Q1 2020 - (released May 2020)
SA's quarterly Private Equity & Venture Capital magazine
by Michael Avery
How will the coronavirus pandemic and resultant global economic collapse affect the private equity industry? The only honest answer is that nobody really knows.
As a healthcare crisis, the most recent precedent, the Spanish influenza, is 100 years old and so offers little use to measure its global sweep and impact. As an economic event, it raises many unknowns about how the sudden demand shock and existential dread will affect business activity and consumer behaviour — especially if the lockdown persists for an extended time.
Yet, a close look at the impact of previous economic shocks, such as the 2008 global financial crisis, can provide some clues as to how PE funds and their limited partners (LPs) will behave in a period of rapid contraction.
Polo Leteka, the co-founder and Executive Director of IDF Capital, tells me that it’s all about going into triage mode with her portfolio companies now: to assess the damage, capital requirements to weather the storm, operational issues arising from the lockdown, and a path into the risk-adjusted approach of reopening the South African economy.
There will be opportunities for funds with dry powder, which will establish private equity funds among the major predators, as the coronavirus pandemic peels the weak from the herd. Cash flush, and with mandates that already accommodate a two-year additional period with which to return capital to LPs, means that the industry will be ideally positioned.
But the growing sense of frustration at Government’s oftentimes incongruent and seemingly irrational approach to opening up sectors like e-commerce, and allowing an appropriate balance between lives and livelihoods, is palpable among dealmakers that I talk to.
Perhaps most concerning of all was an e-mail that I received from a retired High Court judge who tells me that his suspicions – that state capture forces are using this opportunity to regather and mount a concerted fightback against the president – were confirmed when the decision was taken to rescind the proposal in the draft regulations lifting the ban on the sale of tobacco products.
Connect the dots and it doesn’t take a forensic expert to see who stands to benefit from the booming black market.
Saddled with debt to create the fiscal wiggle room to fight the pandemic, South Africa can ill afford to be dragged back to the obsidian days of factional infighting in the ruling party, delaying the long-awaited structural reforms required to ignite growth.
The time for the president to act against those in his cabinet who undermine his mission has arrived.