The Impact of Venture Capital & Private Equity - in South Africa 2020 - February 2020 - SAVCA
←
→
Page content transcription
If your browser does not render page correctly, please read the page content below
February 2020
The Impact of Venture Capital
& Private Equity
in South Africa 2020
Researching Capital Markets and Financial Services
Black Business
Growth Fund ®
Jobs. Growth. Transformation.
Invest in South Africa’s leading Black Private Equity Funds at low risk.
Fund II is currently inviting commitments.
Learn more at www.27four.com
Jobs Fund
Partnership
SAVCA - IMPACT REPORT - 2020
Contents
Foreword......................................................................................................................2
Introduction................................................................................................................3
About SAVCA..............................................................................................................3
Highlights of the impact of venture capital and private equity in South Africa.......4
About this report.........................................................................................................6
Private equity and venture capital industry overview................................................8
The businesses in this study: an overview of respondents............................................... 10
Investment type.........................................................................................................10
Economic sector.......................................................................................................11
Investment type by sector........................................................................................12
Business location......................................................................................................13
© 2020 Southern African Venture Capital and Age of business..........................................................................................................14
Private Equity Association
This report was produced from a research Funding rounds........................................................................................................14
project conducted by Intellidex and funded
by the Southern African Venture Capital and Chapter 1: Financial and business performance............................................................. 16
Private Equity Association (SAVCA) and 27four
Investment Managers with support from Edge Case Study: GoMetro...............................................................................................18
Growth. It was independently researched and
produced by Intellidex. Chapter 2: The impact of investment on BEE................................................................. 20
Disclaimer
Case Study: DSES.....................................................................................................26
This report is based on information believed to be
reliable, but neither SAVCA nor Intellidex make Case Study: SweepSouth..........................................................................................28
guarantees as to its accuracy and cannot be held
responsible for the consequences of relying on any Chapter 3: Governance................................................................................................... 30
content in this report.
Project director: Dr Stuart Theobald, CFA Case Study: Royal Schools.......................................................................................32
Research director: Dr Graunt Kruger
Market research manager: Heidi Dietzsch
Case Study: UCook..................................................................................................34
Analysts and researchers: Letta Maponyane,
Lerato Mokae, Ernest Nkomotje, Orin Tambo, Chapter 4: Innovation.................................................................................................... 36
Design and Layout: Eleonora Del Grosso
Case Study: Aerobotics............................................................................................38
© SAVCA All rights reserved Case Study: Ozow.....................................................................................................40
www.savca.co.za
Email: info@savca.co.za Chapter 5: The impact of investment funding in the business........................................ 42
Tel: +27 11 268 0041
Case Study: Fidelity..................................................................................................46
Case Study: AutoX....................................................................................................48
References...................................................................................................................... 50
Abbreviations, Definitions and Glossary........................................................................ 50
1
Foreword
Private equity: a powerful growth driver
Private equity has long been used as a One such example of partnership between
developmental tool. From Asia to Latin the public and private sector to achieve
America, across Africa and here in South these dual outcomes is the agreement
Africa, deploying investments in targeted set up in 2019 between the Jobs Fund
ways through private equity funds (National Treasury) and 27four through
has been highly successful in driving the Black Business Growth Fund (BBGF).
developmental outcomes. Previous In terms of this partnership, Treasury
studies to measure this impact in South provides concessional funding to the
Africa have demonstrated that private BBGF in order to catalyse private sector
capital does better than other forms of capital into unlisted companies. Private
investment in driving growth, creating sector investors such as pension funds
jobs and improving transformation. receive subsidised returns to encourage
such allocations to private markets, while
Perhaps as a result of these positive
the country benefits through growth
developmental outcomes, private equity
which leads to job creation and additional
in South Africa and other developing
tax receipts.
countries has long been a partnership
between governments or development These “win-win” partnerships are taking
finance institutions (DFIs), alongside off worldwide and we expect to see more
private capital from pension funds, life of them as studies such as the SAVCA
companies and banks. These commercial Impact Study further demonstrate the
entities need financial returns which positive outcomes of this asset class. We
private equity has been good at creating, are a proud sponsor of this study and
while governments and DFIs often hope that it continues to contribute to an
require a combination of returns and informed debate on how to take South
impact outcomes. The partnership nature African forward.
of private equity, as well as the flexible
regulatory framework, has facilitated the Rory Ord
achievement of these dual outcomes. Head of Unlisted Investments: 27four
2
SAVCA - IMPACT REPORT - 2020
Introduction
Strategic partnerships with investees
Private equity (PE) has evolved report are strong business and financial
significantly over the past 30 years, with performance of investee companies
a growing emphasis on the positive post the investment, an increase in jobs
social and economic impact that can created over the investment period,
be achieved through this investment considerable progress made on all BEE
vehicle. So too has venture capital (VC), elements and increased innovation in
a nascent industry in South Africa, aspects such as speed of innovation and
which has shown exponential growth the number of innovations that were
with increasing deal activity. commercialised.
The Southern African Private Equity and This report would not have been possible
Venture Capital Association (SAVCA) is
without the support from 27four and
proud to produce this, the third impact
Edge Growth and our members who
report of its kind, that examines the
nominated the 75 investee companies
impact of private equity and venture
that participated in this study, along
capital in South Africa. It aims to
with our research partner, Intellidex,
evaluate the measurable effects of PE and
who not only compiled the report with
VC on the companies (investees) that
professionalism and care, but also added
have benefited from these investments.
a series of case studies to illustrate the
Besides providing access to capital, impact of PE and VC investment.
