Private equity in SA at a pivotal turning point

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00:00 – Introduction 

Jeremy Maggs: Hello and welcome to No Ordinary Wednesday, an Investec podcast where we step back from the noise to examine the forces shaping the global economy. I'm Jeremy Maggs. Now, one area where those forces are clearly at play is private equity, which involves investing in businesses that are not listed on the stock exchange. Now, instead of buying shares on the JSE, private equity firms raise money from large investors such as pension funds and insurers - pull that capital into a fund and use it to buy significant stakes in companies, often taking control. But this isn't passive investing. Private equity investors work closely with management to improve the business, whether that's refining strategy, expanding into new markets, improving operations or restructuring debt.

The aim is simple, grow the value of the company over several years and then sell it at a profit. But in recent years, that model has been under pressure. After COVID, after the pandemic, growth slowed, interest rates rose and borrowing became more expensive. At the same time, fewer buyers were active and stock markets were volatile, and that made it harder to exit investments. Funds that expected a straightforward buy, grow, and sell cycle often had to hold businesses for longer.

Now it seems that environment is shifting again. Interest rate cycles are turning, capital is becoming more selective, and in South Africa, greater political stability and tighter inflation management are improving investor sentiment. So, what does this moment then mean for private equity? Is it a return to financial engineering? Or is it operational discipline, which is still the real driver of returns? And why are global and Pan-African funds looking at South Africa again?  

To discuss this, I'm joined Rishanth Pillay, Head of Sponsor Leveraged Finance at Investec Corporate and Investment Banking.

Rishanth a very warm welcome to No Ordinary Wednesday.So acute is the strain that government is now calling on Gauteng to reduce water use by a staggering 40%, a scale of adjustment that would require not just behavioural change, but a fundamental rethink of how water is managed, financed and consumed across the economy.

At the same time, South Africans continue to use far more water per person than many global peers, even as climate variability, infrastructure failure and financial strain in municipalities intensify.

So, what does all of this mean for business?
How real is the risk?
And what does resilience look like in practice, beyond compliance and crisis response?

You’re listening to No Ordinary Wednesday, where we unpack what’s moving markets and shaping economies. I’m Jeremy Maggs.

In today’s episode, recorded following Investec and Proparco’s water resilience event, we’re bringing together policy, strategy and lived business experience to explore how businesses can become more water resilient.  

Let’s meet my guests… Joining me today is Dr Sean Phillips, Director-General of South Africa’s Department of Water and Sanitation, Helen Hulett, water-security advisor, founder of ANDWATR. and co-founder of Resolve Water and Melanie Humphries, Head of Sustainable Solutions at Investec

Thank you all for joining us.

02:05 – Big turning points in private equity

Jeremy Maggs: Let me start with this. When people talk about big turning points in private equity, they often go back to the 2008 financial crisis. But you believe COVID was the real game changer. Why do you say that?

Rishanth Pillay: That's a good question. 2008 was highly pivotal for not just South Africa, but globally. For me, working the last few years, 2019 is a lot more relatable and more recent. When you look at companies globally, in 2008, there were businesses with fundamentals within them, and those businesses didn't necessarily go under. There were some businesses that were affected because they were over leveraged, heightened the interest rates at the time ended up resulting in companies going under. And there was also a freeze on access to liquidity and that was the big issue. During COVID, it wasn't just one company or certain companies that were hit, it was everyone. And so, COVID pointed out those who had pure fundamentals behind them in terms of how they operated with those who were susceptible to issues that arose from COVID.

If you look at COVID, it happened at a pivotal time because there were a lot of private equity funds that had just started up their funds and private equity funds have a finite time period in which to deploy capital - deployment of capital or realisation of returns was effectively hampered by no growth in assets for a couple of years, or stunted growth at least.

03:31 – Is private equity moving into a new investment cycle?

Jeremy Maggs: So, let's move on now from 2019, and that seems such a long time ago. So, 2008 was even longer than that. But let me ask you if we are moving into a genuinely new investment cycle, or do you think maybe the sector is still dealing with the aftereffects of what happened during the pandemic?

Rishanth Pillay: So maybe let's deal with the second point first in that I think the market is still being hampered by the after effects of COVID, and that's purely as a result of private equity funds and the respective people around there would have looked at investment cases at the time with a view as to growth and what those assets would look like in a few years’ time. Growth was effectively stunted and private equity funds effectively need to enter an asset and exit an asset and provide a return, and in order to provide their return, those assets should have grown during that period. And so that escalation to that exit off a growth point was effectively halted, and that's led to less activity.

