Private equity growth in emerging markets : a South African case study

Abstract

Private equity investment in emerging markets continues to lag that in advances markets with many emerging countries ranking poorly as investment destinations. However, according to the Venture Capital and Private Equity Country Attractiveness Index which is sponsored by the IESE Business School Centre for International Finance (CIF), South Africa continues to be ranked as the third attractive emerging market after China and India. Further the country is the only African country to be ranked in the top 40 attractive countries for venture capital and private equity investment. This research aims to explore the above phenomenon regarding the South African private equity industry and to understand why it is regarded as amongst the most advanced in emerging markets and ranked third after China and India, resulting in its continued growth and attraction to foreign investment capital at a higher rate than other emerging markets. The research evaluated through secondary data and exploratory semi-structured interviews, three of the factors used by the IESE Business School Center for International Finance (CIF) to measure country attractiveness for private equity and venture capital investing namely; economic activity, depth of capital markets and human and social environment. Academic studies are characterised by macro conclusions mostly as a function of aggregation of results. This is correct in most instances and is evident in that a number of the research outcomes concur with the literature assertions as above. These are in respect of the role of economic growth, well-functioning capital market and banking systems, as well as the availability of good quality skills emanating from good training as pillars supporting the growth of South Africa s private equity industry. However, a key distinctive that the research discovered is that private equity practice is also more micro than macro, with the focus being much more on the quality of the general practitioner than his environment. It is their networks, skills, experience and ability to function as a team amongst others that attracts capital at times in markets where risk is considered high. In addition, South Africa s legal landscape in particular the Black Economic Empowerment Act which was introduced to address the imbalances of a segregated economic history, contributed a significant role in the development of the local industry in the last ten years.