Private equity and the South African economy

Abstract

The private equity (PE) industry in South Africa (SA) has seen continued growth as measured by assets under management over the years, however, in the same token, entrepreneurial activity in the country has been on a decline. This study examined the reasons why (Small and Medium Enterprises) activity in South Africa is on the decline as well as the reasons why they do not seek to access PE investment. The analysis outlined results in eight thematic areas. Firstly, it finds an indication of the positive impact of private equity in the South African economy. Secondly, it presents evidence that PE industry professionals in SA have no experience with SMEs. It then outlines, given an opportunity, the advice that PE professional would give to SA SME business owners. The study also delineates some qualitative factors leading to the observed SME and PE investment disconnect in the SA context. It then profiled SME business ownership and decision making and then tried to characterise informational asymmetry and the lack of corporatisation of SMEs. Further, it brought out the level of awareness of PE and its product offering among SME business owners and finally identified the factors relating to their fear of the loss of control if they allowed PE investment. Private equity investment and involvement in the SA economy can lead to growth. It can also play a crucial role in development of SMEs which can result in labour absorption and job creation. However, PE funds in SA target medium to large companies because that is the space they assume to be less risky as they are generally well established companies. Presently therefore, there is a disconnect between PE investment and SMEs in SA