Delivering returns through traditional approaches will become more challenging, but opportunity awaits those who are prepared to embrace a new era of private equity says Wessel Jacobs CEO of private equity and business advisory firm, Jacobs Capital.
Jacobs acknowledges that the current economic climate may present challenges to private equity players attempting to identify attractive investment options that offer the desired returns. Compound this with South Africa’s uncertain economic landscape and it becomes clear that the business of private equity now requires a more strategic, considered and responsive approach.
For Jacobs, implementing a modified approach to private equity in the current economic climate is highly beneficial as he believes that nimble private equity firms that have the ability to pivot and implement strategic business models have entered a world of opportunity.
Such is the case for Jacobs Capital, the private equity and business advisory firm who are finding the private equity environment in South Africa favourable as they continue to identify attractive opportunities that are delivering impressive returns for discerning investors.
Jacobs highlights that there are several top of mind issues that private equity investors need to consider in the current economic climate, including the relegation of South Africa’s sovereign debt to below investment grade (junk status) by the credit rating agencies and the possibility that increasing interest rates will have an impact on arbitrage based investments, but he maintains that those who are able to acclimatise may find the private equity space more lucrative than ever.
According to Jacobs, private equity firms need to adapt within this landscape by forgoing traditional approaches to managing investments and implementing processes which enable them to respond to changing business climates and performance.
“At Jacobs Capital, we have opted to diversify our investment approach as we can no longer rely on averages. Time is of the essence. From conducting due diligence to building relationships with the management team and then investing, we’ve streamlined the process, because in today’s market it’s critical that private equity firms respond swiftly to opportunities,” commented Jacobs.
“That being said, patience in selecting the right investments is still imperative but if your model is correct the chance of showing decent returns increases substantially,” he added.
Through his analysis of the private equity space in South Africa, Jacobs has identified that major players are shifting and beginning to build more specialised models either through focusing on specific industries or targeting improved operational performance.
He believes that the key focus must be on developing restructuring and performance enhancement business models and the way these models are implemented.
To enable them to support the need for the development and implementation of the right models, Jacobs Capital’s specialist advisory division boasts extensive experience in guiding businesses through challenging times or restructuring businesses to deliver both profitable and sustainable outcomes. This range of services is in high demand for both businesses requiring turnaround and those wishing to enhance business performance. These in-house skills allow Jacobs Capital to act promptly if an asset flounders and enables the team to make a substantial change to the business structure and profitability potential.
In the past, incorporating this approach to redirecting a business in distress was unconventional for traditional private equity players, but today serious private equity partners need to, as Jacobs puts it, “get to the heart of the business and start making structural changes that enhance the business’s performance, either incrementally or via a ‘big-bang’ approach.”
Jacobs Capital further bolsters their private equity expertise through their specialist property division. This division allows for the efficient and profitable management of property assets, a frequent factor in private equity transactions, enabling the company to be highly responsive should they identify an opportunity.
Jacobs suggests that all shareholders need a clear understanding of the specific input and business modelling required for the business to yield the required returns. With a view to implementing this across their portfolio, Jacobs Capital has developed a streamlined system to identify each business’s precise needs.
“We categorise investments into a number of tiers, ranging from high performing businesses that do not require any operational input and only need guidance from a strategic point of view at a board level – to businesses that are in severe distress and require high levels of specialist input from our a team,” explains Jacobs.
Essentially, it is their ability to rapidly deploy these specialist skillsets on varying levels to achieve improved business performance which makes Jacobs Capital stand apart other investment firms.
Additionally, to achieve success within the private equity space, Jacobs believes it is imperative that businesses keep their debt under control.
“Placing management under high pressure to repay extremely high debt is counterproductive and has a number of negative effects on the business and its growth. We tend to err on the conservative side in terms of the amount of debt we place on the balance sheet and the returns are in line with investors’ expectations,” comments Jacobs.
It is this strategy, a systematic approach to private equity and the implementation of highly effective restructuring and performance enhancement models which has enabled Jacobs Capital to develop a diverse portfolio of private equity assets.
While the Jacobs Capital mantra promotes an avant-garde approach, one aspect of traditional private equity best practice remains intact. The standing principle is that the value is found in the buying stage of the transaction.
“Invest intelligently from the outset and ensure that all investment partners are aligned, and success will follow,” advises Jacobs.
Jacobs Capital is an on-balance sheet investor in privately-owned, unlisted businesses that have proven track records. Jacobs Capital invests their funds, and those of their sturdy and loyal investor portfolio, into successful businesses who boast strong management teams to take such businesses to the next level. They are also highly experienced in restructuring and performance enhancement and often invest in distressed businesses which possess high potential in terms of turnaround.
Sources: Input for this article was derived from an interview conducted by Andrew Gillingham for a Special Feature on Private Equity for the Financial Mail, portions of which is quoted in a Financial Mail edition published in May 2017.