By now, you’re probably sick of hearing about how efficient, attractive, and successful our African peer Mauritius is. Not only has the country managed to build (in a remarkably short time) a successful financial and services sector that is innovative and that employs many locals, but the country also ranks high on livability – a great climate, low crime, and temperate politics make Mauritius a stress-free place to live, work, and do business.

 In Africa, between 2012 and 2017, 953 private equity (PE) deals – worth US$24.4 billion – were reported.The main sector focuses for PE investments in 2017 were consumer discretionary and IT; others included financial services, education, healthcare and agribusiness. Although the total value of African PE fundraising decreased from US$3.4 billion in 2016 to US$2.3 billion in 2017, this was largely due to the fact that a number of big funds had achieved final closes in prior years. The hub however for PE firms was and is Mauritius.

According to the Southern African Venture Capital and Private Equity Association (SAVCA), the total size of PE investments in Southern Africa more than doubled in 2017, from ZAR15.5 billion to ZAR31.3 billion, and well above the annual average of ZAR14.7 billion over the preceding ten years. SAVCA further reported that, in 2017, South Africa’s private equity capital penetration rose to 0.7 percent of GDP. The Financial Sector Regulation Act, which took effect on April 1, 2018, is a new piece of legislation expected to bring about a major transformation of South Africa’s financial services regulatory and risk management framework. It is likely that legislation in the form of Section 12J will make unlisted investing more accessible and bring it into the main stream. Spurred on by the change in political leadership and a favourable upswing in market conditions, investor confidence in South Africa is on the rise. This is echoed in the business confidence index, which increased by 55% from 29 index points in 2017, to 45 in 2018.

South Africa benefits from a sophisticated capital markets regime (compared to other African high-growth countries), which continues to develop in ways that seek to overcome the historic obstacles of investment into Africa. The utilisation of permanent capital vehicles listed on the Johannesburg Stock Exchange (“JSE“), allows for long-term investment, the alleviation of exit pressures, a permanent source of capital, and allows the public to co-invest with experienced managers and institutional investors.

However much more needs to be done to develop South Africa as a hub for PE investments.

Making the most of Ramaphoria

Only time will tell the extent to which the election of Cyril Ramaphosa as South African president will actually impact the market. However, “Ramaphoria” has put South Africa back into the international spotlight, and there is optimism that the country will reclaim its undisputed title as the premier investment destination in Africa. Goldman Sachs recently stated that South Africa as the “big emerging market story of 2018”, despite decrease in mining production and declining manufacturing output.

A favourable stable credit rating from Moody’s, the strengthening of the rand (although tempered by the strengthening dollar in recent months), and the step-up in the state capture inquiry, are all part of the Ramaphoria dividends, which are fuelling increased investor confidence in South Africa.

However to entice the PE firms and financial institutions of Japan, Europe, India, Middle East and USA some more broader thoughts are required :

1. Capital Gains Tax regime favourable for PE firms, including that of carry forward interest.
2. Easy repatriation of profits, capital and interest.
3. More connectivity – giving wings to South African Airways, Lufthansa, etc.
4. Corporate tax holiday for qualifying employees in a asset management company.
5. Multi asset class international stock exchange
6. Liberal foreign exchange control regime
7. Investment Promotion and Protection Agreement
8. Legal professional network creation at affordable rates
9. FATCA compliance
10. More network with OECD countries
11. 100% foreign ownership for PE s permitted ( which is, but with some over-riders at present)
12. Foreign exchange control relaxations
13. Regulatory sandbox license Admittedly a relatively recent phenomena, there is not enough evidence yet to be sure what the effects of sandboxes on innovation and tech inclusion will be, but there seems to be more reasons to add them to the policy toolbox than not. Since their arrival, they have started (though slowly) to appear in areas beyond fintech. South African policy-makers might want to consider starting where others have taken a few years to arrive at.
14. Adhering to common reporting standards
15. High stature of judiciary and fast dispensation of disputes with recourse to international courts of law.

With the increase in business confidence in South Africa, there may well be renewed PE activity in the manufacturing and industrial sectors, and continued investment in the financial services sector, the mining and renewable energy sectors, among others. There may also be an increase in the number of open-ended funds in South Africa. The recent weakening of the rand against the dollar, if it continues, may be favourable to dollar-based PE funds seeking investment opportunities in South Africa, while the decline in manufacturing output may suggest there is value to be had in this sector for astute investors.

Three of the most significant barriers to PE investments are the lack of transparency, the long lock-in periods and the high entry level investment requirements. PE firms are responding to these concerns and creating investment vehicles to attract a new generation of investors. South Africa can use these to their advantage by luring SoftBank, Saif, Carlyle, Blackstone to use Johannesburg/Pretoria/Cape Town/Durban as a hub for investment of their innovative products into the rest of Africa and the world. Some of these will trickle down to South Africa due to the higher real interest rates and an underperforming equity market, where arguably the environment for both listed equities and unlisted PE funds are offering better upside at lower risk.

( This was written last year. Now with Covid19 scenario, its still relevant).