Record exit activity reported by VC fund managers in SA
While South African venture capital (VC) investors may have seen a significant slowdown in deal activity this year as a result of Covid-19, the local VC landscape experienced record investment and exit activity in 2019.
This is according to the newly released SAVCA 2020 Venture Capital Industry Survey, which shows that a total of 38 exits were reported for 2019 – more than double the previous record for annual exit activity, and just over triple the nine exits reported in 2018.
Tanya van Lill, CEO of the Southern African Venture Capital and Private Equity Association (SAVCA), says that this record exit activity bodes well for the development of the industry. “Notably, of the 38 reported exits, 50% were reported as profitable, with a total amount of R830.5 million returned to investors. Trade sales remains the most prevalent exit route, followed by exiting to other investors,” she adds.
In addition to the record exit activity, last year also proved significant when it came to investment activity, with 2019 VC investment showing the highest activity recorded to date, both by value and by number of deals. “This was the second consecutive year that the total value of VC deals exceeded R1 billion, with 2019 deals amounting to R1.23 billion – a notable increase of 14.8% on the 2018 deals reported (20.9% by number of deals).”
This, van Lill says, continued the upward trend in investment activity that started after 2015, when changes were made to Section 12J. “Independent VC fund managers continue to comprise the largest share of active portfolios (38.1%), with Captive Government Funds and increasingly Captive Corporate funds playing a more significant role to fuel the growth of early stage investments in South Africa.”
It is important to note, however, that for this current survey, SAVCA introduced additional data attributes to more accurately differentiate between deals that involve secondary assets (e.g. investments into buildings and land) as well as deals defined as “Venture Leasing”. “In both instances, investors are able to hedge investment risk by relying on the underlying value of the asset, and even if the actual business seizes to operate, the original capital invested into such assets can be recovered.
“For this reason, survey respondents were asked to reclassify their investment portfolio to ensure the SAVCA VC Survey captures traditional early stage investments. In future studies we may start reporting on these numbers given the significance is has in financing start-ups,” van Lill explains.
From a geographic perspective, the investment landscape remains dominated by activity in two provinces, namely Gauteng and the Western Cape. While funding into Western Cape-based businesses grew by 21.8% in 2019 compared to 2018, van Lill points out that Johannesburg was still listed as the head office location for most VC fund managers – marginally higher than Cape Town.
In terms of funds under management on a sectoral level, Manufacturing accounted for the largest share of active deals (13.8% by value), followed by the Food and Beverage sector (12.7%) and Business Products and Services (10.9%), despite deals in the Food and Beverage sector receiving most of the investment in 2019 (14.2%), followed by Agriculture (10.9%).
Noting that agriculture does not typically feature amongst the top sectors of VC investments, van Lill explains that recent investment activity by a number of VC fund managers into an AgriTech business, has raised the profile of the sector. “This is an example of how sector-based preferences fluctuate from year to year, with Energy in 2019 making up a smaller share of VC focus due to the survey’s reclassification of deals involving asset leases.”
While acutely aware of the challenges that the industry is currently facing due to Covid-19, van Lill says she is encouraged by the significant growth of VC investors and early-stage deal activity reported in 2019. “There is no doubt that the current health and subsequent economic crisis will reflect in next year’s results, however, we can find some solace in this year’s results, which suggest a strong foundation and an overall positive outlook of the VC industry,” she concludes.