Rumble in the Jungle: Predicting the Unpredictable

By Moushmi Patel

July 30 2017
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The scene of the evening was set at the historic boxing event in Kinshasa, in the then Zaire. Muhammed Ali versus his greatest opponent George Foreman. It was a rumble in the jungle, consisting of eight intense rounds, which saw Muhammed Ali regain his heavy weight title. This is a somewhat, unusual topic to start a SAVCA Private Equity function, but given the backdrop of the underlying topic, “An extra ordinarily turbulent year”, this analogy was quite fitting.

The selected team to box their way around this topic included our very own Samantha Pokroy (Chief Executive Officer of Sanari Capital), Sbu Luthuli (Chief Executive and Principal of Eskom Pension and Provident Fund), Nhlanganiso Mkwanazi (Director at Medu Capital) and Andrei Vorobyov (Partner at Bain & Company). The ring master and host for the evening, Dr Adrian Saville, threw some gruelling punches on his home turf, Gordon Institute of Business Science, Illovo, South Africa.

The industry gathered in anticipation to witness the 3 round boxing match, to see who would come out on top: Private Equity or the Turbulent Times.

Round one: The effects of the recent political and economic events on private equity

The contenders went in with full force dominating the beginning half of the round with the current uncertain economic and political times. The political arena had delivered blow-by-blow scandals over the last couple of months, making business times more challenging for underlying portfolio companies and for capital raising. Concerns were raised that the slow erosion of institutional safeguards and accountability could deliver years of damage to the economy – a serious concussion from repetitive beatings. The contenders noted with great seriousness, the need for positive change and certainty to prevail in the interests of all South Africans.

The question arose as to whether or not the Private Equity asset class was the place to invest?

In forceful comebacks the Private Equity experts were quick to answer with Luthuli throwing the first punch, “Due to the long term investment horizon, Private Equity has always proven to be a stable asset class, while other assets are subject to day-to-day volatilities”. This was substantiated by Pokroy, “the Private Equity asset class outperforms other asset classes during difficult times, because investors have more levers in their control to unlock value” and then by Vorobyov who said that Private Equity professionals succeed by backing the right asset with the right management team, even in difficult times.

It was Mkwanazi, who brought the fight back to the topic of the round and highlighted that the business and economic environment was tough. He made reference to the recently issued industry survey, which showed that international capital raised was lower than in previous years and general capital raising was lower on a normalised basis as compared to historic trends.

Fundraising trends have also started to change, with more and more firms moving toward permanent capital vehicles, allowing fund managers to maximise their returns over more extended periods. And with that, the round had ended with no one coming on top.

Round two: The agility and resilience of the industry

The round started with a quote from Mike Tyson, “Everyone has a plan until they get punched in the mouth”. This was a very apt way to summarise what the country has been served over the last couple of months. Is the Private Equity industry agile enough to roll with the punches?

With the panel on the ropes, they agreed the damage done would hurt in the short run, however in the long run the industry would bounce back. This is in part driven by the nature of the capital that is invested into the industry, which normally has a longer term view. In addition, if Private Equity professionals stick to the fundamentals and focus on operational value add and opportunities that they can control, they will certainty clinch the prize in the end, so long as fund managers do not overpay.

This was evident from past vintages, which showed that funds raised an invested in the good years saw lower returns than those born in troubled times.

With a final round punch, the team noted that even while international capital raising had slowed, Private Equity firms were looking at more creative ways to raise capital such as listed markets and high net worth individuals. This would see the industry continue through unpredictable times.

Round three: Lessons learned from previous cycles of economic and political uncertainty

Round three, saw the Private Equity Panel going the distance. Unanimously the panel agreed, based on prior trends, that this was the time of distinct opportunity for the Private Equity industry. Tough times present opportunities to capitalise on deal flow driven by business owners looking to diversify their wealth offshore providing access to good companies at reasonable prices. Also, history teaches us that investing in portfolio companies through a downturn positions them for significant competitive gains and growth on the upswing. The worst decision to make was going on an ‘investment strike’.

The flash knockdown was Pokroy’s story of Ethos’ Andre Roux investing in the late 1980s, the very darkest of days in South Africa’s history books. Andre’s team found themselves questioning whether they should invest in such uncertain times and his boss and mentor said, “Stick to the fundamentals of your business case as you have outlined it and you won’t be sorry.” This was the right hand hook that won the evening for the Private Equity industry.

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