Global corporations are slowly sloughing off businesses that do not form part of core operations: this includes publicly reported disposals by listed companies such as Ascendis Health, Sasol and MTN. As the market re-assesses and adapts itself to the repercussions of COVID-19, Liz Kolobe of Agile Capital believes that divestiture is emerging as a positive trend, and that Private Equity can be a win both for the seller and the buyer.
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Whilst reasons for divestiture vary, selling non-core assets essentially sharpens the focus of a business by returning emphasis to core operations; simultaneously, such sales improve liquidity for the seller, allowing for a reduction in excess debt. “Often, when leadership teams re-focus, opportunities arise within a business to review operational structures, client service and the like. While it can be painful, it can allow for organic growth, which, in turn, is not just due to the injection of cash,” says Kolobe.
Some believe that local companies can provide superior solutions. As such, South Africa urgently needs to develop a more positive view with regards to investing in local companies.
Acknowledging that slowing GDP growth rates and socio-political conditions are additional factors encouraging divestiture in the local market, means that now is the time for potential investors with foresight to make strategic acquisitions. “For tested management teams to locate a reputable PE partner significantly favours investors in current conditions,” explains Kolobe.
Additionally, divestiture has a silver lining for investors, particularly as South Africa seems to have an exceptional success rate with regards to management buy-outs. The standard of local corporate governance is high and, says Kolobe, “BEE and BBBEE are also strong drivers, as most of our transactions include the opportunity to improve BEE credentials, acting as an added stimulus for the acquisition”.
While the next four quarters are uncertain, in terms of how COVID-19 will continue to impact the global and local economy, both established business and entrepreneurs will be able to look for the best possible outcome, utilising private equity as a vehicle for growth. “Importantly, this will enable private equity to define the business reality for the company, ensuring a solid base from which to grow,” concludes Kolobe.
