There are two reasons to invest in private equity as an asset class; outperformance above listed equity and positive impact. In recent years the focus has grown on the impact part, but in reality private equity has for decades had a positive impact on the economy and society - as an industry we have just not been very good at sharing that message.

It surprises me how misperceptions can stick sometimes. Some people still believe that private equity are a bunch of heartless capitalists who, like the Richard Gere character in the 1990 movie Pretty Woman, buys a business, kicks out the sweet elderly founder, cuts a lot of costs, breaks up the business and then sells the pieces to turn a quick and easy profit. Whilst the movie may have depicted what may have happened in the US in the 1980’s, it simply isn’t reflective of reality in the modern era, especially in South Africa. So that is a bit like saying Carl Lewis is the fastest man in history. It may have been true in the 1980’s, but it simply isn’t true today. The reality is very much the opposite; what we do in private equity is partner with great entrepreneurs and management teams in enhancing the value of a business, which can only be done by growing and transforming such business. And for me growth and transformation are the two pillars of how private equity makes a significant positive impact.

So, what is private equity’s ultimate objective, i.e. what do we need to do to deliver strong returns to our investors? Answer; buy into strong businesses with skilled and experienced management teams, grow the value of the business for 4-7 years, and then sell the more valuable business to the right owner. How does one grow the value of a business? Certainly not by cutting some costs. It’s by being singularly focused, over a long period of time, on growing the business through active ownership. At Old Mutual Private Equity we have been at this for two decades and can talk to some real stories across the entire portfolio over this period, of growing businesses under our stewardship (often in partnership with others).

There are various ways of growing a business. One can add capacity – mostly the case with manufacturers. Examples of where businesses have added significant capacity under our ownership tenure would be Consol, In2Food and Idwala. A second way to grow is by expanding footprint – we have done this in a significant way in retailers such as Pepkor, Footgear, TiAuto and Holdsport. A third way to grow is by expanding geographically – this we have stewarded in Tourvest, Consol and Actom. A fourth way is to add new products, like we have done in Morecorp for example. One can also grow by making sensible acquisitions, like we have done in the case of 10X and Medhold. All five ways of growing a business costs money, i.e. needs significant capital. So what private equity really comes down to is being smart allocators of capital to stimulate significant growth in our businesses.

In the process of growing these businesses, we often witness them exhibiting significant transformation. While demographic transformation is an important priority for us (our portfolio has seen HDSA’s in management roles double over the last four years), the transformation I’m talking about is the actual business transforming fundamentally, becoming a much better business. Through the significant growth I spoke about above, strong governance and a focus on alignment with management and employees, we see these businesses becoming stronger and reaching their full potential, which is very gratifying to be part of.

So in conclusion; private equity is all about growing and positively transforming businesses in partnership with great entrepreneurs and managers – that’s what we must do in order to grow value and deliver returns to our investors. Carl Lewis was the fastest man in history in the 1980’s, but that was the 1980’s.