PE and VC investors should become
strategic partners to investee companies, We hope you find this third impact
offering depth of operational and report both insightful and beneficial, as
industry experience, strong financial we aim to evaluate the contribution of PE
acumen, networks and access to markets. and VC in driving real economic growth
The investee companies examined in and development across South Africa.
this report showcase the contribution
that PE and VC have made to their Tanya van Lill
businesses. Some of the highlights of the CEO: SAVCA
About SAVCA
The Southern African Venture Capital and through 170 members that form part of the research, offering training on private equity
Private Equity Association (SAVCA) is the private equity and venture capital ecosystem. and creating meaningful networking
industry body and public policy advocate SAVCA promotes the Southern African opportunities for industry players.
for private equity and venture capital in venture capital and private equity asset
Southern Africa. SAVCA represents about classes in a range of matters affecting the
R170bn in assets under management industry, providing relevant and insightful For more information visit www.savca.co.za
3
Highlights of the impact of venture capital
and private equity in South Africa
This is the third impact study undertaken by SAVCA and explores the role of venture capital and private equity investments in businesses.
It is based on a study of 75 portfolio (investee) companies of South African private equity and venture capital funds. In summary, the main
findings of this study are:
Supporting innovation
Businesses report that investment
played a very important role in
supporting innovation in a number Job creation Financial performance
of ways. For more than half of
22% 24%
respondents, their businesses saw
their speed of innovation, success of
new innovation, number of innovative
ideas and number of ideas they could
commercialise increase.
Investments created jobs, with Companies show strong business
headcount in South African operations and financial performance post the
Speed of innovation increasing by 22% per year on average. investment. They report that total sales
64% grew an average of 24% per year. In
of respondents saw addition, the growth figures compared
improvement favourably to those of JSE listed firms
and those of PE backed firms in the UK.
Investments and BEE
Success of new innovation
56% Businesses report better outcomes after investment on all BEE elements:
of respondents saw ownership, management control, skills development, enterprise and supplier
improvement development and socioeconomic development.
Cost of new innovation
42%
of respondents saw
improvement
Percentage of
Number of innovative respondents
ideas 62% who reported an
of respondents saw improvement in
improvement BEE element
Management control - 38%
Ownership - 54%
Socioeconomic development - 63%
Skills development - 68%
Number of innovations Enterprise & supplier development - 71%
that are commercialised
55%
of respondents saw
improvement
4
SAVCA - IMPACT REPORT - 2020
How investments make a difference
In 2020 more managers reported Percentage of respondents who indicated that investment allowed their businesses to grow faster
that investment allowed the business
to grow faster and created the
opportunity to introduce BEE than in
2009 or 2013. 2009 64%
2013 56%
2020 87%
0 20 40 60 80 100
Revenue from innovation Growth strategies
31% 81%
Slightly more businesses reported
that they were able to grow after
investment, and the growth
strategies changed from organic to
acquisition for many businesses. This
finding supports the notion that with
investment, businesses have access to
more capital and can pursue organic
as well as inorganic growth strategies
Investments enabled increased Investment-supported innovation led through acquisition.
innovation with 31% of companies to 81% of businesses generating revenue 70
earning 30% or more of their revenue from new products and services.
from new products and services
launched in the past four years.
Acquisition
60 27
Acquisition
15
Governance
50
Investments improved the governance of businesses. Governance improvements
are evident through greater diversity on boards, increased separation between the
roles of chairperson and CEO, and governance and risk management frameworks
were introduced.
Number of companies
40 Organic
47
30
Organic
37
20
Percentage of
respondents
who reported an
improvement in 10
each factor post
More independent directors - 20%
investment
More board positions - 37%
More diversity - 55%
0
Pre-investment Post-investment
5
About this report
Background
This report collates and analyses markets is usually less visible than that of Venture capital – also considered early
perceptions of the managers and leaders investors in publicly traded companies. stage investment – is different from
of companies regarding the impact Private equity, by its definition, is the private equity in that funds are provided
of private equity or venture capital investment of capital into companies that to start-ups or small businesses that
investments on their businesses. It follows are not listed on a public exchange. In are expected to show exponential
previous reports in 2009 and 2013, which fact, in some cases private equity could growth. This form of investment can be
allows us to reflect on the changes in result in the buyout of public companies, considered higher risk than private equity
impact and outcomes. We extrapolate bringing them into private ownership. since those businesses often still have to
from the views we have collected to reflect This form of ownership can have a fully prove their model.
on the broader economic and social variety of effects on companies, providing
This report sheds light on the real impact
impact that the private equity and venture funding for innovation, business and
that these investments have had on South
capital industry has on the country. market expansion, strengthened balance
African businesses, including their financial
sheets, acquisitions, reorganisations and
A survey such as this is important and non-financial performance. ■
bolstering working capital.
because the work of investors in private
Research design and methodology
The design of this study partly follows overall business performance. Not all responsible and sustainable investing, the
that of the two previous SAVCA impact questions were repeated in the 2013 2020 study has additional dimensions
studies in 2009 and 2013. Both reports study from 2009, disabling the sequential to enhance understanding of social
are available online at www.savca.co.za. comparison to 2020 findings. Where data and governance issues. The research
The 2020 report provides continuity were collected for specific questions in design drew on advancements in impact
from those reports on key issues such as either year, we have reported those results measurement, particularly those of the
changes in black economic empowerment for comparison with findings in 2020. The Global Impact Investment Network
(BEE) factors, innovation through data for this report were collected during (GIIN). We adapted the global metrics
the introduction of new products and 2018 and 2019. to be locally relevant and to reflect the
services, the role of investment in the There are two important differences South African social context, hence
business such as enabling expansion to between this report and the two previous metrics for social impact in this study
new markets, as well as financial and ones. First, reflecting global shifts in match the BBBEE frameworks rather than
Case studies
The case studies presented in
this report are on some of the
companies short-listed in the
2018 and 2019 SAVCA Industry
Awards. They reflect high levels Aerobotics is an agritech Auto X is a leading DSES is a tankage Fidelity Security is
of success derived from PE/VC company that provides automotive lead acid maintenance and now Southern Africa’s
investments and highlight ways advanced analytics to battery manufacturer that refurbishment largest integrated security
farmers derived from produces brands such engineering firm that solutions provider
in which the investment boosted aerial drone and satellite as Willard, SABAT and supplies solutions to including guarding and
growth and improvements in imagery helping them HiFase. multinational companies cash-in-transit services.
multiple areas and provide improve yields and Page 48. in the petrochemicals, Page 46 .
insight into how private equity profitability. paper and food industries.
and venture capital can have a Page 38. Page 26.
positive impact on companies.
