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Private Equity in South Africa: An Analysis of Challenges and Opportunities

MGAdvocate Commercial Law, Companies, Don Mahon, Private Equity, shareholders , , , , , , ,

“Private equity is, at its core, a long-term business. Success comes from patience, strategic thinking, and an ability to navigate complexity.”

— David M. Rubenstein, Co-Founder of The Carlyle Group

Introduction

Private equity (PE) plays a significant role in fostering investment and economic growth in South Africa, offering an alternative financing mechanism for businesses while providing investors with the potential for substantial returns. However, the South African PE landscape is uniquely complex, shaped by a combination of stringent regulatory requirements, economic volatility, and constrained exit opportunities. At the same time, evolving market dynamics present significant opportunities, particularly in emerging sectors such as renewable energy, healthcare, and financial technology. This essay critically examines the structural, regulatory, and macroeconomic factors shaping the South African private equity industry, highlighting both the challenges that investors must navigate and the opportunities available for those willing to engage with this dynamic and evolving market.

The Private Equity Landscape in South Africa

South Africa’s private equity market is one of the most developed in Africa, with total assets under management (AUM) exceeding R200 billion (SAVCA, 2023). The industry is characterised by a high concentration of capital among large institutional investors, including pension funds and development finance institutions (DFIs), which play a dominant role in capital allocation. Unlike global markets where large-cap leveraged buyouts are common, the South African private equity sector predominantly engages in mid-market transactions, typically ranging between R50 million and R500 million (KPMG, 2022).

Despite the relative maturity of the South African private equity sector, several factors complicate investment activities. Chief among these are the country’s regulatory framework, economic instability, and a lack of viable exit strategies. These structural challenges have necessitated a strategic approach to investment, requiring fund managers to engage with risk-adjusted models while capitalising on sector-specific growth opportunities.

Challenges in South African Private Equity

One of the foremost challenges facing private equity investors in South Africa is the country’s complex and stringent regulatory environment. Private equity transactions are governed by multiple legislative frameworks, including the Companies Act of 2008, the Financial Sector Regulation Act of 2017, and Broad-Based Black Economic Empowerment (B-BBEE) legislation. Compliance with these laws significantly increases transaction costs and can lead to prolonged deal execution timelines. Exchange control regulations, in particular, pose a major obstacle for foreign investors, as capital movements across borders require approvals from the South African Reserve Bank (SARB). While these regulations aim to ensure financial stability and investor protection, they often serve as a deterrent to foreign limited partners (LPs) seeking greater flexibility in capital deployment.

In addition to regulatory challenges, macroeconomic and political uncertainties further complicate the private equity investment climate. South Africa has faced persistent issues such as low GDP growth, high unemployment, and currency volatility. The depreciation of the rand presents a significant concern for foreign investors, as currency fluctuations affect both valuation strategies and exit outcomes. Furthermore, infrastructural constraints, particularly in the energy sector, have added another layer of risk to investment decisions. Load shedding and unreliable electricity supply impact business performance, particularly in energy-intensive industries, thereby affecting private equity portfolio companies.

Political and policy instability also contribute to investor uncertainty. Issues such as land reform, expropriation without compensation, and fluctuating economic transformation policies create an unpredictable business environment. These concerns necessitate enhanced due diligence on the part of private equity firms, with investors increasingly prioritising sectors that demonstrate resilience against macroeconomic shocks.

Beyond these structural concerns, South Africa’s private equity sector is further constrained by limited exit opportunities. The ability to exit an investment efficiently is critical to private equity success, yet the local market presents challenges in this regard. The Johannesburg Stock Exchange (JSE), traditionally a key exit route, has experienced declining liquidity and reduced initial public offering (IPO) activity in recent years (JSE Annual Report, 2023). As a result, public listings have become an increasingly unattractive exit option for private equity investors. Similarly, the pool of strategic buyers remains relatively small, limiting the potential for trade sales. Secondary buyouts, which involve selling a portfolio company to another private equity firm, have gained traction but remain less common than in more developed markets. Consequently, private equity firms often find themselves holding onto investments for longer than initially planned, which in turn affects return cycles and investor confidence.

