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SIMON BROWN: I’m chatting now with Kondi Nkosi, country head for Schroders in South Africa. Kondi, I appreciate the early morning time. Private equity – in many senses it’s investing, it is entirely investing. The key point I suppose there is the ‘private’. These private equity firms are buying unlisted companies with the key aim of improving the value, whether by turnaround, perhaps by helping them with growth or something. But it is that ‘unlisted’ and that key point of ‘let’s make more value here’ (that is different).
KONDI NKOSI: Good morning, Simon. Thanks very much for having me. Quite right. Yes, it is really around these private equity firms investing in unlisted companies, but I think the key aim there is them identifying companies [where] they feel, through these various strategies that you’ve mentioned, they can increase their value, thereby generating returns for investors.
But I think what we’re also seeing is a trend of companies that are listed being taken private for various reasons and, again, with the aim of trying to increase value and thereby generate returns for investors.
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SIMON BROWN: That’s a good point. I actually hadn’t thought of that. We have seen a number of companies actually taken off the JSE. I suppose in that case part of the attraction is you think that the market is fundamentally mispricing, because that’s really what a private equity company is doing. They want to buy a company which they think they can get significant better value out of. The easiest way to do that is to start with a company which is ‘cheap’.
KONDI NKOSI: Absolutely. But I think it also depends on the approach that the private equity investors are taking. So if you look at a buyout as an example – the case where you’ve got a private equity firm that takes a majority stake in the business now in the listed environment – it’s unlikely that the guys would necessarily have a majority stake in those businesses. And if you’ve got a controlling stake in the business, you’re able to implement various changes that perhaps have been a little more difficult to implement in the listed environment.
The other issue that I think plagues some of the listed companies is this point around compliance, and the cost thereof. As an example, within the unlisted environment you’ve got, I suppose, a few more freedoms to implement a business plan, thereby generating that value we’re referring to.
SIMON BROWN: Yes, I take the point. And perhaps a little more time as well; you don’t have that biannual in the US, [and] that quarterly spotlight with results. This all then says – and this is always the case with private equity – who the private equity managers are is going to be critically important. Can they bring something to the table which turns it around, or perhaps grows the business and makes for that value?
KONDI NKOSI: Absolutely, Simon. So we’ve done a bit of research in this space.
I think all the investors that you speak to will tell you that ‘past performance is no indicator of future performance’. Private equity perhaps is a little bit of a different animal in that regard, in that typically private equity managers who have a history of success have a higher chance that future funds will be successful.
So the point that you make – regarding the credibility and the track record and the pedigree of the private equity manager – is absolutely important.
SIMON BROWN: Yes. I take that point, it is the past performance. One of the other things – and I’ve been noticing this over, I don’t know, the last couple of years or so – is where perhaps access to private equity for an investor out there just seems a lot easier. My sense is that 10 years ago you really had to be connected and know the right people. These days it is getting easier to do, which is a good thing. Caveats, Ts & Cs apply, but broadly that’s a good thing.
KONDI NKOSI: Yes, absolutely, Simon. I think that last point you make in terms of ‘Ts & Cs apply’ is a critical one. But, to answer the question, there’s certainly been a lot of development in the product structures that are available for investors to access, particularly in the sort of international space. We as Schroders are part of this trend where we are broadening the access of these private-equity investments to the more retail client base.
There is still a minimum investment that we’ll accept, but that number has been falling. And if you also look at the structures, they are much easier for retail investors to access.
So this trend I believe is going to likely continue going forward – the widening access of this asset class to retail investors – and you’re seeing it in terms of regulations that are being promulgated in Europe, in the UK, and in a few other areas that allow for private equity managers to market their products to the retail market.
If you look at this trend that we’ve been seeing regarding the number of companies that are listed on stock exchanges, if you go back to sort of the mid-nineties, that number has halved. So if you look at some of the opportunities that are available for investors in the main, and if you’re only looking at the listed environment, you’re absolutely missing out on a portion of the market where you could eke out these returns that everybody’s looking for.
SIMON BROWN: That’s actually a great point. I hadn’t thought of the private equity. It’s not a purpose, but what it is doing is increasing the scope of the investment pool which, as you point out, locally and globally has been shrinking.
We’ll leave that there. Kondo Nkosi, country head for Schroders in South Africa, I appreciate the early morning insights.
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