6
SAVCA - IMPACT REPORT - 2020
Structure of this report
This report has seven parts. Following employee numbers. The report then shifts to for investee businesses. Through this lens,
this introduction, we provide a general explore the findings on the major themes of the key findings on BEE, governance,
contextual overview of the private equity impact in terms of BBBEE, governance and innovation and overall impact of the
and venture capital industries based innovation. Finally, we consider the overall funding are given deeper context.
on the SAVCA Private Equity Industry impact that investment funding has had in
This report also contains nine case studies
Survey 2019 and the SAVCA Venture the businesses.
that illustrate the depth of the relationship
Capital Industry Survey 2019. The next
We use investment type as the primary between private equity/venture capital
part describes the 75 businesses that
segmentation of the respondents in this investments and the portfolio businesses.
participated in this study. They represent
study. Investment type refers to the kind The companies in the case studies were
a broad cross-section of the South African
of investment made into the business and selected from those shortlisted for the
economy by sector, location, age and type of
identifies the life stage of the business 2018 and 2019 SAVCA Industry Awards.
investment. We then examine the financial
at the time of the investment. We use They serve as exemplary models of how
performance of the businesses in terms of
this segmentation to enable a deeper private equity and venture capital can
sales, profitability, expenditure on capital
understanding of the role of venture capital support business growth while delivering
projects, R&D expenditure and growth in
and private equity as strategic enablers noteworthy impact outcomes. ■
those of other global studies. Metrics for their growth. These case studies were that elected to participate. Few questions
governance, innovation and financial chosen from the short lists for the 2018 were mandatory and we have indicated
performance were derived from a desire and 2019 SAVCA Industry Awards and the number of responses for each question
to ensure comparative continuity with therefore are not necessarily in the sample using the notation n=75 (where 75
the earlier reports as well as global best of respondents for the main impact study indicates the number of respondents that
practice. in this report. They are included, however, answered that question). For the case
to show some insight into the mechanisms studies, the data were collected through
Second, this report contains a set of nine
of how private equity and venture capital interviews, submissions by companies
case studies that enliven the connection
investments affect firms in practice. and from company documents and online
between investments and portfolio
sources. ■
companies. Case studies provide in-depth The data for this report were collected
insight into the nuances of how businesses through two methods. An online survey
operate with new investment to support collected feedback from 75 businesses
Ozow is an online Royal Schools provide SweepSouth is an online UCook delivers meal kits
payments gateway that private education at an platform that connects with ingredients in precise
enables instant payments affordable fee. domestic workers in South quantities to homes for
on all smart mobile and Page 32. Africa with households in customers to prepare their
desktop devices. need of cleaning services. own food.
Page 40. Page 28. Page 34.
7
Private equity and venture capital industry overview
Every year since 1999 SAVCA has draws on comparative data from the
published the annual Private Equity impact studies conducted in 2009 and Venture capital vs Private equity
Industry Survey which catalogues fund 2013, which means the most recent Private Equity is a long-term,
raising and investment for the year prior industry surveys provide important alternative asset class, which entails
to the report. In 2019, the report reviewed contextual reference points for this report. fund managers raising third party
funds from various classes of investors,
activity in 2018 and reports comparative Moreover, respondents in the 2020 impact to buy assets that are predominantly
data as far back as 2001. SAVCA also now study were asked questions pertaining to privately held. Private Equity funds
publishes a separate annual survey on the the time of the earliest and most recent can be required at different times in
venture capital industry. The 2019 edition the typical business cycle of a private
investments, and many have had multiple company.
covers deals until the end of 2018 and rounds of investment. Their individual
Venture Capital is part of the Private
collates data from 2008 onwards. investment histories are reflected in the Equity life cycle and is financing that
To complement these surveys, SAVCA aggregated data from the Private Equity investors provide to businesses in the
start-up and early growth phase of
also publishes a series of impact reports Industry Survey 2019 and the Venture
a business that they believe has long
with a different focus that seek to unpack Capital Industry Survey 2019. term, high growth potential.
the social and governance impact For private equity, overall industry
of private equity and venture capital activity has grown significantly since the
investments. The industry surveys and first impact study in 2009. Venture capital report. These changes underscore the
impact reports complement each other declined between the first two reports need for an impact perspective on these
well. For instance, this impact report but increased considerably after the 2013 investments.