Another key challenge in the South African private equity space is fundraising. Raising capital remains a significant hurdle, particularly for first-time or emerging fund managers. The private equity industry in South Africa is heavily reliant on institutional investors, with pension funds and DFIs playing a dominant role in capital allocation. Unlike global markets, where high-net-worth individuals (HNWIs) contribute substantially to private equity fundraising, South African HNWIs tend to favour direct investments in real estate or public equities. Additionally, foreign investors often hesitate to commit long-term capital to South African funds due to concerns over exchange controls and economic instability. These fundraising constraints necessitate innovative capital-raising strategies, including co-investment structures and partnerships with impact investors who are more willing to engage with emerging market risks.

Opportunities in South African Private Equity

Despite these challenges, South Africa remains a compelling market for private equity investment, particularly in high-growth sectors that demonstrate resilience against economic fluctuations. One such sector is renewable energy. Given Eskom’s ongoing struggles and the government’s commitment to energy diversification, private equity-backed renewable energy projects in solar, wind, and battery storage present significant investment potential. The government’s Renewable Energy Independent Power Producer Procurement Programme (REIPPPP) has further created a conducive environment for private sector involvement in the energy transition.

Another promising sector is healthcare and life sciences. The increasing demand for private healthcare services, pharmaceuticals, and medical technology solutions has created numerous investment opportunities for private equity firms. South Africa’s dual healthcare system, comprising both public and private healthcare providers, offers scope for consolidation and efficiency improvements, making the sector attractive for buyouts and growth investments.

The financial technology (fintech) sector is also experiencing rapid expansion, driven by increased mobile banking penetration and demand for alternative financial services. The rise of digital banking platforms, mobile payment solutions, and alternative lending models presents a significant opportunity for private equity investors seeking exposure to high-growth, technology-driven businesses.

Beyond sector-specific investments, the economic downturn has also created opportunities for acquiring distressed assets. Many businesses, particularly in the retail, manufacturing, and hospitality sectors, have faced financial distress due to macroeconomic pressures. Private equity firms with expertise in turnaround strategies can acquire undervalued businesses, implement operational improvements, and ultimately exit at a premium.

Regional expansion into broader African markets presents another lucrative avenue for South African private equity firms. South Africa serves as a financial gateway to the continent, and private equity firms are increasingly looking to high-growth markets such as Nigeria, Kenya, and Egypt for regional expansion. Investing in businesses with scalable models that can operate across multiple African jurisdictions allows private equity firms to mitigate domestic economic risks while accessing larger consumer markets.

Additionally, environmental, social, and governance (ESG) considerations are reshaping investment priorities in private equity. There is growing demand for ESG-compliant investments, with institutional investors increasingly prioritising funds that align with sustainability principles. This shift provides an opportunity for private equity firms to attract long-term capital from global DFIs and impact investors who are actively seeking exposure to socially responsible businesses. Investments in sustainable agriculture, clean technology, and inclusive financial services align well with these evolving investor expectations.

Conclusion

The South African private equity industry operates within a complex and evolving financial ecosystem. While regulatory challenges, economic volatility, and constrained exit opportunities present notable hurdles, the market continues to offer compelling investment opportunities, particularly in high-growth sectors such as renewable energy, healthcare, and fintech. Investors seeking exposure to South African private equity must adopt a strategic and risk-adjusted approach, leveraging sectoral expertise, regulatory acumen, and regional diversification to unlock value. Despite the challenges, those who navigate the market effectively stand to generate strong returns while contributing to South Africa’s broader economic development.

References

   •       KPMG (2022). Private Equity Market Insights: South Africa.

   •       PwC (2023). Regulatory Compliance and Private Equity Trends in Africa.

   •       SAVCA (2023). Annual Private Equity Industry Report.

   •       JSE (2023). Johannesburg Stock Exchange Market Performance Review.

EMPLOYEES CLAIMS AND THE TREATMENT OF CONCURRENT CREDITORS IN A BUSINESS RESCUE – By Don Mahon, Lisa-Marie Bowes and Kyle Telfer

MGAdvocate Business Rescue, Commercial Law, Companies, Company Law, Don Mahon, Employees, Legislation, Liquidations, meetings, shareholders, shareholders' meetings , , , , , , , , , , , , , ,

“The Employer generally gets the employees he deserves.” – J. Paul Getty

 

The introduction of the Business Rescue regime into South African Company Law has been a boon for litigators, whilst stakeholders and business rescue practitioners navigate their way through a minefield of difficult legislative provisions in an effort to give effect to the purpose of the regime.

