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Wednesday, November 4, 2015 - 03:16
Private initiative

The South African venture capital industry now represents almost R2 billion in assets under management, with healthy confidence levels that are commensurate with reported rising deal activity, a pleasing exits record and a significant increase in fund managers and industry professionals.

These findings are encapsulated in the SAVCA 2015 VC Survey, which covers VC-type transactions that took place between January 2011 and July 2015, and follow two previous studies produced by the Southern African Venture Capital and Private Equity Association (SAVCA), in 2010 and 2012.
The latest survey reveals that in the 2011-2015 period, 21 public and private venture capital fund managers and angel investors completed 168 new deals amounting to a total value of R865 million. As at July 2015, total assets under management were valued at R1.87 billion, comprising 187 deals.
SAVCA CEO Erika van der Merwe says, “The survey results confirm that the South African venture capital industry continues to expand in line with the increase in entrepreneurial high-tech activity in the market, a deepening pool of skills and experience, a growing exits track record, and lower barriers to entry for these types of deals, especially for those that target businesses involving the use of digital technology (e.g. online, e-commerce and new media) to expand service offerings.”
The survey indicates an uptick in the number of venture capital deals done, from the 11 deals struck in 2012, to 18 in 2013, 34 in 2014 and 43 annualised in 2015 to date.
In line with international trends, the average deal size has declined in recent years. The average transaction value has reduced from R9.3m over the 2009-2012 period, to R7.3m during 2011-2015, a decline of 22%. Lean approaches to starting new businesses, which translates into smaller quantities of capital required for transactions, is a key reason for this development. Another reason is the dwindling deal activity by public fund managers and public-funded entities, given that these entities in the past typically have done larger transactions than private sector managers.
The survey shows that 56% of fund managers with deals on their books had exited from at least one investment during the 2011-2015 survey period. The average rate of return on investments, for all declared deals that were exited with a gain, is 20% (compound annual growth rate). The amount declared as write-offs over the survey period totals R187 million, compared with the total value of profitable exits of R438 million.
“The trends highlighted in this survey are positive, in that they signify the advancement of a still-emergent industry that is an integral component of a vibrant and healthily functioning economy – and which is considered a critical enabling mechanism for new high-growth and entrepreneurial sectors and technologies that have the potential to transform the South African economy,” Van der Merwe says.
However, the survey found that public-sector venture capital funds were reducing their activity, and this is obviously a concern.  Private sector fund managers collectively have now overtaken government as the primary source for venture capital deals, at 81% of deals recorded in the survey period. However, government-backed investors still represent a significant portion of the value of deals, given the magnitude of their transactions.
Stephan Lamprecht from Venture Solutions, who conducted the survey, comments: “Evidence from other markets is that sensible government backing and enablement of seed-stage and early-stage VC activity are vital in ensuring not only the development of the VC asset class but, more importantly, the growth of high-tech, high-growth entrepreneurial activity. Without visionary and consistent government backing for venture capital, the industry will at best continue to grow at average and organically driven rates, subject to market pressures and the high risks associated with being an emergent asset class. It is therefore imperative for the transformation of the entire economy that VC in South Africa is harnessed to support improved, more diversified and more sustainable economic growth.”
The survey also reported that, as at July 2015, there were 31 venture capital fund managers, up from 22 in 2012. New deals have primarily been driven by independent fund managers, and by angel investors (typically high-net-worth individuals): Angels concluded 55 transactions (33% of total number of deals), amounting to R42.55 million (5% of total value of deals).
Interestingly, the average annual rate of return on investments achieved for all deals exited with a gain of 20%. When exiting venture capital deals, trade sales (sales to third parties operating in a similar industry) are the preferred mechanism, with the second-most common exit strategy being sale to management. In view of the current economic climate, almost all respondents indicate a willingness to wait up to three years for a profitable exit, while the average investment holding period was four years and seven months. Government-backed investors remained invested for longer compared with private sector fund managers.

Copyright © Insurance Times and Investments® Vol:28.11 1st November, 2015
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