35 700
30 600
25 500
20 400
Value (Rbn)
Volume
15 300
10 200
5 100
0 0
2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018
Figure 1: Value of private equity investment
Value: Follow-on investments Value: New investments Volume: Follow-on investments Volume: New investments
8SAVCA - IMPACT REPORT - 2020
Activity in the private equity industry has in new investments. Deal volumes in annually increased to R830m.
grown strongly over the past two decades contrast show a decline from 2009 until
The Private Equity Industry Survey 2019
but not without notable contractions in solid recovery of growth in 2014, to reach
argues that the 71.6% growth in total funds
specific years. In 2009, overall investment a total of 818 deals a year in 2018, split
in 2018, against a backdrop of 0.8% growth
totalled R7.2bn (Figure 1), then almost almost equally between new and follow- in GDP, reflects the resilience of the PE
doubled to R13.9bn in 2013 and then by on investments. industry and the confidence of investors
2018 it nearly tripled to R35.4bn. Growth
In the past decade, changes in venture that venture capital and private equity
in investments was not consistent over
capital activity can also be observed are able to grow value despite the overall
the latter period: between 2011 and
in terms of volume and value of deals. lethargy in the economy. The Venture
2012, the investment value dipped by
Between 2009 and 2018, 775 VC deals Capital Industry Survey 2019 also shows
nearly R5bn but recovered over the next
were concluded with a total investment year-on-year increases in both value and
four years to levels seen in 2011. Then
value of R5.3bn. A watershed year for volume of deals since 2014, which again
a major leap happened in 2017 with
the industry was 2013 (Figure 2). Before underscores the robust confidence of
investments totalling R31.1bn, double
that, the industry average was 32 deals a investors in the industry to grow value.
the amount recorded in 2016. In 2017,
most of the investment – R18.9bn – was year and from 2014 onwards, the average The rest of this report unpacks how that
for new deals compared with R12.2bn jumped to 129. Similarly, the value of growth in financial value is reflected in
in follow-on investments. In 2018 this deals shifted after 2013. Before 2013, other aspects of the portfolio businesses
was reversed with the majority of funds the average value of investment by the in terms of job creation, governance, BEE
(R20.5bn) channelled into follow-on industry was R223.6m a year, and between contributions, and innovation, among
investments compared with R14.9bn 2014 to 2018 the average value invested others.
1 600 200
1 455
1 310
150
1 165
1 020
Value (Rm)
Volume
875 100
730
585
50
440
295
150 0
2009 2010 2012 2013 2014 2015 2016 2017 2018
Figure 2: Value of venture capital investment
Value Volume
9The businesses in this study: an overview of respondents
This report is based on a study of 75 portfolio (investee) companies of South African private equity and venture capital funds.
Investment type
Seed and early stage capital refers to development capital and refers to funds
investments made during the early that investors contribute to support
phases of a company’s life cycle. Buyout/ a company through an expansion or
buy-in investments refer to funding growth stage in its life cycle.
to enable a management team or The majority of investments have
empowerment partner, either existing always been for expansion/development
or new, and their backers to acquire purposes and this has remained
a business from the existing owners, consistent over the years at around
whether a family, conglomerate or other. 40% (Figure 3). There has, however,
Unlike venture and development capital, been strong growth in buyout/buy-in
the proceeds of a buyout generally go investments since the 2013 study while
to the previous owners of the entity. far fewer investments are for seed/early
Buyouts are sometimes leveraged. The stage capital.
third form of investment is expansion or
42
41
40 40
37
35
32
30 30
Percentage
25
21 22
11
0
Seed & early stage Buyout/buy-in Expansion &
development capital
Figure 3
2009 2013 2020
Q8. What type of investment was initially received? n=73
10SAVCA - IMPACT REPORT - 2020
Economic sector
Electricity & electrical technology 18%
Chemical & commodities 11%
Food 10%
Computer & IT services 10%
Telecommunications & media 9%
Industrials & industrial engineering 9%
Health 7%
Financial services 7%
Real estate 6%
Support services 5%
Transport & freight 5%
Retail & household goods 2%
Utilities 1%
0 5 10 15 20
Percentage
Figure 4 Q5. In what sector does your business operate? n=75
The economic sector’s taxonomy has been health, financial services, support services,
broadly adopted from the taxonomies real estate, transport & freight, retail &
used for indices of JSE-listed companies. household goods and utilities.
The 75 respondents are from a variety of
The electricity and electrical technology
sectors.
sector attracts the bulk of PE/VC funding
Sectors of the economy represented are with 18% (Figure 4) while chemicals
electricity & electrical technology, food, & commodities, food, computer/IT,
chemicals & commodities, computer & telecommunications & media and
IT services, telecommunications & media, industrials each getting around 10% of
industrials & industrial engineering, the funding.
11Investment type by sector
We examined the kinds of investments Expansion and development capital Buyout/buy-in investments are usually
made into the top seven sectors represented investments are made into businesses into more mature businesses. Two thirds of
by respondents. Other sectors had too few that are in a growth phase and require respondents in the industrials & industrial
respondents for meaningful analysis. investments to reach their next level engineering segment received buyout/
of potential. Here, 71% of respondents buy-in investments and 50% in financial
For the telecoms/media and electricity/
in computer & IT services attracted services, while 43% of respondents in each
technology sectors, 43% of respondents
expansion capital and 50% of those in of telecoms/media and food received this
said they had received seed funding and
support services. type of funding.
38% early stage funding.
14%
25% 25%
33%
31% 38% 43% 43% 67%
31% 50%
Electricity & electrical Financial services Food Industrials &
technology industrial engineering
14%
25%
71% 50% 43%
29% 25% 43%
Computer & IT services Support services Telecommunication & media
Figure 5
Expansion & development capital Seed & early stage Buyout/buy-in
Q5. In what sector does your business operate? n=39
Q8. What type of investment was initially received? n=73
12SAVCA - IMPACT REPORT - 2020
Business location
0% 0%
Limpopo
59%
35%
2% 0%
4% Mpumalanga
0% Gauteng
North West
0% 1% 9% 8%
Free State
Kwa-Zulu Natal
3% 4%
Northern Cape
29%
0% 1%
Eastern Cape
27%
17%
Western Cape 0%
Multiple territories
Figure 6 2013 2020
Q6. Where is your business located? n=75
Compared to the study from 2013, in the earlier studies.
this study had a broader geographic Most respondents were still from
spread of businesses1, with just under Gauteng and the Western Cape with no
30% of the businesses having locations respondents at all from Limpopo and
and operations across more than one Mpumalanga in 2020 and only 1% in the
province. This factor was not measured Free State and Eastern Cape.
