THE stock market is perhaps the most famous financial market and deservedly so because it is the ultimate place, especially for equities. As an entrepreneur, getting your company listed on the bourse is the dream, using Marlsow’s analogy with the hierarchy of needs, it is the equivalent of the self-actualisation level.
However, companies are not just started today and get listed on the exchange the following day, unless if you are Econet, but that is a discussion for another day.
There is a process that a company follows from its embryonic stage all the way to the time when it can be listed and in many circumstances, private equity (PE) firms play a critical role in ensuring that happens.
Broadly speaking, equities are divided into public listed and private equity and the latter focuses on investing in the shares that are off the market.
This means that PE is associated with very low liquidity, and it is relatively a long-time game. Information availability is very minimal and so is the regulatory oversight hence the market efficiency is very low.
High active investment is what is popular with PE firms and in most cases, it sends out its own management to its investee companies either to turn around them or to safeguard their investment.
These companies could be at any stage of their lifecycle but usually, early stages are associated with higher upside potential. Unlike with public equities that are accessible to retail investors, investors in private equity funds are typically high-net-worth individuals and institutional investors. They follow a partnership structure where the investors are called limited partners (LPs) the general partner (GP) is the administrator of the fund and makes the investment decisions.
PE firms are somewhat similar to Asset Management (AM) companies or investment companies in the sense that they collect and manage their and other people’s money, but the major difference is that PE funds then chase alpha by investing in high-risk and unlisted opportunities.
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The experience and expertise of the GP in a selection of investments becomes very important in this case since information is not as easily available as with listed equities.
The global PE market was estimated at US$ 721,2 billion in 2023 according to Imarc and the African market is estimated to be in the US$8 billion region.
Southern Africa has been making strides with South Africa leading and the contribution of deals coming from Zimbabwe are also notable.
According to the African Private Capital Association in its Private Capital Regional Landscape magazine, May 2024 edition, Southern Africa has 832 portfolio companies backed by private capital and this was 26% of Africa’s deals.
Private capital in southern Africa has a bias towards the Information Technology sector and software and services in particular.
The same research by the African Private Capital Association highlighted that technology and tech-enabled businesses in Southern Africa received US$2,2 billion of private capital investment across 135 deals This represented 54% of total investments in the region.
In the Zimbabwean landscape, a number of PE firms have started to mushroom and although we are not there yet, the progress is well noting. The PE funds operating in Zimbabwe have been growing and some of the notable funds include Takura Capital, Mangwana Opportunities, Spear Capital, DBF Capital, Brainworks Capital and Nurture Capital amongst others.
Venture Capital firms are those that target startups and early-stage companies and the Alternative Assets arm of Old Mutal Zimbabwe has taken good care of that with success stories in companies like Glytime Foods and Solgas.
Growth equity funds are more attracted to companies that have a proven concept and now want to scale and most of the funds' investment philosophy falls under here.
The buyout funds on the other hand target publicly listed companies and take them private and clean them up whilst the private debt funds are interested in lending to companies and keeping the debt instruments to themselves.
Takura Capital’s deal with Manicaland Boards and Doors is an example of a turnaround strategy employed by these funds.
What PE firms bring to the investee companies besides just the financial injection is the operational expertise and access to markets and networks.
As PE firms scout for a target, they usually have a strategy to execute to take the company to the next level. This could be getting it into new markets or partnering it some companies to exploit the synergies. Operational discipline brought by the PE firms is also critical in transforming the company.
The PE firm should then have an exit strategy and in some cases this is when the private capital meets the public markets.
The partners can decide to use the stock market as the exit destination through an Initial Public Offering and given the USD-denominated bourse in Zimbabwe, some of the PE firms are eyeing this option.
Often times we have come across arguments that the stock market has not grown since the turn of the century, and I would like to believe that ensuring a vibrant private equity market is one way to prepare for new listings on the market.
Considering that Zimbabwe is highly informalised with many startups that need to be formalised, financially backed and transformed into the blue-chip companies that they dream of and that is the opportunity I see for venture capital in Zimbabwe.
- Hozheri is an investment analyst with an interest in sharing opinions on capital markets performance, the economy and international trade, among other areas. He holds a B. Com in Finance and is progressing well with the CFA programme. — 0784 707 653 and Rufaro Hozheri is his username for all social media platforms.
