Heated debate over the pros and cons of private equity has masked the large and growing foreign interest in funding South African mid-size merger and acquisition activity through mezzanine finance.
Given my proximity to the mezzanine coalface, I have witnessed the trend with gratifying fascination and excitement.
Most recently, CDC Group, a UK state-owned investor in private equity and mezzanine funds, committed R100 million to Vantage Mezzanine Fund, South Africa's first independent mezzanine venture. CDC's commitments to private equity funds in South Africa now total in excess of R1.8 billion spread over 10 funds.
CDC boasts net assets of £2 billion (R27.7 billion) targeting businesses in poorer countries, with an emphasis on Africa and South Asia.
Its most recent fund commitments to South Africa include Sphere Private Equity Fund 1, managed by Sphere Holdings, and Ethos Private Equity Fund 5, managed by Ethos Private Equity.
Vantage, which has attracted commitments of almost R500 million to date, is applying the mezzanine finance it has raised to South African mid-cap companies with an enterprise value of between R150 million and R750 million, targeting a mixture of growth, buyout and refinancing capital.
In addition to its CDC coup, it has attracted commitments from FMO, the Netherlands Development Bank and Germany's DEG. Domestic commitments emanate from the Public Investment Corporation, the Eskom Pension and Provident Fund, the Transnet Pension Fund and Metropolitan Asset Managers.
The African Venture Capital Association Investment Activity Report 2006 revealed that in 2005, private equity funds totaling R2.55 billion were raised for investment in South Africa, with 62 percent deriving from European sources, compared with 7.5 percent in 2004. In 2005 the largest proportion of funds was raised for buyouts.
More recent statistics are not available, though it is clear that last year's number must have been yet larger than in previous years, with the mezzanine component increasing as a percentage of the total.
The context is reflected in recent observations by Rod Evison, CDC's portfolio director for Africa: "Until recently, the South African economy was characterised by high interest rates, with funding packages for mid-market private equity deals only comprising senior debt and equity provided by private equity firms or other institutions like the Industrial Development Corporation. The government's success in reducing inflation and interest rates has created a large potential for mezzanine financing.
"In western Europe and the US, mezzanine investment has generated attractive and stable returns. Although mezzanine is a relatively young asset class in South Africa, we believe that there are now excellent opportunities for mezzanine investment in South African mid-market companies."
South Africa's fiscal and monetary discipline over the past decade has resulted in accelerated economic growth. The country has seen increased spending on infrastructure, a rise in commodity prices and a consumer boom. In 2005 it generated an overall growth rate of 4.9 percent, which is expected to rise to 6 percent by 2010.
It is against this background that CDC has expressed a tremendous vote of confidence in this country. Its vote is further evidence of the growing importance of the South African market for European investors, especially in this relatively new asset class.
n Luc Albinski is the managing partner of the Vantage Mezzanine Fund