1
Data were not collected on this question in the 2009 study.
13Age of business
10 %
Respondents to this 2020 study represent In the last
5 years
a mix of business age. Businesses aged
five to 10 years attracted the most funding
(36% were in this category) followed by
24%
much older businesses, while 10% were More than
30 years ago
younger businesses – less than five years
old.
How long ago
respondent 36 %
26 to 30
years ago
4% business was
founded 5 to 10
years ago
21 to 25
4%
years ago
12 %
15 to 20
years ago
10 %
10 to 15
years ago
Figure 7 Q7. When was your business founded? n=70
Funding rounds
80 A funding round refers to a cycle or round
70 of funding that a business goes through in
order to raise capital. In 20132, almost one
60 65
third of respondents had only one funding
50 round;15% received one other funding
Percentage
40 round; 7% received two other funding
rounds; and 13% received more than three
30
32 funding rounds.
28
20
21 By contrast, in 2020 participating
19
10 15 13 businesses were more likely to have had
0 7 other funding rounds. Almost two thirds
No other PE/ 1 other funding 2 other funding More than 3 other (32%) had only one funding round; 28%
VC funding round rounds funding rounds had one additional round; 19% had two
additional and 21% had more than three
Figure 8 2013 2020 funding rounds.
Q9. How many funding rounds has your business had? n=57 This trend in increased funding rounds
underscores the committment of the
PE/VC industry to continuously engage
businesses and enable their growth.
2
Data were not collected on this question in the 2009 study.
14Proudly championing private
equity and venture capital
SAVCA is proud to represent an industry exemplified by its dynamic and principled people, and
whose work is directed at supporting economic growth, development and transformation.
SAVCA was founded in 1998 with the guiding purpose of playing a meaningful role in the Southern African venture capital
and private equity industry. Over the years we’ve stayed true to this vision by engaging with regulators and legislators,
providing relevant and insightful research on aspects of the industry, offering training on private equity and venture capital,
and creating meaningful networking opportunities for industry players.
We’re honoured to continue this work on behalf of the industry.
www.savca.co.za | +27 (0)11 268 0041 | info@savca.co.za | @savca_newsFinancial and business performance
Chapter 1
In his section we examine the performance of the businesses in terms of sales, profitability, their expenditure on capital projects (indicating
their confidence in the future of the business), their R&D expenditure (which reflects their desire to remain relevant to customers and
retain their competitiveness) and growth in employee numbers (which shows their contribution to job creation in South Africa).
Growth rates of firms
The annualised growth rates in the table Modified CAGR (%) Sample size*
to the right reflect the changes in specific
business performance metrics since the Total sales 24.0 18
time of investment to the most recent
financial year. Respondents provided Ebitda 18.4 16
exact figures for each of the metrics,
which were then used to calculate a SA headcount 22.0 22
compounded annual growth rate (CAGR)
for each metric. Figures were annualised Capital expenditure 26.6 12
and then a simple average was determined
for CAGR in each line item. Annualising R&D expenditure 34.0 4
data allows comparisons regardless of
* Sample sizes vary because not all respondents provided data. Only firms with investment periods of
investment periods. more than one year were included. 15 of these firms are enterprises with turnover of more than R50m
Across all indicators, financial and per annum, and one has turnover between R10m and R50m.
business performance has been positive
with average growth of 24.0% in total
sales, 18.4% in Ebitda, 22% growth in Q33 Please provide values for each of the following at the time of investment
employment, 26.6% in capital expenditure Q34 Please provide values for each of the following in your most recent financial year.
and 34% in research & development
expenditure. Portfolio companies sampled
had a total revenue of R48.4bn, an Ebitda
total of R3.5bn, R5bn in fixed assets and
spent a total of R410m on R&D.
16SAVCA - IMPACT REPORT - 2020
Comparison with listed companies and UK PE companies
Another perspective on the growth performance or being delisted, are excluded. were published in the 11th edition of the
experienced by PE/VC-backed companies is However, this approach mirrors the nature Ernst & Young Annual Report on the
to compare them with industry peers both of our survey which looks only at portfolio Performance of Portfolio Companies. The
nationally and internationally. For local companies that were operational at the time report concludes that the PE firms perform
comparison we selected two indices of JSE- the survey was conducted. roughly in line with public companies in
listed companies, the all share index (Alsi, the UK. The report covers 55 portfolio
which includes all the companies listed on Here it is opportune to note potential companies as at 31 December 2017 plus 88
the JSE; there were 356 at end-September survivor or high-performance bias in portfolio companies that had been owned
2019) and the JSE Top 40 index (the largest PE/VC portfolio companies and the JSE and exited since 2005. The annualised
40 companies by market capitalisation). We companies. All respondent companies are growth rates are calculated based on
also introduced an international benchmark still operating entities so failed companies aggregated information.
from the UK private equity industry. are not included. In addition, participation
in the study was voluntary for portfolio The only difference between the above
For JSE-listed firms, compound annual companies and those that may be benchmarks and the companies in this
growth rates (CAGR) for each indicator struggling financially may have opted not to study is the following: annualised growth
shown on the table are calculated using participate. Both these factors may skew the for the three comparators – the JSE All
unweighted aggregates of companies that results positively. Share Index, the JSE Top 40 Index and the
were constituents of the indices as at 31 UK-based companies – were calculated
December 2018 and have a five-year history. The UK companies’ data are from a study using aggregated information whereas
This approach of calculating growth is of companies that meet the Private Equity annualised growth rates for the PE/VC-
vulnerable to survivorship bias because Reporting Group requirements – a set of backed companies is a simple average
companies which exited the indices before guidelines on transparency in reporting of annualised growth rates of individual
end-2018, most likely because of poor in the private equity industry. Findings portfolio companies.