In this article, we intend dealing with two aspects, namely:

  • a proper interpretation of section 135 of the Companies Act 71 of 2008 (“the Act”) dealing with the preferent rights of employees; and
  • whether creditors are obliged to accept a payment of less than what is owed to them, on the basis that their claims may be classified as concurrent.

 

A Proper Interpretation of Section 135 of the Act

 

Section 135 of the Act provides as follows:

“(1)    To the extent that any remuneration, reimbursement for expenses or other amount of money relating to employment becomes due and payable by a company to an employee during the company’s business rescue proceedings, but is not paid to the employee –

  • the money is regarded to be post-commencement financing; and
  • will be paid in the order of preference set out in subsection (3)(a).

…

(3)     After payment of the practitioner’s remuneration and expenses referred to in section 143, and any other claims arising out of the costs of the business rescue proceedings, all claims contemplated –

(a) in subsection (1) will be treated equally, but will have preference over –

(i) all claims contemplated in subsection (2), irrespective of whether or not they are secured; and

(ii) all unsecured claims against the company…

(4)     If business rescue proceedings are superseded by a liquidation order, the preference conferred in terms of this section will remain in force, except to the extent of any claims arising out of the costs of liquidation.”

[Our emphasis]

The question arises as to what meaning must be attributed to the words “becomes due and payable”. Although the section, at first blush, does not induce a sense of ambiguity, upon closer analysis it appears that two possible interpretations could be extracted from the wording used, as is set out more fully below.

It has been held that a debt is “due” when it is immediately claimable, that is, when it has matured and that, as its correlative, it is immediately payable.

See    White v Municipal Council Of Potchefstroom 1906 TS 47; And HMBMP Properties (Pty) Ltd V King 1981 (1) SA 906 (N) At 909d

It has also been held that the word “payable” means “that which may be paid or may have to be paid” and that “payable by him” means “for which he is liable in respect of such future loss”.

See    Marine & Trade Insurance Co Limited V Katz No 1979 (4) SA 961 (A) at 975-976

It can therefore be observed that if a debt is “due” then it must also be “payable”, but that a debt may be “payable” without yet being “due”.

A preliminary examination of section 135 of the Act discloses, in our view, two possible meanings, namely:

  • a debt which becomes due and which becomes payable during the company’s business rescue proceedings; or
  • a debt which may be payable prior to the commencement of business rescue proceedings but which transforms into a debt which is both due and payable during the business rescue proceedings.

In order to overcome the interpretational difficulty posed by section 135, one must apply the principles enunciated by Wallis JA in the judgment of Natal Municipal Joint Pension Fund v Endumeni 2012 (4) SA 593 (SCA).

We are thus enjoined to attribute meaning to the words used, having regard to the context provided by reading the particular provision in the light of the statute as a whole, giving due consideration to the language used in the light of the ordinary rules of grammar and syntax, the context in which the provision appears, the apparent purpose to which it is directed, and to weigh each possible interpretation against each of these factors. A sensible meaning is to be preferred to one that leads to insensible or un-businesslike results or one that would undermine the purpose of the Act.

The purpose of the Act can be ascertained from section 7 thereof, the most apposite subsection being section 7(k), which directs the purpose of the Act to “… the efficient rescue and recovery of financially distressed companies in a manner that balances the rights and interests of all relevant stakeholders …”.

Section 144(2) of the Act provides that:

“To the extent that any remuneration, reimbursement for expenses or other amount of money relating to employment became due and payable by a company to an employee at any time before the beginning of the company’s business rescue proceedings, and has not been paid to that employee immediately before the beginning of those proceedings, the employee is a preferred unsecured creditor of the company for the purposes of this Chapter.”

It can immediately be observed that section 144(2) refers to amounts of money which became “due and payable” prior to the commencement of business rescue proceedings where a mere reference to a debt which had become “due” would suffice to bear the same meaning. One can therefore not presume that the Act necessarily seeks to distinguish between debts which are due and payable on the one hand, and debts which are payable but not due on the other hand.

