As investment specialists, we’re often asked: “Given South Africa’s challenging economic climate and ongoing global political tensions, can meaningful investment, from strategic acquisitions to building local capacity for growth, still thrive?”  Our answer is a resounding yes.

The very challenges South Africa faces create the fertile ground for strategic dealmaking and capital allocation. Domestic and international investors are finding opportunities not only to acquire businesses but also to expand operations, build capacity, and strengthen competitiveness.

This optimism isn’t blind faith. It’s rooted in the resilience of strategic sectors, the adaptability of local businesses and the unique role that Hybrid Capital, a specialist unit within Old Mutual Alternative Investments, plays in bridging critical funding gaps when traditional sources may hesitate.

While uncertainty can deter, for us, it acts as a filter for quality.

Let’s start with the facts.

Despite economic slowdown, high-profile geopolitical risks, and trade tensions, South Africa remains resilient in the African M&A landscape. Recent figures reveal that South Africa accounted for an impressive 30% of Africa’s M&A deal volume and a remarkable 60% of the deal value in 2024.

Time after time, local companies demonstrate that operational resilience and adaptability enable businesses not only to survive but also to leverage adversity for growth, investment, and a competitive advantage.

Periods of economic weakness often create both attractive entry points for savvy dealmakers and opportunities for expansionary projects.

Valuations across various sectors have recalibrated to more reasonable levels, triggering renewed local and international interest in assets which offer structural growth, independent of short-term volatility, that have real asset underpins, inflation protection, and strong moats embedded in the business model.

Market participants continue to see prospects in distressed assets where fundamentals remain intact, and value can be unlocked through a well-considered turnaround plan.

With the Rand showing relative stability and interest rates set to ease, we’re witnessing an appetite for strategic acquisitions and investments. Multinationals are streamlining portfolios, and private equity funds and corporates continue to deploy capital and unlock trapped value in transactions.

Many capital allocators are sitting on large amounts of undeployed capital, having adopted defensive and conservative postures over the past few years. As confidence gradually returns, supported by structural and regulatory reforms, these pools of capital are set to flow toward growth opportunities.

Hybrid Capital’s Supporting Role

We operate in the space between traditional senior debt and ordinary equity, providing subordinated funding solutions (both debt and preference shares) to businesses and sponsors seeking capital to execute on strategies, pursue transactions, or build operational capacity.

Crucially, we don’t use a one-size-fits-all approach. Each deal is tailored with our portfolio companies and sponsors to meet their specific goals; whether it’s a 5-year plan to grow market share or the need for regular distributions.

Our flexible approach and long-term focus, rather than a short-term opportunistic approach, are designed to support our partners.

We structure returns proportionately, ensuring alignment with both sponsors who drive value creation and our investors who share in that success.

Resilience is Driving Activity

It would be naïve to ignore the impact of global conflicts, logistical bottlenecks and domestic political unpredictability, which all make dealmaking more complex. Yet, deal flow persists in sectors built on structural demand and real asset underpins such as:

• Energy and infrastructure: The need for clean and reliable power is driving South Africa’s energy transition with the private renewable energy value chain unlocking massive investment.
• Logistics and supply chain: Business-to-business operators continue to attract capital. Their ability to pass on input costs and adapt to infrastructure gaps fuels resilience.

• Logistics and supply chain: Business-to-business operators continue to attract capital. Their ability to pass on input costs and adapt to infrastructure gaps fuels resilience.

• Food security and processing: Demand is non-discretionary, and agile management teams navigate input cost volatility through diversification and efficiency.

• Digital infrastructure: Data consumption growth makes connectivity-related assets mission-critical.

These sectors share key traits and can withstand interim volatility. They attract sophisticated sponsors, who look beyond noise to intrinsic value.

This is where we add the most value - partnering with seasoned sponsors and enduring businesses, pricing risk clearly, and structuring funding solutions which are sustainable when the environment gets tougher.

Why M&A optimism endures

Several factors underpin our confidence:

• Valuation opportunities: South African assets trade at lower multiples than global peers, drawing international capital seeking emerging market exposure. Recent interest isn’t speculative; it’s mandated and strategic.

• Resilient sponsors: Despite headwinds, sponsors are doubling down on quality opportunities.

• Capital availability: While funders remain cautious on high-risk lending, liquidity for quality assets is strong. Private debt is filling gaps, with lower margins reflecting disciplined appetite.

• The Government of National Unity (GNU) effect: Despite its fragility marked by policy disagreements, the coalition government is stable. This is a baseline investors can work with. We have seen a positive shift in investor activity since.

There is a growing recognition among investors that markets exposed to geopolitical shocks can offer diversification and outsized returns. South Africa, with our strong financial markets and deep pools of professional expertise, is well-positioned to attract this capital.

Mitigating risk: Discipline is a default

Our track record, despite persistent low-growth and challenging macro backdrop, reflects rigorous risk management. As responsible custodians of capital and long-term partners, we are highly selective.

The foundation of any Hybrid Capital investment is a business with the right fundamentals, and avoiding exposure to those which are unable to deliver through the cycle.

Further protection comes from embedding buffers into every transaction, ensuring our position can absorb short-term volatility. These structures incorporate covenants, cash flow waterfalls, and participation features — mechanisms that guarantee the sustainability of funding structures.

Although we invest across different sectors, we don’t choose opportunities randomly. Every investment is carefully evaluated, focusing on strong governance, capable management, and lasting competitive advantages. This allows us to balance returns with capital preservation.

Embracing Opportunity

While uncertainty remains ever-present, the fundamental drivers of M&A and investment in South Africa are robust. As confidence continues to build, the outlook is one of renewed optimism. Those of us on the front lines, whether as capital providers, advisers, or corporate decision-makers, must continue to embrace change, unlock synergies, and act with creativity and discipline.

The Hybrid Capital Advantage

At Hybrid Capital, we take real risk alongside our partners, whether we’re funding at the shareholder level or directly into an operating business. As such, our perspective on value creation is fully aligned with our investors, sponsors, management teams, and a broader stakeholder group.

Conditions will rarely be “perfect”, but periods of uncertainty often reward those willing to focus on the long-term. Our experience, disciplined approach, and partnership model are why we thrive, even when markets are volatile.