Indicator* PE/VC-backed companies JSE Alsi CAGR (%) JSE top 40 CAGR (%) UK PE portfolio
2020 CAGR (%) companies CAGR (%)
Total sales 24.0 2.5 3.0 6.5
Ebitda 18.4 3.4 3.8 4.2
Number of employees 22.0 3.0** 3.0** 2.4
Capital expenditure 26.6 -2.5 -1.8 9.8
* PE/VC backed companies, Alsi, JSE top 40 and UK PE portfolio companies all represent annualized growth and are calculated based on aggregated information.
** Employment figures were available only for companies in the financial services sector.
From the table, we observe the following: trend is one of improvement across all and UK PE-backed firms on metrics such
measures except capital expenditure as turnover, Ebitda, capital expenditure and
• Alsi companies showed 2.5% turnover
(-1.8%). growth in number of employees. Again, it
growth, 3.4% Ebitda growth and 3%
should be noted that the sample of firms that
growth in the number of employees. The • UK PE portfolio companies showed 6.5%
participated in this study was not randomly
overall trend here is one of improvement turnover growth, 4.2% Ebitda growth, a
selected and is thus not intended to represent
across all measures except capital 9.8% increase in capital expenditure and
the performance of all PE/VC-backed firms.
expenditure, which showed a -2.5% 2.4% growth in the number of employees.
Instead, the findings should be read as
decline. The overall trend for UK PE portfolio
showing the performance of those companies
companies is also one of improvement
• JSE top 40 companies (which are a that opted to participate in this study. It is these
across all measures.
subset of the Alsi companies) showed 3% firms that have shown favourable outcomes
turnover growth, 3.8% Ebitda growth and The comparison above shows that PE/VC- when compared with the JSE-listed firms and
3% growth in the number of employees. backed firms included in this study showed UK PE-backed firms.
Similar to the Alsi companies, the overall far better performance than JSE-listed firms
17Case study
GoMetro:
Go Metro:AnAnexample
exampleofofhow
how
the investment improved overall
business performance
Investment impact highlights
• Revenue has grown 100% year on year since
2014
• Between 30% and 50% of profits are
reinvested in research & development
• Has delivered an internal rate of return
(IRR) of 7% for the lifetime of the investment
• Revenue topped US$1m for the first time in
the 2018 financial year
Key facts
Website:
www.getgometro.com
Sector/business focus:
Public transport smart mobility solutions
Country:
South Africa
General partner/investor:
Angelhub Ventures, Tritech Media, 4Decades
Capital, Centaurus Capital
Year of investment:
2014 and follow-on 2016
Company history The company has proven that it is able to
Type of investment: GoMetro is on a mission to change the way establish long-term relationships with local
Seed capital that cities move by improving the efficiency authorities such as the City of Cape Town
Investor shareholding: of public transport systems. It does this by (three years) and public transport operators
40% using an artificial intelligence (AI) platform like Prasa (seven years). It has also shown
Year of exit (if applicable): to map and measure current patterns and that its system has ready customers in highly
Current then optimise public transport operations to developed markets such as the UK and US,
Enterprise value at time of investment: most effectively meet demand. as well as in developing economies such as
R12.5m Rwanda and Ghana.
Turnover: Having put its system to the test in
R17m South African cities from Cape Town GoMetro’s core technology was
Turnover growth: to Rustenburg, the start-up already has acknowledged by the University College of
403% operations in six countries and has had its London, at the Urban Age Convention in
EBITDA: Addis Ababa in 2018 as “world-leading in
system deployed in 10. The business has
R1m reforming public transport”.
shown 100% year-on-year growth since it
EBITDA growth:
was established in 2014 and has attracted the
N/A Transaction motivation
Employees: attention of notable backers along the way.
GoMetro’s initial seed capital investment
35 It has received funding in various forms over was used to launch the small enterprise
Employee growth: that had been bootstrapping itself over the
the years from the likes of initial co-investors
200%
Angelhub Ventures and 4Decades Capital, two preceding years. It subsequently had
and subsequently TriTech Media. At the end two more successful fund-raising rounds
of 2018, GoMetro took on Centaurus Capital that have helped to maintain GoMetro’s
as a majority black investor. momentum. The rapid growth in the
18“Every time we’ve
raised venture
capital we’ve always
made break-even a
key milestone. And
we’ve been able to
achieve that 18 to
24 months after
raising funds, so our
profitability margins
business necessitated the hiring of costly and within the company.
have increased to
scarce skills.
GoMetro’s influential investors have played essentially 50% to
Company founder Justin Coetzee says a key role in opening doors to new markets
the advantage of “patient capital” offered and opportunities, while helping the 60%.”
by private equity funding has allowed business to bed down formalised structures
the business to grow at the right pace and processes. This provided “accelerated
and allowed management to “build the learning” for Coetzee and his relatively young - Justin Coetzee,
business we wanted to build”. With 30% to team.
50% of profit reinvested into R&D to drive company founder
Through this support and the initial
accelerated development, this breathing
room is important.
expansion into new markets, GoMetro
generated revenue above US$1m for the first
and CEO
time this year.
Impact of the venture capital partnership
GoMetro is starting to reap the rewards The company is a level 2 B-BBEE contributor,
of this patient capital that has allowed with 51% black ownership.
it to manage growth and prepare for its
Justin Coetzee, company founder and
international expansion.
