vcapital posted on August 23, 2011 01:49
Vantage team ticks the box
On July 1 new legislation came into effect allowing SA pension funds to invest up to 10% of contributions in private equity, four times the previous limit of 2.5%
"Of 175 companies assessed, only five were chosen to get funding"
Aug 21, 2011 | Times Live: By TINA WEAVIND
This brings the potential allocations into line with the global standard for this asset class - and it makes it too big for pension funds to ignore.
It's also good news for Vantage Capital, an SA-based private equity investment company with offices in Botswana and Casablanca, which provides mezzanine financing to local and pan-African businesses. Vantage had been getting in the region of R500-million for its investment tranches from South African pension funds before the section 28 amendment; this is expected to double.
Mezzanine financing, which is a way of lending money through a combination of debt and equity, offers many of the same rewards as private equity but with less risk, making it an attractive way for institutional investors to get access to this asset class. Investors get some measure of protection from the company defaulting - downside risk - via contractual returns, assets or the option to convert the debt into equity and assume part ownership. Interest on the debt is payable each quarter and is often above 20%, and investors can expect equity kickers as well as the principle to be returned at maturation date. The benefit to the borrower is that they get the money they need to take their business forward and are able to negotiate the terms of repayment.
Vantage gets involved to a greater or lesser degree in the running of the business to make sure it has the best chance of success. This might involve appointing a financial director or advising on cost-cutting options or on ways to improve the efficiency of a value chain. The Vantage team has a combined 180 years of experience in private equity, banking and leverage and finance.
Investing in private equity and mezzanine finance ties up the principlal for up to eight years, which might put off those who put a premium on liquidity. But the flip side of this thinking is the benefit of giving up access to a chunk of money for a given period when the temptation to move it from asset to asset could see any gains eroded through broker's fees.
Vantage Capital offers financing opportunities to local and pan- African businesses that have in excess of R100-million enterprise value, and which bring in more than $15-million a year after tax. These are usually mid-level companies, or companies at the forefront of their particular niche. Companies that look for this kind of funding are carefully scrutinised to ensure that their business is viable and has the trappings of success. The due diligence process includes having a forensic auditor examine the company's books, talking to customers and suppliers as well as physically spending time at the factories, warehouses and offices and interacting with employees. The prospects of the industry as a whole are also carefully weighed up and the company is assessed in terms of local and global competencies. Vantage takes its selection criteria seriously. Out of the 175 companies that were assessed for Fund I, five were deemed suitable to receive financing.
Vantage is currently raising money for Fund II, having invested the R1-billion raised for Fund I. All but one of the earlier technology fund investments have been successfully exited, with all investors having been paid out. A total investment commitment of $250-million is being sought for Fund II, $25-million of which was recently provided by the African Development Bank. Institutional investors are the main source of funds, a lot of which comes from Germany, The Netherlands, Switzerland and the UK. Norway is also a contributor through Norfund, a state-owned investment company that promotes business development, economic growth and poverty alleviation in poor countries. This philosophy is a good fit for the Vantage mezzanine schemes which are largely focussed on the empowerment of the previously disadvantaged.
TrenStar is a company being financed through Vantage Capital's Fund II. The mezzanine fund provided R85-million of debt and equity, and RMB private bank added a further R50-million of senior debt. Trenstar makes returnable packaging crates that transport automotive parts within and between car-making factories primarily. Each crate is custom designed for the vehicle part it carries and because each one is bar-coded, inventory is easy to monitor. This provides just-in-time capabilities which streamline the efficiency of the production process, preventing bottlenecks and cutting wastage on warehousing costs. The most valuable aspect of TrenStar, though, lies in the intellectual property contained in its locally designed IT systems which monitor the movement of each crate.
The financing of TrenStar altered the ownership structure of the company from a 51/49 shareholding by the CEO and the bank respectively to a 60/26/14 split between the CEO, an empowerment group and a management team. The automotive industry is especially needy of secondary industries with good empowerment credentials because the primary companies aren't required to be BEE accredited. In addition, the industrial policy contained in the automotive production development plan legislates that manufacturers increase their levels of local content to 70% from 30%, putting TrenStar in an enviable position.