Parliamentary Standing Committee on Finance - Informal Hearings 22 June 2011 J-P Fourie and Mark Linington SAVCA

Parliamentary Standing Committee on Finance -

Informal Hearings

22 June 2011

J-P Fourie and Mark LiningtonSAVCA

www.savca.co.za

Presentation objectives

Overview of our industry in South Africa

Facts and figures of the industry and the economic impact thereof

Discuss the impacts of the suspension of Section 45

What is private equity?

Typically transformational and value-adding strategies.

Specialised skills and experience.

Reasons for private equity financing increasing its working capital base; business expansion and development; developing new technologies and products in order to

grow and/or remain competitive; to finance acquisitions of other businesses; to buy out certain shareholders in order to restructure the

ownership and management of the business; and introduction of BEE.

The global playing field…

Most activity is expansion/development-focused

Source: SAVCA KPMG 2011 Private Equity Industry Performance Survey

Analysis of investments by stage based on cost of investments

BEE investment activity


Cost of BEE investments made during the year (excluding Captives – Government) (Rbn)

Third party funds raised are sourced from various geographies


Geographic sources of third party funds raised

Employment growth rates of 9% p.a. JSE business’s growth rates of 4% and 1% across all businesses in SA

Employment of 5% of SA’s formal sector employees which equates to around 427 000 jobs

Average turnover growth of 20%, compared to 18% for JSE businesses

Pre-tax profit growth of 16% per annum compared to 14% for JSE businesses

Average R&D expenditure growth of 7% compared to 1% for JSE listed businesses

2006 to 2009, Private Equity achieved:

Source: SAVCA DBSA 2009 Private Equity Industry Economic Impact Survey

So what is the role/impact of role of Private Equity


In the main, respondents report that private equity has made a positive contribution to their business

Impacts Private Equity

Respondents report that performance in key areas of business had improved since receiving PE or VC backing


Reasons for Private Equity

Respondents were asked if they felt private equity was preferable to other forms of financing and why this was so


Typical deal structure

Step 2:

Step 1:

Distributions

Repay bridge

Sale of Businesses

Sale of Shares Bridge loan

Target

Sellers Bidco

Bank loan Target

Bidco

Newco

Private equity investors

Make the acquisition more feasible for the investors; Optimise debt security by direct access to assets and cash; Debt advanced to a newly-formed company; Uplift market values of assets; and The legal structures can be simplified.

Reasons for debt push-down

History of South African private equity


Cost of investments made during the year (Rbn)

Positive sentiment and growth forecasts; World was flooded with liquidity and cheap debt; Foreign bond markets were very active; A handful of deals were funded by means of foreign

bonds; Local banks were lending on more generous terms; A few debt packages were tranched (senior debt and

mezzanine debt); and Up to 70% third party debt.

Landscape in 2006 – 2008

No new foreign bond issues; Mezzanine funding for the big deals has dried up; Local banks have remained very cautious in providing the

debt; 50% of local bank debt only in a deal; and Interest rates are in the range of Jibar plus 2% to 4%

therefore not excessive.

Landscape post 2008

Typical capital structure

0%

10%

20%

30%

40%

50%

60%

70%

80%

90%

100%

2006 to 2008 Post 2008

Share capital

Shareholder loan

Mezzanine

Bank debt

In 2006-2008 some deals included mezzanine debt (10% - 15% of capital structure);

Not a feature of capital structures post; Shareholder loans are the only subordinated debt; and Exchange control limits the interest rate to prime.

SARS toolkit Shareholder loans are limited to a 3:1 ratio; New thin capitalisation rules from October 2011; and Withholding tax on interest from 2013.

“Much of which carries a subordinated or junior ranking”

Erodes confidence in South Africa; Foreign investment will go elsewhere; National Treasury and SARS have always been aware of

debt push-down – SAVCA engagements in 2006/7; Deals are being abandoned; 18 months will be a significant setback for the industry; No consultation or warning; and Need to restore certainty – SAVCA would like to urgently

engage with National Treasury (as per 2007)

Suspension of section 45

Documents

Parliamentary Standing Committee on Finance - Informal Hearings 22 June 2011 J-P Fourie and Mark Linington SAVCA