Although deals by large listed companies grab the headlines, BEE is having an impact at all levels of South African economic life. Despite its short investment horizon, some bankers see a natural fit between private equity and BEE.
“The private-equity model of highly leveraged deals is ideal for BEE, especially if the financing is largely cashflow-based,” says Shaun Rosenthal, head of specialized funds management at Wipcapital. “Some of our deals in the non-listed area are very much based on LBO principles.”
Ethos, one of South Africa’s leading private-equity firms, did its own BEE deal in November 2004. Its BEE partner is Sphere Holdings, a 74.4% black-owned and black-managed investment company. A Sphere-owned entity now owns 24.25% of Ethos, and Sphere can appoint two directors to the Ethos board. Ethos and Sphere will jointly raise Sphere Fund 1 and Ethos Fund V.
“Even in pure private-equity deals, there’s usually BEE involvement through participation by an empowered private-equity company or a BEE company,” says Sphere CEO Itumeleng Kgaboesele.
It’s still not clear whether investment by an empowered private-equity house empowers a target company. Draft versions of the South African Department of Trade and Industry’s BEE codes of good practice suggested that the target’s empowerment would depend on the carried interest accruing to black fund managers. In the DTI codes published on November 1, it looks as though the presence of black investors in a private-equity fund will also count towards the empowerment of the target. “We think there’s an agreed position that you can look through at the colour of the money,” says Kgaboesele. “The critical thing is that there’s a recognition that [private equity] is an effective way of achieving ownership transfer. Black investors have access to cashflow. You don’t have the high risk of waiting for the share price to appreciate.”
“With a 10-year fund, we can’t indulge in that kind of uncertainty,” adds Ethos partner Garry Boyd.
One of Ethos and Sphere’s first deals together is an investment in the South African subsidiary of Delta Plc, an electrical parts and repairs business. Delta will be the first portfolio company for Sphere Fund 1. The planned acquisition financing includes an bond issue.
On one level, the involvement of BEE companies doesn’t change the economics of the deal. “It’s a classical buyout and the debt-to-equity ratio and price wouldn’t really be different without empowerment,” says Boyd. But empowerment will boost Delta’s business. “Delta’s customers increasingly want to deal with an empowered supplier,” says Kgaboesele.