Now, if we talk about whether we are entering into a new investment cycle, just from a macroeconomic perspective, we are very excited about what we are seeing in the markets, but also what is effectively a pivotal turning point in terms of how private equity funds deploy in South Africa. There are a lot of large-scale private equity funds who've raised new funds and need to deploy, and that's combined with emerging fund managers - those are even more exciting. The new entrants into the market make the space even more exciting because of the enhanced activity at the end of the day, banks love that more deal flow. But I think just from a pure macroeconomic perspective, it's great to see that there's deployment of capital, encouragement of wanting to deploy investment capital into the country and growing jobs at the same time.

05:26 – Where are international private equity firms putting money right now?

Jeremy Maggs: So, let's hone in on the current macroeconomic environment if we can. I don't need to tell you that we see and continue to see a lot of global uncertainty, investors pulling money into the so-called safe havens. At the same time though, big funds still need to deliver growth. So therein lies a challenge. How are international private equity firms then deciding where to put their money right now?

Rishanth Pillay: So, I think in times of high uncertainty - and the world's a scary place at the moment - but what private equity funds and a lot of large capital allocators are looking for at the end of the day is, can we look through the cycle? What’s happening right now is not necessarily going to be present in three-four years’ time and large capital allocators and those who need to provide returns to investors need to be brave enough and need to look through the cycle. And so, I think what you're seeing, particularly in North America and in Europe, is a shift from pure race behind sector tailwinds to back to private equity fundamentals - which is look for good leaders in certain sectors that you have conviction over, look for market leaders, look for good management teams and businesses that are highly cash generative, and those that can effectively get through macro headwinds at certain points in the period.

I think that's what you're seeing globally and that overlaid with what does the next sectoral tailwind look like? What is the next AI type boom look like? Those are the sectors that guys are effectively looking to reach for but in the interim are looking for sectors that are feeding into fundamentals of private equity. That overlaid with growth stories – so where can they find growth? So, looking at countries and regions where there is growth, particularly in emerging markets, even though I think everyone's saying people are looking for safe havens. There's no real safe haven at this time of global investment. And so, guys are moving again to looking at the East, India, the Middle East, looking at Africa again, and that's highly encouraging.

07:38 – Is stability in SA translating into more deals?

Jeremy Maggs: So, let's bring it home. South Africa has faced, and continues to face, deep structural challenges. I think that is a given, but we are seeing signs of greater stability. So, are you seeing that translate into more deals actually getting done and maybe an increase in investor interest?

 Rishanth Pillay: Deals is a key word for banks. What's been highly encouraging is that the last few years have been hard, and I think that's both from a private equity perspective, but those of us in the market who are trying to support those sorts of players, it's not been an easy place. What we've seen particularly in the last 12 months, and which I think is going to be a theme going forward, is you're seeing structural tailwinds. So, you've got political stability, combined with a decreasing interest rate environment and that coupled with those green shoots that we are seeing from a macro perspective, and that sort of triangle ends up leading to guys starting to look at the country again.

Private equity funds at the end of the day have a finite time period in which to invest, and they need to pick the right time in which to start deploying. I think this is the time now. If you look at the deal volume and the activity in the space over the last 12-18 months, I think that resonates with the other items that we touched on earlier, which is new private equity funds having to deploy and new emerging funds coming through. So, those are all highly encouraging for us.

09:09 – Does South Africa have an advantage?

Jeremy Maggs: So let me pick you up on that phrase, looking at the countries - that's good news. This might sound like a naive question but compared to other emerging markets, does South Africa maybe have something of an advantage? Maybe because global investors just understand us a little bit better and see us as a little bit more predictable, or is that too simplistic an interpretation?

Rishanth Pillay: It's simplistic to an extent, but I think it's resonating quite strongly with potential investors that have reached out. South Africa's been an investment destination for a lot of developed markets, out of pockets of capital looking for investment. South Africa as a country has a rich history in terms of deep capital markets combined with strong governance structures. There's a lot of reliance on management teams in the private equity space and any investment space. I think if you look at the quality of people and if you just take a look at the listed market and look at the management representation, they're all very strong. And that translates into the private capital markets as well. And I think as an investment destination that is highly encouraging. So, disclosure standards, quality of management teams, deep capital markets - those are all green ticks for investors at the end of the day. And while it might be simplistic, I think it does help a lot that we do have a deep history of being an investible country.

11:23 – Are more deals being structured with higher leverage?

Jeremy Maggs: Now that interest rates are starting to ease, are you seeing more deals being structured with high leverage again?

Rishanth Pillay: So not back to the traditional lever to the hills, kind of thing. What we saw over the last few years is a more pragmatic view on leverage. Heightened interest rates meant people took on less debt and there was more focus on creating operational efficiencies and how to grow the business without the utilisation of excessive debts. Through a lowering interest rate environment recently, we've seen a lot more activity in our space. At the end of the day leverage is an imperative for private equity funds. You need to utilise debt and clever financial structuring in order to enhance return for investors, and that's the name of the game at the end of the day. So, we have seen an increase in deal flow.