CEO: “Every time we’ve raised venture
Coetzee says rapid growth in revenue, capital, we’ve always made break-even a key
operations and complexity required a milestone. And we’ve been able to achieve
concerted effort to invest in staff, as well as an that 18 to 24 months after raising funds, so
effective structure and recognisable culture. our profitability margins have increased to
This process has produced a new layer of essentially 50% to 60%.” . ■
leadership that has been nurtured from
SAVCA - IMPACT REPORT - 2020 19The impact of investment on BEE
Chapter 2
South Africa’s black economic empowerment codes are a set of measures that show the extent to which businesses are transforming
in terms of key issues such as ownership, management control, skills development of staff, enterprise & supplier development and
socioeconomic contributions.
The Broad-Based Black Economic and R50m. These businesses are also
Empowerment (B-BBEE) Codes define expected to comply with all five elements
several categories of businesses which have on the BEE scorecard. However, a QSE with
implications for the expected compliance 100% black ownership immediately qualifies
and benefits derived. Generic enterprises for a level 1 rating while a QSE with at least
(GEs) are businesses whose revenue exceed 51% black ownership qualifies for level 2
R50m. Businesses in this category are rating.
expected to comply with all five elements on
Exempt microenterprises (EMEs) refer to
the BEE scorecard.
businesses whose revenues are R10m or
Qualifying small enterprises (QSEs) are lower. EMEs receive an automatic BEE score
businesses with turnover of between R10m of 100 and are exempt from BEE criteria.
BEE scoring pre- and post-investment
80
70
66
60
50
51
Percentage
40
30
26
20 23
21
10 13
0
Before investment After investment
Figure 9
Generic enterprise Qualifying small enterprise Exempt microenterprise
(turnover >R50m) (QSE; turnover R10m-R50m) (EME; turnoverSAVCA - IMPACT REPORT - 2020 BEE classification pre- and post-investment A BEE scorecard refers to a set of The BEE Act defines each compliance level elements considered in determining in terms of the following parameters on the a company’s BEE compliance generic scorecard: level. When all elements (equity Level 1: ≥100 points ownership, management control, skills Level 2: ≥ 95 but
Changes in BEE elements
Chapter 2
Ownership
7% 9%
54% 30% Drilling down into the different BEE development, which reflects that, post the
categories, the strong influence of PE/ investment, businesses are ensuring their
VC investments is clear: the navy-shaded competitiveness through developing their
areas are the percentages of businesses staff. However, 2% reported lower levels
that report improved scores in the various of skills development; while this is a low
categories after the investment. percentage, it is of concern.
Management control
The equity ownership element relates to The BEE codes require companies to
9% shareholdings and voting rights controlled implement preferential procurement
by black people within a business. PE/ and spend specified percentages of net
VC investments clearly have a strong profit after tax on different enterprise and
38% 53% influence here with more than half (54%) supplier development (ESD) programmes.
of the businesses reflecting higher levels Here the influence of the investment is
of black ownership post the investment. strong, 71% reporting an increase in their
Conversely, 9% reported lower black ESD expenditure.
ownership – while this is a relatively small
The socioeconomic development (SED)
Skills development number, it is worth noting the diminished
element refers to the extent to which
performance on this important BEE
2% a business participates in social and
7% element.
economic investment programmes. The
23% The management control element refers compliance target for SED is 1% of net
68% to the extent to which black board profit after tax (NPAT). In 2020, 63% of
members have voting rights, have control businesses reported an increase in their
of a business’s executive board and form expenditure on this BEE element while
part of senior management. Again, the 27% said it remained the same.
influence of PE/VC investments is clear
Next, we compare the findings from the
with 38% reporting an increase in black
Enterprise & supplier 2020 study to those in 2009 and 2013.
development management control.
Across the five elements, respondents
The skills development element refers indicate that progress on BEE elements
8% 21% to the extent to which a business is better than before the investment, and
contributes towards the development significantly better than in the previous
of the skills and education of its black studies. The exception is management
71% employees. Just over two thirds (68%) control which in 2020 is lower than in
reported an increase in their skills 2009 and only slightly higher than in 2013.
Socioeconomic development
10%
27%
Figure 11
63%
Lower The same Higher Not applicable
Q14. What have been the specific changes to these BEE factors since investment? n=64
22SAVCA - IMPACT REPORT - 2020
Ownership
The impact on black ownership is notably
higher in 2020 than in 2009 and 2013. 5% 9%
The number of companies reporting
improved equity ownership dropped from
44% in 2009 to 33% in 2013 but soared to 44% 2009
51% 33% 2013
58%
54% in 2020.
7% 9%
54% 2020
30%
Figure 12
Lower The same Higher Not applicable
In 2009, 5% of businesses reported lower higher. In 2020, 9% of businesses reported
equity ownership, just over half (51%) lower equity ownership, about a third said
said it remained the same and 44% said it it had remained the same, over half (54%)
had grown higher. In 2013, 9% businesses said it was higher, while 7% said this was
reported lower equity ownership, 58% said not applicable to them.
it remained the same, and 33% said it was
Management control
Relative to other elements measured
1% in 2020 and to the previous
studies, management control is the
underperforming element. While
41% 2009 58% 35% 2013 65% about 40% in all three studies reported
improved management control by black
9% people, the majority in each case (2009:
58%; 2013: 65%; 2020: 53%) reported
that this element remained the same after
38% 2020 53% investment.
Figure 13
Lower The same Higher Not applicable
23Skills development
Chapter 2
Skills development is an extremely
important element of black economic
empowerment as it improves people’s
qualifications and provides potential for 37%
upward mobility within companies. In 42% 2009 58% 2013 63%
this 2020 study, PE/VC investors have
clearly focused on this issue, with more
than two thirds of investee companies
7% 2%
reporting an improvement post the 23%
investment against 42% in 2009 and 37%
in 2013. 2020
68%
Figure 14
Lower The same Higher Not applicable
In 2009, 58% of businesses said skills reported lower skills development, 23% said
development had remained the same and it had remained the same, over two thirds
42% said it was higher. In 2013, 63% said (68%) said it was higher, and 7% said this
it remained the same, and 37% said it had was not applicable to them.
grown higher. In 2020, 2% of businesses
Enterprise & supplier development
This element is difficult to compare across the three studies since the updated BEE codes combined enterprise development with
preferential procurement to create enterprise & supplier development as one element. We compare the findings here nonetheless to
ascertain whether there are any broad trends or observations.
