The Impact of Venture Capital & Private Equity - in South Africa 2020 - February 2020 - SAVCA

 
The Impact of Venture Capital & Private Equity - in South Africa 2020 - February 2020 - SAVCA
February 2020

The Impact of Venture Capital
            & Private Equity
     in South Africa 2020

                    Researching Capital Markets and Financial Services
The Impact of Venture Capital & Private Equity - in South Africa 2020 - February 2020 - SAVCA
Black Business
Growth Fund                                                           ®

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The Impact of Venture Capital & Private Equity - in South Africa 2020 - February 2020 - SAVCA
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
The Impact of Venture Capital & Private Equity - in South Africa 2020 - February 2020 - SAVCA
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
The Impact of Venture Capital & Private Equity - in South Africa 2020 - February 2020 - SAVCA
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
The Impact of Venture Capital & Private Equity - in South Africa 2020 - February 2020 - SAVCA
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
The Impact of Venture Capital & Private Equity - in South Africa 2020 - February 2020 - SAVCA
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
The Impact of Venture Capital & Private Equity - in South Africa 2020 - February 2020 - SAVCA
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
The Impact of Venture Capital & Private Equity - in South Africa 2020 - February 2020 - SAVCA
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
The Impact of Venture Capital & Private Equity - in South Africa 2020 - February 2020 - SAVCA
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

8
SAVCA - 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

                                                                                                                                         9
The 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

10
SAVCA - 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.

                                                                                                                                                    11
Investment 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

12
SAVCA - 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.

                                                                                                                                                 13
Age 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.

14
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     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_news
Financial 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.

            16
SAVCA - 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

                                                                                                                                                              17
Case 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   19
The 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; turnover
SAVCA - 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

            22
SAVCA - 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

                                                                                                                                   23
Skills 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.

            24
SAVCA - 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.

                                                                                                                                    25
Case 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   27
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