Earlier this week South African powerhouse Ethos Private Equity revealed its intention to list Ethos Capital on the main board of the Johannesburg Stock Exchange. The firm plans to raise 2 billion rand ($139 million; €126 million) to invest in Ethos funds.
The idea behind the listing is twofold: turbo-charge the firm’s growth and diversification ambitions and reach untraditional private equity investors.
On the growth and diversification side, Ethos – formerly a pure-play private equity house – has acquired South African mezzanine capital provider Mezzanine Partners, and is planning to launch a mezzanine fund. It has also launched a dedicated mid-market fund targeting 2.5 billion-3 billion rand and towards the end of the year intends to return to market with its seventh flagship fund, targeting 8 billion-10 billion rand.
Ethos Capital (the listed vehicle) will play a major role in all of these fundraisings. Intending to follow an “over-commitment strategy”, Ethos Capital is expecting to commit 1 billion rand to the mid-market fund, 2.5 billion rand to Fund VII and 400 million rand to the mezzanine fund, accounting for around one-third of each fund. It will also seek to take a 10 percent stake in the 8.4 billion rand Fund VI and has earmarked up to 30 percent of Ethos Capital NAV for co-investments alongside Ethos funds.
The aim is to turn Ethos Private Equity into a leading multi-strategy alternative asset management platform; think a sub-Saharan African KKR or Carlyle.
Listing a vehicle provides a speedy way to raise cash, but it is not without potential challenges. Listed private equity funds frequently suffer from low trading volumes, and rarely trade at anything other than a discount to the underlying net asset value. They also open up previously private portfolio matters to regular public scrutiny. On occasion they can attract activist investors with disruption in mind; the uncertain future of London-based Electra Partners is testament to this.
Ethos has decided that these challenges are trumped by the new world of potential investors the listing opens up.
“Over the years we’d been approached by many institutions and many high net worth individuals who had appetite to invest in what we do, but were precluded from doing so because of the private equity fund model, which is typically quite a large commitment that is then locked up for a very long period of time,” Ethos Private Equity CEO Stuart Mackenzie explained to Private Equity International.
“Providing a liquid entry point into what we do provides a universe of investors that would typically not invest in our strategies an opportunity to invest.”
Ethos has already received commitments of more than 1 billion rand from investors, all of which are both new to Ethos and based in South Africa.
Peter Hayward-Butt, who is heading up the listed entity, explained that while institutional investors globally allocate around 20 percent of their assets to alternatives, “in a South African context that number is closer to 2 percent”.
Part of the reason, he said, has been the lack of a liquid entry point which avoids the 10-year lock-up, allows investors to put “any amount of money” to work and to sell in and out as they choose.
It is unlikely that listed permanent capital feeder vehicles are the future of all private equity fundraising in Africa. But Ethos’s attempt to create an innovative solution to a local problem is a smart one.
According to a 2014 report by the Commonwealth, the Making Finance Work for Africa Partnership Secretariat (MFW4A) and EMPEA, African pension funds have $29 billion that could potentially be invested in private equity, which would effectively double the size of the African private equity industry.
That’s an opportunity too big to ignore.
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