Q&A with Sally Hutton, managing partner and Private Equity (PE) specialist, Webber Wentzel
Sally is a private equity mergers and acquisitions specialist, who has acted in most of Africa's best-known private equity transactions over the past 25 years. Her expertise in this field has been recognised by Chambers Global, Legal 500, IFLR1000 and Who’s Who Legal.
What were the overriding themes in the PE sector in 2020?
Initially, the Covid-19 crisis caused a virtual cessation of deal activity as PE funds focused on managing liquidity issues across portfolios. This did, however, lead to quite a lot of restructuring and refinancing activity.
After a few months, we started to see some new deal activity. Funds flush with cash found good opportunities in 'Covid resilient' sectors. Disposal processes also resumed in respect of targets that could show that they had had a "good" Covid - making them attractive targets. We also saw heightened investor interest in certain sectors like digital infrastructure (following the heightened need for high-speed and reliable connectivity), energy and infrastructure and certain consumer sectors.
Several potential disposals involving offshore buyers were placed on hold in light of the related travel restrictions – bidders wanted the ability to "kick the tyres" and meet management teams in person. As the year progressed though, we saw buyers become more comfortable with virtual engagements.
What were some of the most significant PE deals your firm worked on in 2020?
- Actis' acquisition of 100% of Octotel, a Cape Town-based fibre-to-the-home operator, for R2.3 billion, as well as of a significant minority stake in RSAWeb, an internet service provider. This deal has been shortlisted for Catalyst Private Equity Deal of the Year 2020;
- Capitalworks' proposed acquisition of all / a portion of the entire issued share capital of Peregrine Holdings (Peregrine), excluding the Peregrine shares held by Peregrine subsidiaries, by way of a scheme of arrangement and general offer and the subsequent delisting of Peregrine from the JSE and the securities exchange operated by A2X (Pty) Ltd;
- Phatisa Food Fund 2 LLC in respect of its acquisition of the entire issued share capital of Rolfes Holdings Limited (Rolfes), other than certain excluded shares, by way of a scheme of arrangement and the subsequent delisting of Rolfes from the Main Board of the stock exchange operated by the JSE Ltd. This deal was awarded Mid Cap Deal of the Year Award 2020 at the Private Equity Africa Awards;
- Paycorp Group (Pty) Ltd in respect of a disposal of its shareholding in Tutuka Software (Pty) Ltd to Apis Partners; and
- African Infrastructure Investment Managers' acquisition of a significant minority equity stake in MetroFibre Networx, a fibre network operator, for R823 million, in a deal that will boost MetroFibre’s expansion plans.
Has Covid-19 had a specific impact on PE dealmaking – positive or negative?
Looking at some of the negatives, those PE firms which were in a capital-raising phase were challenged when investors delayed or reduced their commitments in order to focus on their own balance sheets. Those that were amid acquisitions or disposals also had to deal with challenging regulatory and other delays and limitations on the ability to do due diligence investigations. In some cases, potential buyers also relied on material adverse change clauses to exit transactions.
There were also positives though. For PE firms looking for acquisitions, the financial strain on small- and medium-sized enterprises significantly widened the opportunity set. Also, many processes to dispose of non-core assets continued, giving rise to further buying opportunities. In many instances, pricing was also attractive for buyers, although pricing remained quite buoyant in Covid-resistant sectors.
There seems to be a growing acceptance now though that Covid-19 is going to continue to affect all of us for most of this year and that ordinary course business needs to continue. This is good for dealmaking. Businesses are now also fortified by management teams who have gone through a fast learning curve and are more experienced now than they were last year in managing this crisis. There have also been several good practices, e.g. around liquidity management, that will be entrenched and stand companies in good stead going forward.
Performance across portfolios was also quite varied, depending on the sector, demonstrating once again the value of a diverse portfolio.
Do you think the implementation of the AfCTA will stimulate cross-border PE deal activity?
There are still various agreements to be finalised (e.g. rules of origin) and countries will have to revise their tariff books, which will all take time. But ultimately the success of the AfCTA will depend on the willingness of the various signatory governments to implement it. In future years, it may create a more pan-African outlook among signatory countries, which should stimulate more cross-border trade. But as far as PE specific activity is concerned, cross-border deals have been a reality for a long time. They will continue to happen wherever there is an attractive market and an investor-friendly government.
What can African governments focus on to create investor friendly environments?
Greater policy clarity and certainty of treatment and responsiveness in processing key approvals would be helpful in encouraging foreign investment in all African jurisdictions, including South Africa and particularly in regulated sectors.
Will US president Joe Biden drive policies that will revive investor interest in Africa?
Under Biden, the US International Development Finance Corporation, which was formed in 2018 with a capacity of US$60 billion to invest across emerging markets in sectors such as energy and healthcare, could see its funding and mandate increased. That said, the US government has several very significant domestic spending priorities at this point. While Biden might encourage US companies to invest in Africa, the private sector will only do so where it is comfortable with the risks and returns.
Could you discuss some of the themes you expect will dominate the African PE sector in 2021?
Overall, Africa will continue to offer promising prospects for investors interested in emerging markets. Heightened acquisition activity may continue as there are some great opportunities out there and financing conditions are quite favourable. It is likely that much of the refinancing work that was required has now been done, so we may see lower levels of that type of activity this year.
In terms of regional areas of interest, Southern Africa will remain a key area of interest, but West and East Africa are increasingly seen as promising areas of opportunity for LPs and GPs.
From a sector perspective, agriculture will be a focus as will ICT, given the drive to digitise Africa. Renewable energy and healthcare in Africa also offer enormous opportunity as does education.
This article was first published in DealMakers Gold Medal Issue 2020 (Volume 21 No. 4).