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.