Environmental, Social and Governance (ESG) improvements are key to positioning a private equity company for strong exit prospects, according to recent research.
Strong ESG standards not only improve performance, but also act as a confidence booster to potential buyers, as they indicate that key risks are mitigated, according to recently released research from Ernst & Young and the African Venture Capital Association (AVCA).
The findings are in line with earlier findings from the United Nations-backed Principles for Responsible Investment (PRI) Initiative, which revealed that 80% of companies had reduced the valuation of an acquisition target or not gone ahead with a deal because of poor performance on ESG factors.
About 75% of the research respondents said poor performance in ESGs had prevented a deal from taking place. The survey, conducted in partnership with PwC, aimed at assessing the attitudes of trade buyers of private equity companies. The survey covered global private equity deal making, and broader mergers and acquisition activities.
For Africa, the ESGs are even more important as the continent continues to heavily rely on trade buyers for exits. According to the AVCA and Ernst & Young research, trade buyers are the most active acquirers of private equity portfolio companies in Africa, accounting for around half of all exits.
Regional trade buyers have particularly been the most active in recent times, accounting for over half of all sales between 2010 and 2012. This is underpinned by regional growth strategies frequently pursued by a number of corporate buyers.
Overall, the continent has recorded 118 exits between 2007 and 2012, with 58% of these executed outside South Africa, the AVCA research revealed. Financial services companies were the most sold assets, with 23% of realisations. Consumer-based industries have also provided a good number of sales, with food and beverage delivering 9%, while telecommunications brought in 8%.
On average, private equity funds have delivered 11.2% in annualised returns for the 10 years ending September 30, 2012, according to the recently launched Cambridge Associates LLC African Private Equity and Venture Capital Index.
The index’s underlying data revealed that African private equity funds had outperformed US venture capital, which is roughly in line with the broad Cambridge Associates emerging markets private equity and venture capital index. The African index is comprised of 40 institutional private equity fund managers, and was launched in partnership with AVCA.
The data also revealed that African PE had outperformed the 10-year emerging market benchmark, in earlier 10-year periods, particularly those ending between 2008 and 2010. Except for the most recent periods, African private equity has performed in line with or ahead of Asian and Latin American private equity. Over 40% of the funds in the index beat the broad emerging markets median fund for their vintage year, according to Cambridge Associates.