Private equity has arrived when business journalists vie for the most outrageous play on "Barbarians at the Gate", the title of the book chronicling the famous buyout by Kohlberg Kravis Roberts of RJR Nabisco. Recent media focus has been on the arrival of the large offshore funds of Blackstone, Bain and KKR – Bain won a bidding war for Edcon, a retailer, with a R25 billion ($3.5 billion) bid (and recently obtained shareholder approval, against a slight headwind, for what will be the biggest leveraged buyout in South African history). Other overseas funds are also active: Citigroup and the CDC have set up a $200 million Africa fund, most of which is expected to be invested in South Africa; and Actis (a perennial investor in Africa) is involved in a R7.5 billion offer for Alexander Forbes, a financial services and risk adviser. These firms will all be affected by black economic empowerment, whether they know it now or not.
BEE is a policy to transform South Africa's economy so that it better reflects the country's diverse population. The policy is reflected in the Broad-Based Black Economic Empowerment Act, the Codes of Good Practice issued under the Act, and numerous industry charters (such as the Financial Sector Charter). In short, companies operating in South Africa are measured on the degree to which they integrate previously disadvantaged individuals in the economy through equity ownership, directorships, employment, training and procurement. BEE is not legally compulsory for non-government organizations, but anyone wishing to do business in South Africa would be brave (or foolhardy) to ignore it.
One of the most well known aspects of BEE is the equity requirement that a company put a percentage of its equity into black (or previously disadvantaged) hands. Private equity firms acquiring South African companies should bear this in mind when pricing and structuring their investments, or they could be exposed to unnecessary pressure from customers or government to rush through an equity sale at a time when they might prefer to focus on their strategy for increasing the value of their investment. This sort of pressure could also lead to unwanted publicity (as several listed companies in South Africa have recently discovered).
There was some hope that the equity requirement would be diluted for overseas companies investing in South Africa, by allowing those companies to earn equity equivalents. Statement 103, issued by the Department of Trade and Industry, recognizes equity equivalents, but does not stipulate what they are or how they may be earned. Also, only multinational businesses headquartered outside South Africa that have a global policy requiring that local subsidiaries be wholly owned, and that can show that they would suffer substantial commercial harm if they were to depart from that policy, may use equity equivalents. Unless they meet these criteria, overseas private equity firms will not benefit from Statement 103.
A possible solution would be to club with a South African private equity firm that has the necessary BEE profile. The co-investor could (depending on how the acquisition was structured) contribute the necessary BEE ownership. Three immediate difficulties present themselves. The first is finding a suitable private equity firm (that is, one that is black-owned or black-influenced). These do exist but (and here is the second difficulty) might charge a premium for their involvement, for example by negotiating a greater share in the investment by virtue of their inherent BEE value. Third, these firms are successfully executing mid-tier transactions and might have no need for the distractions of a club transaction with a large overseas firm. It might be these issues that have limited tie-ups: of the overseas firms involved in high-profile transactions in South Africa, only Actis appears to have clubbed with a South African firm, having bid for Alexander Forbes with Ethos, a well-established local firm.
Before bemoaning a policy that seems designed to deter foreign direct investment, potential investors should be mindful of the importance to South Africa that apartheid's historical legacy be corrected. Creating a more equal society is critical and, despite criticism that it is enriching an elite coterie rather than benefiting previously disadvantaged South Africans generally, BEE is directed to that end. They should also bear in mind that a good BEE profile has commercial value: it is necessary to win government tenders and contracts from businesses that in turn provide services to government bodies (such as municipal pension funds). The market takes these facts into account when pricing companies. The Public Investment Corporation, South Africa's biggest fund manager (and an Edcon shareholder that opposed the Bain transaction, although for non-BEE reasons), recently made public its concerns about the pace of change at Barloworld and JD Group, both listed South African companies with no black executives. Barloworld's share price in particular took a big knock. If a private equity firm has an eye on an IPO, it would do well to ensure that its investment has the necessary BEE profile. Listing an under-empowered company in South Africa is no longer an option.