If the provisions of section 135 were to be interpreted on the basis that they refer only to debts which became payable during business rescue and not before, this would lead to insensible or unbusinesslike results or a result that would undermine the purpose of the Act.

We say this because, implying such an interpretation, the Act would give preferent status:

  • to employees to whom payment had become due prior to the commencement of business rescue proceedings; and
  • to employees in respect of whom employment-related claims arose and became due during business rescue proceedings.

Protection would, however, on such an interpretation, not be afforded to employees in respect of whom employment-related claims arose prior to business rescue but which only became due subsequent to the commencement of business rescue. We fail to see any legitimate basis for seeking to exclude this category (and only this category) of employees from the protection afforded by the Act through preferent status.

It would be more reasonable and businesslike, in our view, to attribute a meaning to section 135 which is directed at the preservation of employees’ claims which do not fall within the purview of section 144(2). One would, on such an interpretation, regard a debt as having become due and payable once it is both due and payable. Therefore, if the moment at which both criteria are met (that is, the debt being both due and payable) occurs during the company’s business rescue proceedings, then the claim will be preferent in terms of section 135(3)(a)(i). In our view, an employee who has not been paid must either fall within the provisions of section 135(1) or section 144(2).

 

­Can Concurrent Creditors Lose the Right to Enforce Their Debt or a Part Thereof

 

We have witnessed an increasing practice on the part of Business Rescue Practitioners to make provision in the proposed business rescue plan for payment to creditors which they have classified as concurrent, of a concurrent dividend which is less than the full amount of their claim. This is similar, in principle, to how concurrent creditors are treated in liquidation proceedings.

Where all of the creditors concerned agree to such a proposal, no difficulty arises. However, can a creditor be forced to accept such a proposal, if he has unsuccessfully voted against the adoption of the proposed business rescue plan?

In our view, this approach is contrary to the provisions of section 154(1) of the Act which provides as follows:

“A business rescue plan may provide that, if it is implemented in accordance with its terms and conditions, a creditor who has acceded to the discharge of a whole or part of a debt owing to that creditor will lose the right to enforce the relevant debt or part of it.”

In DH Brothers Industries v Gribnitz No 2014 (1) SA 103 (KZP) At Para [67], Gorven J held that a business rescue plan may only provide that a creditor “who has acceded to the discharge of a whole or part of a debt” may be deprived of the right to enforce its claim. Since section 152(4) makes an adopted plan binding on non-consenting creditors and section 154(2) allows enforcement of pre-business rescue debts only to the extent allowed for in a plan, any provision in a plan which goes beyond a voluntary discharge of a whole or part of a debt is not competent.

We are mindful of the provisions of section 128(1)(b)(iii) of the Act, which contemplates a plan which results in a better return for the company’s creditors or shareholders than would result from the immediate liquidation of the company under circumstances where it is not possible for the company to continue to exist on a solvent basis.

At first blush this would seem to suggest that a business rescue plan may lawfully contemplate the discharge of a portion of debts owed to concurrent creditors for so long as the dividend which is paid to such creditors would constitute a better return than that which would prevail in the event of an immediate liquidation.

However, the Supreme Court of Appeal, in Oakdene Square Properties v Farm Bothasfontein (Kyalami) 2013 (4) Sa 539 (SCA) at para [33], has held that an alternative, informal kind of winding up of the company outside the liquidation provisions of the 1973 Companies Act was not the intention of the legislature when creating business rescue as an institution and that a winding-up of the company in order to avoid the consequences of liquidation is not what is contemplated by the Act.

A similar view was taken in the decision of Gormley v West City Precinct Properties (Pty) Ltd And Another, Anglo Irish Bank Corporation Ltd V West City Precinct Properties (Pty) Ltd And Another (19075/11, 15584/11) [2012] ZAWCHC 33 (18 April 2012) At Para [12].

In light of these decisions, one cannot help but wonder what was intended by the latter provisions of section 128(1)(b)(iii) of the Act and, as far as we are aware, the Supreme Court of Appeal is yet to provide meaningful guidance in this regard in light of what is stated Oakdene.

 

Adv Don Mahon

Attorney Lisa-Marie Bowes

Attorney Kyle Tristan Telfer