In 2001 athletic leisure shoe retailer Footgear launched its first store in Cape Town with the simple goal of getting the best brands onto South African feet, without breaking their pocket, while providing the best service to customers. Its formula proved a success and by 2019 the company had a footprint of around 70 stores.

In 2019, Old Mutual Private Equity (OMPE), part of Old Mutual Alternative Investments (OMAI) invested in Footgear through its fourth fund, OMPE Fund IV, providing growth capital, strategic insights, and support. In the three years following OMPE’s investment, Footgear grew to more than 190 stores across the country, significantly increasing its performance and creating hundreds of new jobs, while preserving a material number of jobs through the acquisition of Edgars Active and High Key chain stores from the distressed Edcon group.

The Footgear case study is just one example of the grass-roots ability of private equity to make a meaningful contribution to the economic growth of South Africa and grow sustainable jobs. Additionally, it has the potential to address fundamental challenges such as transformation and inequality of opportunity in workforces, institutions, and communities.

The need for growth solutions is pressing and the private market is a key contributor to growth in South Africa which can with more investment, play an even bigger role. While South Africa’s economy grew by 1.2% in the fourth quarter of 2021, we are yet to reach the GDP levels achieved before the pandemic. According to recently released data by Statistics South Africa, the country’s annual real GDP increased by 4.9% in 2021, still reeling from the contraction of 6.4% in 2020, due to the Covid-19 pandemic. Even during challenging economic times, high-quality private equity managers have success[1]fully generated competitive returns for their investors.

Private equity is an alternative form of financing, distinct from public markets and bank debt. The private equity investment model allows direct investment into private companies or buyouts of private companies, facilitating access to alternate forms of capital for entrepreneurs to develop and grow their businesses, and ultimately contributing to increased economic activity, productivity, and growth.

Recently, the eyes of the world were fixed on the 4th annual South Africa Investment Conference (SAIC) where an additional R332-billion in investment pledges was announced. Investors committed to support the economic recovery project as part of the SA government’s plan to raise at least R1.2-trillion in new investments over a period of five years ending in 2023. The inclusion of investment in private equity managers is an obvious opportunity that we feel is missing from the overall plan. Despite Regulation 28 of SA’s pension funds act allowing for allocations of as much as 15% of assets under management (AUM) in unlisted assets, investors continue to under -allocate capital to this category with less than 20% of AUM typically being invested in asset classes such as private equity, globally.

South Africa offers a considerable number of attractive investment opportunities in the mid-market due to our combination of world-class entrepreneurs in well-run, highly scaleable businesses. Around 3 000 mid-sized companies are run by successful, proven entrepreneurs who form one of the largest employer bases in the country. Moreover, these businesses are often ripe for growth. With the right equity partner and capital, they are capable of scaling up, institutionalising, and generating attractive returns.

Investing in these companies has the power to substantially stimulate the economy because in addition to the sizeable capital available for expansion plans, private equity investments come with experienced strategic advisory and management support. This model, largely funded by institutional investors seeking to diversify risk and investment returns, offers South Africa one of the most efficient ways to stimulate economic growth.

In addition to improved business performance, private equity also brings with it a wealth of experience in environmental, social and governance (ESG) practices, often to organisations that simply do not have the resources or expertise to invest into broader societal needs. South Africa is one of the most socially unequal countries in the world and businesses play a vital role in helping to address some of the fundamental socio-economic and environmental challenges of our day.

Corporate ESG policies go well beyond the tick-box approach but rather employ significant resources to make a tangible difference. At its core it provides and ensures adherence to global benchmarks for the creation of sustained outcomes that, while driving value and growth, strengthen the most vulnerable communities and minimise harmful impacts on the environment.

Old Mutual Private Equity Fund IV was established in January 2014. The R3,7-billion fund, which has since closed, invested in high-quality unlisted companies in the mid-market space that display significant growth potential. Its portfolio of seven companies are significant employers, employing almost 20 000 people as at December 2019. Some 74% of these employees were historically disadvantaged South Africans – a testament to transformation and steps towards reducing inequality.

It is clear that private equity can help deliver the impact needed to address South Africa’s most immediate and pressing challenges – growth and unemployment. Talented, innovative entrepreneurs and business owners hold the keys to unlock South Africa’s economic potential. With strategic access to capital, and robust business and market insights, private equity can accelerate the country’s economic performance so that we can better deal with inequality and other socio-economic challenges

This article was originally published in the SAVCA Private Equity Conference publication.