Q3 2021 - (released November 2021)
SA's quarterly Private Equity & Venture Capital magazine
Pandemic evidence that active ownership by private equity helps to build antifragile companies
by Michael Avery
Private equity investment in South Africa is poised for an exciting few years.
The COVID-19 pandemic, and the unprecedented disruption it has caused, has provided a compelling case for how the active ownership model practised by private equity investment managers can help good companies emerge 'antifragile'.
This is the view of Jacci Myburgh, co-head of Old Mutual Private Equity (OMPE), part of Old Mutual Alternative Investments, who says that the pandemic provided evidence that sound strategy and effective management cannot be overemphasised when navigating a crisis. "While the terms resilience or robustness are considered antonyms of the word fragile, relating to a company’s quality to resist shocks or disruption, antifragile companies emerge stronger," he says.
A term coined by Nassim Nicholas Taleb in 2012, “antifragile” companies gain strength from stressors thanks to their leadership's ability to learn, grow, strategise, and execute, explains Myburgh. "Supporting, guiding and counselling company leadership teams is precisely where the active investment approach adopted by private equity managers creates the most value," he says.
While private equity managers don't interfere operationally, they work with management to craft a clear strategy that outlines how a business will compete in a particular market or under certain conditions, he says.
Myburgh experienced this first hand in 2020 when some of Old Mutual Private Equity’s most significant investments were severely impacted by the hard lockdown imposed to curb the spread of COVID-19.
"Private equity managers had the immediate advantage of seeing how the impacts of the lockdown and pandemic were playing out across many different portfolio companies," explains Myburgh. "As a result, we were able to develop a sort of playbook to support the company leadership teams across various sectors.
"This involved securing the safety of people, managing costs and working capital responsibly and engaging with important stakeholders such as lenders and landlords, for example."
At one stage, Myburgh says OMPE was holding urgent board meetings with management teams twice a week. "What the team learnt is that the active ownership model works best in periods of crisis," he says. "COVID forced our management teams to implement sometimes drastic measures – like cutting product inventory by half, for example – to survive."
Myburgh says that this is in sharp contrast to listed companies in the public market, which only meet with its board four times and shareholders twice a year. "Our advantage was acting quickly and decisively, based on current information learnt from across the portfolio, allowing our businesses to weather the crisis very well."
He says that this approach naturally translates into significant results for investors of private equity. "Unlisted equity is proven to outperform listed equity over the long term, evidenced across various markets.
"Rather than trying to elevate private equity over listed, we would argue that allocating a portion of a portfolio to this alternative growth asset class helps to diversify investment risk and smooth out volatility over the long term, over and above the return premium that it offers,” says Myburgh.
Given the medium-term outlook of a more stable political and economic environment and a balanced supply of capital, Myburgh is optimistic about the outlook for private equity over the next five to 10 years.
"We don't need the economy to grow at four or five per cent for private equity to do well – one or two per cent will suffice,” he says.
Add to this the fact that foreign investors are looking to South Africa for new growth opportunities, and Myburgh’s belief that “we are in for an exciting phase in the private equity space,” provides an optimistic outlook for what has been a tough few years for the industry.