Preferential procurement
Direct comparison on this element
is not possible, but it is worth noting
30% 24% the significant change between the
preferential procurement figures from
2009
70% 2013
76% earlier reports, and the 2020 report
showing a 71% improvement in ESD.
8% 21%
2020
71% In 2009, 70% of businesses said
preferential procurement had remained
the same and 30% said it had grown
Figure 15 higher. In 2013, 76% said it remained the
Lower The same Higher Not applicable same and 24% said it had grown higher.
24SAVCA - IMPACT REPORT - 2020
Enterprise & supplier development
Again, the figures show that investors
are pushing enterprise and supplier 1%
development (formerly termed enterprise 32%
development) of black businesses far more
than in previous years, with a very high 37% 2009 62% 2013
68%
percentage (71%) of investee companies
reporting improvement in this aspect
against 32% in 2013 and 37% in 2009. 8%
21%
71% 2020
In 2009, 1% of businesses said enterprise
development was lower, 62% said it
had remained the same and 37% said it
had grown higher. In 2013, 68% said it
remained the same and 32% said it had
grown higher. Figure 16
Lower The same Higher Not applicable
Socioeconomic development
10% This element was not included in the
previous studies but PE/VC investors do
27% push socioeconomic upliftment initiatives
in their investee companies, with 63%
63% 2020
reporting higher levels socioeconomic
development initiatives after the
investment.
Figure 17
Lower The same Higher Not applicable
Conclusion: Strong investment focus on BEE
The figures for all five BEE elements show that investors are clearly encouraging their investee companies to focus strongly on
all five elements of black economic empowerment and are indeed succeeding in improving overall transformation within the
companies themselves and within their business ecosystems.
25Case study
Investment impact highlights
• Revenue has grown 100% year on year since
2017
• Profitability has grown 432% over this
period
• DSES delivered a 12% internal rate of return
(IRR) for the lifetime of the investment
• The DSES Domes division promises a whole
new chapter for the business
Key facts
Website:
www.dses.co.za
Sector/Business focus:
Tankage maintenance and refurbishing
Country:
South Africa
General Partner/investor:
Edge Growth
Year of investment: Company history of increasingly large projects..
2017 DSES is a tankage maintenance and
Type of investment: refurbishment engineering firm in Durban Transaction motivation
Expansion capital/funding loan The Engen contract may have been the
that has rapidly built a solid reputation
Investor shareholding: spark that set DSES off on its accelerated
as a preferred supplier to multinational
0% growth path, but that project could just
companies in the petrochemicals, paper and
Year of exit (if applicable):
food industries. as easily have sunk the business if it had
Current
been unable to perform as expected. From
Enterprise value at time of investment: The genesis of this growth was a five-year humble beginnings with a handful of staff
N/A contract secured from Engen to maintain
Turnover: and plant and machinery hired as needed,
its tanks near Durban harbour. This set DSES today is a significant, efficient player
R33m
the company on a growth path that has in the market.
Turnover growth:
100% seen it win additional contracts in different
industries across South Africa. Engen introduced DSES to Edge Growth to
EBITDA:
bolster the capacity and capabilities at the
R7.2m The company started in 2008 and has grown young company. The funding enabled it to
EBITDA growth:
from a staff complement of 12 to more than acquire the necessary plant and machinery
432%
150 today. It has also expanded its range of to fulfil its commitments. Profitability
Employees:
153
services and products. increased as a result.
Employee growth: It has been a steep learning curve for the For Edge Growth, specialists in building
448% husband and wife team of David and the capacity of SMEs through enterprise
Melanie Swartz who operate the business. and supplier development programmes and
They have received considerable support funding, DSES has proven to be an ideal
from Edge Growth that has seconded a partner because it has managed to exploit its
financial manager to help DSES stay on top competitive advantage.
26“From when we only
had Engen, to our
application to Sapref,
BTT and other
potential clients, Edge
Growth has been
with us every step
of the way. I must
attribute most of the
new clients we have
Impact of the private equity partnership Social and environmental impact
DSES has recorded phenomenal growth DSES is heavily involved in social initiatives secured to them.”
over the past five years on the back of new within its communities and those
contracts and expanded capacity. surrounding its projects under its Projects -David Swartz, CEO
with Purpose banner. This encompasses
Apart from plant and machinery, this
charitable deeds such as its annual Food
growing enterprise has also expanded the
Drive. DSES challenges its staff to donate
skills in the team. Of the company’s 150
food to local communities, which DSES
staff, 12 have professional engineering
then matches. Staff are also encouraged
qualifications, enabling the company to take
to nominate families in their local
on increasingly complex projects.
communities who are in need of assistance.
Funding and access to markets apart, Edge
Throughout the year, DSES also raises
Growth’s most valuable contribution has
funds for these and other activities by
been to help build the internal capabilities
selling unused materials when projects are
needed to handle the rapid growth. Among
completed. It is also a regular contributor
other improvements, these mentors helped
and supporter of local churches, schools,
to get DSES certified to the necessary
crèches and other community organisations.
quality, engineering and safety standards.
The company is a level 1 B-BBEE
A major development is the exclusive
contributor, with 100% black ownership. ■
licensing agreement to supply imported
geodesic domes and decks to the local
market. These domes and decks are
retrofitted to reduce harmful emissions
escaping from storage tanks.
SAVCA - IMPACT REPORT - 2020 27You can also read
