are able to demonstrate that we are able to provide those returns we have in the past.
STV: What sectors are you keen on?
NC: Our strategy is to invest in businesses that have very strong and differentiated business models, that have strong management teams and strong cash flows. More specific to sectors we look for those with superior growth prospects. Currently it’s not rocket science that the consumer sector is interesting — we have invested there, and we think there is still some time to go. Again South Africa and the rest of the continent is a very strong commodity provider. There is a lot of infrastructure that’s being put in place to support this — clearly we as a manager don’t invest directly into infrastructure, but we look for businesses that will support this infrastructure roll-out.
STV: What is your strategy for the rest of Africa?
NC: We see the rest of the continent in two ways — first we have a mandate within our fund to invest directly, being up to 20% into consumer-facing companies of scale where we can partner with local like-minded investors. More importantly, we will invest in South African companies that are looking to exploit the growth that’s taking place in Africa. We’d like to partner with management teams and support them in that ambition.
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