The unique world of private equity among owner-managed enterprises

04 November 2019 3 min. read
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Having a strong network and building trust is crucial for owner-managed enterprises (OMEs) in South Africa to attract private equity investment, partly due to the extra time it takes for deals with OMEs to be completed. This is according to new analysis of the OME sector by FTI Consulting.

The survey comes in light of the crucial role that OMEs are playing in developing the South African economy. Aside from a handful of South African OMEs that have grown into global conglomerates, most OMEs in the country belong to the mid-tier category, which is a key pillar for the country’s economy.

The OME sector overlaps to a large degree with the small and medium enterprise sector (SME), which is home to approximately 90% of all South African businesses, employing more than half the workforce. As South Africa looks to carve a way back to strong economic growth, many have realised the importance of the sector’s welfare.

Deal origination in South Africa

OMEs are increasingly turning to the consulting industry for support with business strategies – particularly in the burgeoning digital sphere – while some have suggested that the sector should be granted special regulatory liberties to establish themselves. One strong avenue for growth is drawing private equity wealth.

FTI Consulting reports that OMEs face a sea of obstacles when it comes to making private equity deals, from the business as well as from the regulatory sphere. In the latter domain, challenges appear primarily with respect to increasingly tight governance requirements that have emerged recently. 

Private equity firms demand a high standard of governance practices, which can hinder OME growth due to limited resources. Investors also demand significant changes to internal structures and functioning, which can pose a considerable challenge to owners, who are used to being in control.

Building a relationship with investors

Another issue that the sector appears to be facing is that OMEs are struggling to determine the valuation of their own firms, making it a challenge to draw concrete proposals. Completing a deal with an OME also takes a significantly longer time than it does with a larger corporation. 

As a result of all these factors, the metrics that drive successful private equity deals in the OME sector differ considerably from those governing large transactions. OMEs require a personal approach, based on demonstrated trust in order to secure a long-term investment.

“Relationships, work ethic and a cultural fit are essential factors of the long-term success of these partnerships,’ writes John Geel, Managing Director and Head of Corporate Finance at FTI Consulting. OMEs must also have a particularly strong set of business indicators to successfully attract investors.

Key business indicators

‘Private Equity Investors also recognise that they can bring immense value to these types of businesses not only through corporatisation, improvements in governance as well as access to funding, but also through ‘softer’ issues and knowledge transfer in the day-to-day management of the business,’ continues Geel.

The personal side to transactions in the OME sector is demonstrated by the fact that nearly 80% of all OME private equity deals originate from some kind of personal professional network, while just over 20% originate through the advice of a corporate finance advisor.