12:17 – Has the private equity playbook changed?

Jeremy Maggs: Which brings me then to a question about private equities playbook and back to COVID. I'm wondering whether it's changed for good since the pandemic, or do you think the industry is always going to revert to using financial structuring as that primary driver of returns? Obviously when conditions allow.

Rishanth Pillay: So, I hate using financial structuring. So, let's talk about clearer financial engineering and capital optimisation. At the end of the day debt is cheaper than equity and in order to enhance returns for investors, you going to need, not irresponsible utilisation of financing, but clever ways in order to one grow the business and to enhance and provide returns to your investors. And so, the focus over the last few years, particularly internationally, was how do we sweat the asset? How do we create efficiencies? How do we create growth in an industry or certain sector? And how do we consolidate? That has started shifting slowly but steadily back towards the utilisation of leverage. And it's a cyclical thing at the end of the day. never a consonant - it's never going to be debt to your eye walls just to be able to close on a transaction. It's the smart use of financing to be able to close transactions because at the end of the day, if you are not being responsible in that regard, you're likely not going to get further investors coming to you later on.

13:47 – Is AI making a difference in SA private equity firms

Jeremy Maggs: I've got to ask the AI question now. We've, we've seen huge advances in artificial intelligence over the past couple of years. Maybe tell me from a practical point of view how private equity firms are using AI inside the companies they own. And I wonder if it's making any difference at all in South Africa or, as with so many other sectors, it’s largely experimental at this point.

Rishanth Pillay: Internationally, it is a massive topic of focus. There are a couple reports around focusing on how private equity is utilising AI. It is almost a given - if you are not embracing AI, particularly internationally and private equity, then you are lagging your competitors. Private equity, particularly Europe and North America, have been utilising AI to create efficiencies at the end of the day. Efficiency is the name of the game in private equity. So, they're utilising it all the way from a pure due diligence to canvassing of information, to synthesising of information and its analytics that effectively give you outputs that you can utilise in terms of assets screening amongst a number of other utilisations.

The GPs are using it for marketing and other uses that give them a lot more ability to focus on other areas and therefore freeing up their time. In the context of SA, themes in international, not just private equity but in developed markets, tend to fault it through to SA typically later on. A couple of phone calls before this to some of our private equity colleagues, they've indicated that slow migration of themes to SA has been accelerated over the last 12 to 18 months. I think it is being embraced in SA. The more we can utilise it both from our perspective as well as theirs. It's going to be highly beneficial not just for deal flow but for the creation of opportunities led on.

15:51 – Most attractive opportunities

Jeremy Maggs: Let's throw forward if to the next 12 maybe 24 months. What do you think might derail improving the momentum that you've been talking about and what do you see as the most attractive opportunities?

Rishanth Pillay: Those structural tailwinds that we talked about earlier - political stability, lowered interest rates, macro tailwinds - those can be hampered quite quickly, and I think we all know there are reasons behind that. We've got elections coming up, regional not national. We've got an inflation targeting regime and whether that's achievable in the short term is a question that we all need to ask. And what could lead to, again, a heightened interest rate environment, which could potentially hamper one investment and two spending. So those are the types of elements that could very quickly change tailwinds into headwinds. And so, I think, over particularly over the next 12 -18 maybe 24 months, those are the most important factors.

16:54 – One structural trend that will define private equity in 2026

Jeremy Maggs: And just finally then one big structural trend that's going to define private equity this year.

Rishanth Pillay: Structural trends, I think for private equity is going to be the clever utilisation of financial structuring as we talked about earlier because it allows the bigger players to participate in the market in a clever way. It also makes the market highly competitive as a result of the emerging fund managers coming into the space and being able to utilise clever financing to compete with some of the larger players on assets that are up for grabs.

So, not the complete move from operational efficiencies to clever financial structuring, but I think a gradual move and a deliberate utilisation of that financing is going be a, a structural theme together with hybrid equity instruments, which is effectively going to promote deal activity in the space. I think that's going be one of the large structural trends.

Jeremy Maggs: Private equity is not operating in a vacuum. It's shaped by the broader environment, the cost of borrowing, political stability, as we've referenced global risk appetite and investor confidence. I think what we're hearing is that South Africa may be entering a renewed phase for private capital driven, not just by sharper operations, but by smarter use of capital and a more confident global investor base.

Rishanth Pillay, Head of Sponsor Leveraged Finance at Investec Corporate & Investment Banking thank you for joining us on this episode of No Ordinary Wednesday.

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